While policymakers are edging forward online safety legislation, a new vision of the digital future is already inspiring entrepreneurial activity and venture capital investment. It comprises web3 – the putative next iteration of the web’s technical, legal, and payments infrastructure – and the metaverse – the persistent, real-time, interoperable, virtual world that could be built on top of it. It will bring new challenges, even before the existing ones have been fully tackled.
Some components of web3 will already be familiar, at least by name, to policymakers. Smart contracts – self-executing contracts programmed in computer code – and blockchain – a distributed database technology – have been mooted by management consultancies as a solution to numerous public sector problems, from patent protection to benefits management. Meanwhile, the growth of cryptocurrencies – blockchain-based financial assets such as Bitcoin – has underlined the need to update anti-money laundering regulations and strengthen consumer protection from fraud and misleading financial promotions.
Other manifestations of web3 present comparable opportunities and risks, but may be less familiar. Let’s look at two in detail.
web3: a potential solution to digital rentiership?
First, the distributed autonomous organization (DAO) – an organisational form governed by smart contracts rather than a central authority – has been proposed as a mitigation of the rentierization of the digital economy.
The problem here is well-understood: gatekeeping of app downloads enables Apple and Google to extract up to 30 per cent of developers’ revenues; Spotify and TikTok offer little compensation to most of the creators whose music and videos they distribute; Uber, Deliveroo and other gig economy platforms typically do not treat the workers they rely on as well as if they were employees. web3 advocates argue that all such intermediary platforms should be reconstituted as DAOs. Rather than serving the interests of shareholders, such DAOs would issue crypto tokens giving developers, creators, and gig workers a stake in the platforms’ governance and financial performance.
Is this plausible? It isn’t yet clear what benefits DAOs would bring beyond the financial upside already offered by existing content monetization platforms like Patreon and Substack, or the governance upside of unionization and worker representation on boards. Nevertheless, the extent of power asymmetries in today’s digital economy is such that competition policymakers might at least consider DAOs alongside other policy levers.
Are NFTs democratizing decision-making, or the next financial mis-selling scandal?
Second, newer forms of crypto token are prone to the same kinds of speculation and misuse that have come to characterize Bitcoin. These include non-fungible tokens (NFTs) – blockchain-based ownership records for items of digital property, such as imagery, videos, and audio files.
Celebrity Cryptopunk owners and reports of Bored Ape Yacht Club jpegs changing hands for up to $3.4m might give the impression that NFTs are the preserve of the super-rich, whom policymakers can reasonably expect to look after themselves. However, major brands are beginning to financialize merchandise and loyalty programmes with crypto tokens, in a way that exposes ordinary consumers to the same risks as cryptocurrency speculation.
Several football clubs including Manchester City and Glasgow Rangers have created collectable NFTs, while 24 clubs across Europe’s top five leagues have launched “fan tokens” in partnership with the platform Socios. These tokens, which can only be purchased with Socios’s cryptocurrency Chiliz, promise to give fans proportionate voting rights in their clubs’ decision-making on matters such as “jersey-design [sic], picking dressing-room artwork, choosing a new goal celebration or match-day music”. But the tokens are also volatile crypto assets that can be traded in a secondary market, purely in pursuit of financial gain.
As with DAOs, policyholders may see mechanisms which give individuals a greater stake in the organizations they are affiliated to as a good. The regulatory challenge is to foster this potential benefit without leaving open the door to unnecessary consumer harms. There are additional questions such as whether NFTs should be regulated as financial assets, and how to apply capital gains tax to them.
Growth in the virtual economy?
This brings us to the first of two points about the metaverse – the context in which the non-speculative rationale for buying NFTs becomes somewhat clearer.
Currently, the idea of spending significant time immersed in a virtual world probably makes most sense to users of online multiplayer games such as Fortnite, Call of Duty, and Minecraft. Even before the advent of NFTs, annual sales of ‘skins’ – virtual goods enabling players to change their in-game appearance – supposedly amounted to as much as $93 billion. A downside of such purchases is said to be that they are tied to a specific game, and never truly owned by players, since game developers can technically remove them at any time. By contrast, in a metaverse where games were interoperable, and skins were NFTs, players would be able to take skins from one game to another, and otherwise treat them as their personal property – lending, gifting, or swapping them as they wished. The size of the virtual goods market could be expected to grow as a result.
Since the creation and exchange of virtual goods looks more like “real” economic activity than cryptocurrency speculation, policymakers might want to promote it – albeit with an awareness that it risks producing new forms of gambling and global inequality.
Metaverse-enabled improvements to everyday life under pandemic conditions
One particular vision of the metaverse is likely to be familiar to policymakers: the one presented by Mark Zuckerberg at the 2021 Connect conference. It might seem unlikely that a significant proportion of Meta’s vast user base will embrace virtual goods with the same enthusiasm as gamers, buying virtual designer outfits for their avatars and decorating their “homespaces” with original digital artworks. But in the near-term, the metaverse is more likely to involve using virtual reality (VR) to enhance the experience of remote working and social interactions with family and friends who live in different places (as well as entertainment and online gaming).
The emergence of the Omicron variant underlines the possibility that we will be living with Covid-19 and/or other zoonotic respiratory viruses for many years to come. An obvious implication is that remote, online work is likely to remain a fact of life. Anyone who has spent a high proportion of the last two years in front of a laptop screen would probably agree there is scope to improve on the experience of Zoom, Miro, Slack, and Microsoft Teams. VR workplace and teaching environments clearly have potential to do that; as such, policymakers would do well to think through their implications for industrial strategy and education policy.
Understanding the opportunities and risks of web3 and the metaverse can be challenging. The technical complexity is often compounded by obfuscating hype and an inconsistent use of terminology, not to mention fraudulent activity in some areas. However, an awareness of the incentives at play can help.
From an investor perspective, Web 2.0 (social media) is largely played out. Venture capital funds are looking for the next generation of IPO-able tech companies, but currently have more capital than credible opportunities. Some, notably Andreesen Horowitz, are actively developing the market for web3 and the metaverse with communications and government relations efforts. Cryptocurrency investors have similar financial incentives to shore up demand for the coins they are “hodling”. web3 provides a legitimating story for activities that regulators might otherwise see as pure speculation.
Meanwhile, the incumbent big tech companies have shareholder value to think about. The public and regulatory emphasis on user privacy means alternative revenue streams to advertising are required. VR hardware and services, into which billions of dollars in mergers and acquisitions (M&A) and research and development (R&D) has already been sunk, are the most compelling options. But VR has achieved little traction outside gaming to date: the metaverse is partly a grand narrative to help it “cross the chasm”.
In fact, Silicon Valley’s incentives are perhaps the best reason for policymakers to take web3 and the metaverse seriously: we often end up living in the future the Valley imagines for us. Reading some of the critical perspectives curated by The Crypto Syllabus would be a good way to learn more. Meanwhile, financial, competition and tax authorities have plenty to keep them busy.