McKensie-Villarreal-web.jpgIn a land called Sandbox, a company called Republic Realm sold 100 private islands, complete with villas and docks for boats and jet skis. Ninety of the islands sold for $15,000 on their first day on the market last year, and resale values have reportedly reached $300,000. This may sound like a real estate deal, but the real estate involved is not actually “real.” Rather, it’s virtual property in the metaverse, an emergent high-risk, high-reward space that is capturing the imagination of the investment community.

What is the Metaverse?

The metaverse is a network of 3D virtual worlds that people can visit for socialization, entertainment and commerce. Tools like virtual reality headsets, motion-sensing controllers for interaction with virtual objects, and microphones for communication with others enable you to immerse yourself in the virtual world – to feel like you are “in” the computer, rather than at the computer.

Real Estate Marketplace

The metaverse currently has four major platforms, or worlds – Sandbox, Decentraland, Cryptovoxels and Somnium – and several smaller ones. In each world, there is a certain amount of real estate, which can be purchased directly from the platform or from a developer, and prices fluctuate based on supply and demand. Real estate sales, which are conducted using cryptocurrency, totaled $501 million in the four largest worlds in 2021, according to MetaMetric Solutions. January 2022 sales reached $85 million, and MetaMetric projects that 2022 sales could approach $1 billion.

Facebook generated publicity for the metaverse when it announced on Oct. 28, 2021 that it was changing its name to Meta to reflect its plans to focus in that space. Real estate sales surged to $133 million for the month of November in the wake of the announcement. Microsoft further fanned the flames when it cited the metaverse as a reason for its January 2022 purchase of gaming publisher Activision Blizzard for $68.7 billion.

Notable Real Estate Sales

The largest metaverse transaction to date occurred in November 2021, when Republic Realm, which is a metaverse real estate investor and advisor, paid $4.3 million to purchase 792 parcels of land from gaming company Atari. Republic Realm plans to co-develop some of the land with Atari.

Also in November, Toronto-based metaverse investment firm Tokens.com, via its subsidiary Metaverse Group, spent $2.4 million for 116 parcels of land comprising 6,090 square feet in Decentraland’s Fashion District, where it plans to host fashion events and build retail stores, where luxury brands can be sold and advertised.

Each parcel of metaverse land is traded as a type of NFT, or nonfungible token, which in the latter transaction was purchased using mana, the native cryptocurrency of Decentraland. The property is currently worth much more as mana appreciated in value significantly following the transaction. In Sandbox, the cryptocurrency unit is called sand.

Investment Risks

As a classic high-risk, high-reward vehicle, the metaverse has potential for huge growth and payoffs. Indeed, the vehicle has enjoyed sizeable growth in recent months. But there are also significant risks, not least of which is the extreme volatility of cryptocurrency, on which the value of metaverse land is based.

Further, the metaverse is still under development, and there is no guarantee that it will ever become commercially successful on a large scale. One or two of the leading worlds, or perhaps a couple of newcomers, could potentially rise to prominence in the future, leaving the others in the dust and significantly devaluing real estate in those lands – including yours if you choose the wrong one.

Unlike physical real estate, digital real estate is not intrinsically valuable or backed by tangible assets. People buy physical real estate because they need a place to live or work; there is no need to stake a claim in cyberspace, and if the trend fizzles, or if there is an economic downturn, demand for digital real estate could dry up. The fact that real land is finite is fundamental to its value. More virtual land can easily be created with code, and there is no limit to the number of new metaverse platforms that could be launched.

Currently, the investment pool is limited to those investors who can afford to take on significant risks. There is no guarantee that a broader array of investors will come into the space and drive up demand for, and therefore value of, your real estate.

Then there’s the moral question: Why invest in a whole new universe when the money could be put to good use making improvements and addressing a myriad of pressing issues in the existing world?

Legal Considerations

In the physical world, a parcel of land is identified by its exact location, with boundaries shown on a land survey, and ownership rights are vested through a deed, which is recorded in the land records of the jurisdiction where the real estate is located. In the metaverse, instead of a deed, ownership rights are encapsulated by an NFT, which includes the owner’s smart contract, which spells out rights to own, sell and rent the property. But if you have a dispute over your virtual property, it’s important to consider what legal remedies you have, and what jurisdiction applies. The current smart contracts are relatively simple, but as the metaverse evolves and becomes more populated, the types of transactions and disputes will undoubtedly become more complex. Investors may jump into their investment without properly dissecting the platform’s terms and conditions. It’s advisable to seek the counsel of an attorney, as you would with a real property transaction, to scrutinize the agreement and the legal risks involved.

The Takeaway

For investors who may have missed out on earlier tech booms, the metaverse presents a new opportunity to get into what could be the next big thing at a nascent stage. But it’s not a vehicle for the risk averse, or one that should be undertaken without performing due diligence and procuring sound legal advice.

Novack and Macey LLP is a commercial and business litigation law firm that represents companies, entrepreneurs and other parties in disputes arising out of business relationships and commercial transactions. To contact the author, please email McKensie N. Villarreal at mvillarreal@novackmacey.com or call 312.419.6900.