Bankrupt In The Metaverse – Insolvency/Bankruptcy

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    Restructuring and bankruptcy can also occur in the Metaverse. The uncertain and evolving rules of digital ownership can have surprising effects on who gets paid.

    Companies are pouring capital into the metaverse, often expecting huge future profits. Investments in the Metaverse will more than double in 2022, and industry experts predict that the Metaverse could generate as much as $5 billion in value by 2030.1

    But innovation is risky, and not all innovators reach the land of promised rewards. Just like in real life, some players building and operating in the Metaverse will inevitably face challenges that may force them to restructuring or bankruptcy. Indeed, the Metaverse real estate market, which has been booming recently, is showing signs of softening significantly, and investors believe the Metaverse housing bubble may be about to burst.

    Since Metaverse assets (including real estate) consist primarily of digital assets and intellectual property, issues around ownership of these assets are central to bankruptcy and restructuring efforts.

    As recent crypto bankruptcy filings demonstrate, legal ambiguity over ownership of digital assets has resulted in costly litigation between creditors and real estate trustees over what constitutes “property property.” can cause claims of creditors.2 Creditors may believe that they hold certain property rights only to know that they belong to the debtor’s property, which is divided pro rata among the debtor’s creditors.

    As the Metaverse expands and content created in and for it proliferates, tensions over ownership between platforms and users will inevitably rise, especially in Metaverse-related bankruptcy filings.

    The three core elements of the metaverse platform

    The complexity associated with ownership in the metaverse is how the rules apply to three core elements of many new metaverse platforms: fungible digital tokens, non-fungible tokens (NFTs), and content. It depends a lot on what is done.

    • A fungible digital token A virtual currency such as Bitcoin. Some metaverse platforms issue their own tokens and store them on the platform. If Tokens stored on the Platform are commingled and not stored for a particular User, such Tokens, even if purchased by the User or obtained as payment, will not be owned by the User upon the insolvency of the Platform. It may belong to the platform. For virtual properties, services or experiences.

    • NFTs Represents a unique digital asset such as a work of art, land, or building (also acts as a property title). His NFT purchased outright is almost certainly owned by the purchaser, leaving little room for ambiguity. However, using NFTs as collateral can lead to complications, as explained below.

    • content This includes music, digital clothing, virtual real estate, and anything else created or built in the metaverse. Who owns content on a particular platform depends on the platform’s terms of use, as detailed below. The ownership issue is further complicated when content is purchased with a loan (often NFTs) that requires collateral.

    Content Ownership

    Most issues regarding what constitutes real estate property can be rooted in content ownership issues. As previously stated, content ownership varies according to the terms of use of each platform. But, of course, conditions are different. Some platforms’ agreements clearly state that you own the content you create. Other platforms use language that suggests that the platform may claim some ownership over User Generated Content.

    If the content has value, a bankrupt platform operating as an owning debtor may claim ownership of such content to determine the value of the bankruptcy property and its ability to monetize and distribute to creditors. Motivated to grow the pool of available assets. Similarly, the creditors committee appointed in the platform’s bankruptcy is focused on determining whether the contract language allows the debtor to claim ownership of her content in the metaverse.

    Ownership claims can become even more complicated as metaverse platforms become interoperable, allowing users to bring properties from one platform to another, potentially developing properties along the way. There is a nature.

    Ownership of collateral

    In late 2021 and early 2022, investors were eager to buy properties in the Metaverse, with a string of record sales. The cottage market for Metaverse Mortgage Loans is budding, with lenders offering secure financing through Metaverse Mortgages. Metaverse loans use an underlying non-fungible token (NFT) that represents land as collateral. With the Metaverse real estate market stymied, the question arises as to whether such protected Metaverse assets belong to the Platform, the Borrower, or the Protected Lender.

    One approach to metaverse mortgages that has emerged is for mortgage lenders to lend digital tokens to borrowers to finance the purchase of virtual land. An NFT representing the land is held by the lender before the loan is paid off. This gives the lessee full development rights to the land, similar to a license. This placement allows users to access the land and improve it with user-generated content.

    In such a scenario, the law has not been tested as to whether a metaverse mortgage lender that owns and manages an NFT representing land will own that NFT until the underlying loan is paid in full. . Does the mortgage lender have legal and beneficial ownership of the NFT while it owns the NFT, or does the lender simply hold the NFT on behalf of the borrower until some future triggering event occurs? Until the law is settled, there is a significant risk of Metaverse mortgage borrowers going into bankruptcy of the platform. In particular, the metaverse his mortgage lender, rather than the borrower, may be considered the owner of the land with the sole position to exercise the right. Making decisions on bankrupt land.

    Further complicating matters, if the borrower is considered a licensee of a non-bankrupt mortgage lender, it may not be given the primary bankruptcy protection normally available to the direct licensee in the bankruptcy of the licensor (e.g. (including the right to maintain). hold on the lease term).

    Some of these issues are clarified through jurisprudence, but many are statutory and contractual, including the newly promulgated Article 12 of the Uniform Commercial Code and the development and evolution of “smart contracts” in metaverse mortgage lending. Clarified through development.

    Article 12, which has already been adopted by some states, stipulates that digital assets such as NFTs can be completed by filing UCC-1 financial statements or managing actual NFTs. increase. Completion of her NFT by Control will allow Metaverse mortgage lenders to have a first-class security interest in collateral and seize that collateral in the event of certain triggering events. Much like control of a bank account, control does not equate to ownership until the lender seizes the collateral.

    Metaverse mortgage smart contracts, which incorporate coded rules that are triggered when certain conditions are met, determine when foreclosures occur. This can be immediate. In such a case, if a metaverse mortgage borrower were to default under that metaverse mortgage, it could be coded such that ownership of the collateral (here, his NFT) is immediately transferred to the mortgage lender. As a result, the mortgage borrower would lose that right. To metaverse land. As I write today, it is unclear whether smart contracts will support concepts such as tolerance, correction, and workouts.

    * * *

    Bankruptcy will be part of the metaverse just like every other part of financial life. Participants may be able to protect themselves from unforeseen shocks by drafting contractual language that makes ownership rules clear at the outset and pricing risk appropriately. But participants will need to understand the risks of doing so, and will need to watch the space closely to ensure they understand how the rules evolve as disputes are adjudicated. we certainly do.


    1. “The Metaverse Guide for CEOs” McKinsey (January 2023).

    2. Filing a bankruptcy petition creates a bankruptcy estate that includes all of the debtor’s legal and equitable interests in the property at the time of filing of the bankruptcy petition and commencement of bankruptcy proceedings. 11 USC §54l(a)(l); Fowler v. Shade, 400 F.3d 1016, 1018 (7th Cir. 2005).

    The content of this article is intended to provide a general guide on the subject. You should seek professional advice for your particular situation.


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