A recent Bloomberg report estimates that the metaverse will be an US$800 billion market opportunity by 2024, driven by a global shift towards the virtual world. Goldman Sachs notes that this estimate is likely the most bearish case, adding that a more bullish scenario predicts a US$12.5 trillion market opportunity, albeit over a longer timeline.
As the concept of the metaverse gains popularity, an increasing number of “metaverse developers” have emerged with goals to capitalize on this tremendous metaverse opportunity by providing entrepreneurs with some of the tools they need to purchase digital assets. A service we have been privileged to develop in this space is one of the first “metaverse mortgages” : a loan designed to allow investors to purchase virtual real estate (represented as a non-fungible token – an “NFT”) in the metaverse. Before diving deeper into the structure of a metaverse loan, it is helpful to understand what the metaverse is, and how it has evolved from pre-blockchain iterations (based in Web 2.0 – the websites most of us use every day) to modern blockchain-based, decentralized iterations (often called Web 3.0).
What is the Metaverse?
The concept of the “metaverse” is still being defined. However, a useful way to think about it is in the context of traditional online multi-player games like Runescape or Second Life which allow users to set up accounts and create an avatar that represents them in the game. Through their avatar, users engage with the game map, buy/sell in-game assets (like armor in RuneScape, for example), build in-game houses, chat with other gamers, etc. However, the games themselves are centrally developed and owned by corporations, including all in-game digital assets, currency, IP, etc. Only that controlling entity has the power to update the game’s software, develop new features, and choose what to do with the game once released.
In contrast, metaverse 3.0 (and games that are built on its infrastructure) are not owned, updated or developed by a single corporation. Rather, metaverse 3.0 operates in a way that allows anyone to buy, sell, and develop digital assets in a virtual world, and become an owner of a piece of that world. In this modern iteration of the metaverse, the technological interface people interact with is created and owned by a community of unassociated, open organizations as well as individuals. Today, this interface provides a similar viewing experience to traditional, online multiplayer games. However, supporters of metaverse 3.0 point to the potential for it to become an immersive interface where our physical and digital lives converge through technologies like augmented and virtual reality; a place where people can play, relax, socialize, work and transact from anywhere in the physical world. Today, there are many different players racing to develop the most popular and comprehensive metaverse interface. This competition has resulted in a proliferation of not one, but many worlds, designed to enable people to form communities and extend social and business interactions digitally.
Barriers to entry: The value of metaverse land
As mentioned above, the key difference between metaverse 2.0 and metaverse 3.0 is the ownership economics. Metaverse 2.0 is a virtual world wholly owned and designed by a corporate entity(ies), whereas metaverse 3.0 allows anyone to buy, sell, and develop digital assets in a virtual world in such a way that each buyer becomes an owner of a piece of that world. However, as the demand for digital assets grow, so does their price. In fact, in 2021, the average price of a parcel of virtual land doubled in the six-month window from June to December 2021, from US$6,000 to US$12,000 across the four main Web 3.0 metaverses.
The metaverse lending solution
Resulting price increases have created an opportunity for lenders to provide loans to borrowers so they may capitalize on opportunities in the metaverse. These loans enable a borrower to purchase a digital asset in the metaverse. This loan can be provided by a traditional lender (i.e., a bank or corporation), or via a decentralized lending protocol, as we discuss in a previous article on crypto lending. This article focuses on centralized arrangements, governed by the terms of a loan agreement entered into by the lender and borrower.
Structuring a loan in the metaverse
Like any loan, structuring a metaverse loan involves several elements, including purpose, amount, collateral, type, covenants, events of default and remedies. However, in the metaverse context, the legal drafter may also need to incorporate crypto specific considerations into the language of the agreement to better protect their client’s interests. Some of the most important crypto specific considerations to contemplate in the language of a metaverse loan agreement are as follows:
- Defining the digital asset(s) as a form of legal property
When providing loans for digital assets, lenders need to ensure that they have control over the assets and the ability to enforce on such assets if there is an event of default. . To do this effectively, the digital asset must be defined as a particular form of legal property. While regulators have not issued guidance on the classification of digital assets for this purpose, it is arguable that they should fall under the meaning of an “intangible” under personal property security legislation since digital assets are not tangible (i.e., physical) personal property.
- Establishing ownership and deployment rights
In the context of a metaverse loan, the lender typically holds the admin keys of the crypto wallet containing the digital asset so that they can enforce their security interest in an event of default. Therefore, a metaverse loan ensures that legal and beneficial ownership and control of the digital asset remains with the lender until the borrower satisfies all of its obligations under the loan. However, in most circumstances, the borrower will want to utilize the digital asset for commercial purposes during the term of the loan. Deployment rights must also be contemplated in the language of the loan agreement so that a borrower has the ability to, for example, build/develop their virtual store front atop the virtual land that they will own once they pay off their loan. The lender may also want to have rights as to how those deployment rights are utilized to ensure their collateral is not affected.
- Events of default
While most events of default may be relatively transferable between traditional loan agreements and metaverse loans, crypto asset price volatility should also be considered. The fair market value of the digital asset can rise and fall in accordance with macro crypto market trends and/or metaverse token trends. While it is understandable that parties to a crypto loan may appreciate that inherent risk, the language of the agreement should contemplate mechanisms to manage triggering events in these circumstances.
- Crypto specific representations and warranties
Depending on the type of loan and digital asset in question, reps and warranties should consider technical issues around custody of the digital asset, execution of development and trades of the digital asset during the term of the loan, crypto wallet security, blockchain network security, and other risks inherent to the metaverse that may affect either parties ability to carry out its obligations.
As the metaverse landscape evolves, we will likely see situations where loans need to be prepared very differently because they are a part of a larger package of assets. For example, in the future, there may be someone who wants to buy a physical building, some physical assets, and the NFT associated with the digital building in a metaverse. Loan structure will have to address the variety of property. We may also have situations where lenders do not want to be seen contractually asserting how the digital asset must be used. There, the loan agreement would likely establish a definitive security interest, but not an ownership interest with deployment/licensing rights. Moving forward, questions remain about whether other legal considerations – such as mortgage regulation – will be applied to intangible metaverse properties if they are effectively treated like tangible property by all parties involved.
 1 Republic Realm, ‘The 2021 Metaverse Real Estate Report.’ Available at: https://www.republicrealm.com/post/the-2021-metaverse-real-estate-report.