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Does the Metaverse Need a Free Trade Agreement?

Metaverse

www.coindesk.com 01 April 2022 17:59, UTC
  
Reading time: ~14 m

A centerpiece of Web 3 is the metaverse – an immersive online space that recreates and augments reality, as envisioned by developers, businesses and even jokes from the U.S. government.

Its most prominent champion may be web mogul Mark Zuckerberg – but Zuckerberg should beware: If his vision is a success, it could prompt a massive regulatory backlash from governments who normally seek to control the services that enter their territory, warns Sam Lowe, a trade policy consultant at Flint Global, in an interview with CoinDesk.

Zuckerberg’s vision of a metaverse where people from across the world can share and exchange may be nothing new, argues Lowe, previously a researcher at think tank the Centre for European Reform. Facebook’s existing social media site, and many online games that allow for buying and selling in a virtual world, already share its main features. But the ambitions of Meta, as the company is now known, may reach much further, creating an online space where people spend the bulk of their work and leisure time.

Countries already restrict trade for a number of reasons – they want to protect domestic jobs, or their citizens’ privacy, or what they perceive to be national security – and, Lowe argues, the metaverse could be next.

Worse still, regulators often come to new technologies after they’ve already bedded in – the backlash against crypto sites like Binance being just an example – by which time finding a workable solution can prove impossible. In the financial sector, for example, securities regulators are just now examining the role social media advice on sites like Reddit play in influencing investment decisions, and are looking for ideas about what to do about it. The EU and U.S. have also been caught in a long struggle about how to share personal data across borders, and Lowe fears that recent news of a breakthrough may prove short lived.

Anyone attempting to build a career in the metaverse could find that hastily thought through regulations could render their business model unviable after it’s too late, he warns.

The following interview, conducted via Zoom, has been edited for brevity and clarity.

CoinDesk: I’m going to start from the basics. When we talk about trade policy, I think of selling wood or beef to another country, and customs and tariffs. What else is there to understand?

Lowe: It’s all rules and regulations that impede or facilitate the movement of goods, services, data and, on occasion, people, across borders.

As you said, sometimes the barrier that we talked about is a tariff or tax, but more often than not, it's actually a regulation and regulatory requirements. So, you might be prevented from selling a certain service into another jurisdiction remotely because your qualification is not recognized. If we’re thinking about financial services, there is a requirement for you to have a local presence within that territory to sell to retail consumers.

So say I’m an E.R. doctor, or an architect, I’m based in Belgium: I can’t just go to the U.S. and say, "I’m going to practice architecture now and design your house for you."

Lowe: You can’t just show up and instantly start designing … you might need to re-qualify, you might need to go through a whole process. What most people think about is tariffs and taxes. But in terms of what academics, researchers and people operating in businesses think about is a much more expansive regulatory environment that either allows or inhibits the cross-border movement.

And lots of this is about visas as well. Even before someone checked my qualifications, they check if I’m allowed to physically come to the U.S. in order to work.

Lowe: Countries require work visas for foreigners to come and deliver even for temporary contracts within their territory – largely because they're worried about their own citizens losing out on work. It’s a sort of protectionist motivation. At the moment, for non-regulated services – advertising, lots of consulting and the like – there may be restrictions on your ability to physically go to a country to deliver a contract; there are very few restrictions on your ability to deliver that remotely.

If you get to a point where most service delivery is done virtually, do you then have an instance where regulators start to try and restrict that, so as to ensure that people physically based in their regulatory jurisdiction are not being outcompeted by people operating elsewhere? You wonder if, for someone to sell to Belgian citizens, they have to have obtained some sort of virtual work permit, despite the fact that they might be operating out of their living room in London.

So if I go into the metaverse and say, "I want to sell you something here in this world created by Mark Zuckerberg," – I might try and design your house, I might try and fix your medical problems, I might try and give you financial advice – you’re saying that someone could come along and say, "Hang on, you’re not allowed to do that."

Lowe: Yeah. Let’s envision a global metaverse, so a virtual reality accessible to all. And we’ll pretend there’s just one, rather than multiple different ones. Underpinning all of that you still have individual countries and individual regulators and individual regulatory environments. In this metaverse, you could interact with people from all over the world, and just walk around by yourself. That’s not what’s going to happen. Underneath all of that, you will have restrictions on recognition of qualifications in the financial services space, you will have restrictions on the ability to sell cross border, absent physical presence within individual territories. If you then start to think about restrictions on data transfers, and the requirement for personal data in many jurisdictions to be held onshore, you might have instances where certain bits of this virtual reality of this metaverse are shut out to people from elsewhere. These are all problems that inhibit services trade right now. I think the reason the metaverse is interesting is it’s the most maximalist vision of the internet. It’s a new reality transposed on top of our real existing one. All these problems just become magnified.

This isn’t a new problem, right? There are lots of online games already where you can go into this virtual world, Minecraft or whatever, and buy or sell stuff.

Lowe: At the moment, virtual reality, and even the sorts of conversation we’re having across regulatory trade jurisdictions – it’s a niche pursuit. Lots of people are doing it, but it’s not actually the bulk of the economy; you don’t have people in countries worried about losing their jobs yet to people selling services. But if you move to an existence where the majority of economic interaction happens in the virtual space, then the pressure to regulate that space and introduce constraints that are more akin to those operating in the real world, movements of people and the like, will increase. That’s the direction of travel.

Of course, you have two forces. You have the forces in play, which say, "Well, this is great. This will unlock whole new opportunities and people will embrace it." But then you will have people in other jurisdictions who will say, "Well, we’re scared of this. We’re threatened by it." Add in the national security type concerns, the sorts of concerns you have, say, in China around information flows, and who knows.

You think the ideal is this global, interconnected metaverse where everyone can interact and be free to be whoever they want to act in certain ways. But in reality, what you end up with are territories very similar to what we have now: countries, or regions or zones. But then moving outside of that [zone] into, say, India is going to remain just as difficult as it is now, when it comes to adding goods and services to India in the real world.

And there are lots of drivers for this, right? You mentioned classic protectionism of jobs, but also there are data protection worries, and there’s the issue of censorship – making sure people can’t read newspapers in the metaverse that maybe they wouldn’t be allowed to read in Beijing.

Lowe: Exactly. And also, in the financial services space, you know, there are legitimate concerns about regulatory access to information and abuse of consumers. There’s always a reason these things are regulated, and quite often they’re not nefarious. We had a financial meltdown; financial regulators are a bit concerned about lots of different things, and they want to make sure that if there is a problem, they're able to adequately intervene.

There are currently restrictions all over the world on your ability to sell cross-border to consumers. If I’m in London, I can’t go up just marketing my financial product to retail consumers in Germany. I might have to set up a subsidiary or branch so that I'm under the purview of the German regulator.

You can do so-called "reverse solicitation," which is where the German consumer just comes to me. I didn't advertise to them. But how does that actually operate in the metaverse whereby you could have a virtual reality where you can just walk into a bank? You have no idea where that bank is actually physically located. But you made the decision to go in and to purchase the product. So in the sense that’s reverse solicitation.

So a lot of these rules are about companies not allowed to market in a jurisdiction, but there’s really no way to know if they’re "marketing" on the internet, right? If you hear about it on social media and think, "Oh, this looks like a good exchange, I’d like to see if they can do some brokerage for me."

Lowe: Someone did actually respond to the piece I wrote, someone who works in financial services on the regulatory side, and they said, "Well, I suppose the model here is something similar to the crypto exchanges." Whereby people just follow them and start doing stuff, like Binance or something like that. But what's happening, they're getting regulated, and you having some countries where they just say, "Well, you’re not allowed to operate here anymore."

That seems to me to be what could happen in the context of this grand virtual reality, and it's a little bit frustrating, because I find all of this stuff quite fascinating. I spent a lot of my youth playing games online and had a great time. But then you think, all of these old-world problems that inhibit trade now, in a sense will just become magnified. Because if you are in a space where everyone's online, everyone’s operating virtually, and a huge amount of economic activity exists there then it’s going to get far more attention from regulators and politicians.

That’s my next question, whose job is it to fix this? Because you’ve got this institution, the World Trade Organization, whose job is to come up with treaties for when things change in trade policy. Do you think we’ll see something like a "Trade in the Metaverse Treaty?"

Lowe: That’s the other thing we haven’t actually discussed. How do you govern? If you have a global metaverse, you also then have to govern trade within it. So the exchange of digital property – tokens, or you could have your own house – who do you buy it from, how do you get a legal guarantee to it?

We’ve got a pretty good treaty in place, when it comes to trading goods under the auspices of the WTO. There are provisions relating to services, but they’re very undeveloped. No one’s really managed to make any multilateral progress on anything new or modern. You do get some in bilateral contexts – say, the U.K. and Singapore, most recently, reaching a digital economy agreement that has sorts of commitments to refrain from data localization, placing duties on data flows and the like, but it’s very piecemeal.

My view is that in terms of how this will develop, individual countries, and particularly the larger ones – the U.S., European Union, India, China – will introduce their own piecemeal approach to all of this and it won't be a collective vision. It won’t be, "We will think about how we regulate the metaverse," it will just be, "Well, we’ll think about how we regulate the fact that we’ve got all of these people providing consulting services from the other side of the world and displacing our local consultants." And the regulation you introduced to deal with that has an impact on what you can do in the metaverse.

So if the WTO hasn’t even caught up with the internet yet, or with the digital economy, which is already getting a bit old, then there's little hope of catching up in the metaverse.

Lowe: Exactly. The issue here is, when you talk to people at the cutting edge of technology, quite often they operate in a regulatory gray area. The thing that does need to be at the front of your mind is: What happens when the regulatory environment catches up with you? Is your product still viable?

It’s the Uber model, if I can call it that: You’re not quite sure whether the taxi licenses apply. So you just go in, and wait until you become such a big part of people’s lives that they’re not going to do anything about it.

Lowe: Yeah, and it can work. But I think we’re also seeing it in the crypto space. It’s taken a little while, but it looks to me as if some of the bigger financial regulators are moving into that space, and some business models will work, and some won’t as a result. It’s the same here. If you’re going into this, assuming you’re just going to have some sort of globally interlinked metaverse, where everything is doable and available, it probably won’t operate like that.

So there’ll be bumps along the road, and they’re all looking like they’re unpredictable.

Lowe: I think a few of them are actually quite predictable, but maybe not fully thought through.

Right. I just want to come back to a point you’ve raised a couple of times about data. It seems like, whatever the metaverse is, it’s going to be based on data, and probably data about people. This has been an area of quite a lot of barriers in the past. How important was this agreement between the U.S. and the EU last week, the "Privacy Shield?"

Lowe: So that was a really good step forward. It’s not been impossible to transfer personal data between the EU and the U.S. in the absence of agreement, it’s just required contracts – standard contractual clauses and the like, and it’s created impediments.

If the EU and U.S. have an adequacy agreement again, the movement of that data just becomes much easier, and requires less legal involvement. If I were a company, I would not be relying on that for a little while because it will be subject to legal challenge. It could easily fall away again.

In the context of a metaverse, the sort of approach most conducive to its operation would be for people themselves to have much greater individual ownership over their data and what they can choose to do with it and how they choose to share it. But again, I’m not necessarily sure that’s the direction of travel.

So that’s just two jurisdictions, and even then they are having difficulties, and it’s not quite clear they’ve resolved their differences, once you take the courts into account. So who knows what the other 192 countries in the world will throw in.

Lowe: In many countries, the trend is towards greater data localization. Some of that is under the auspices of privacy and personal data, but you also have it under the auspice of national security concerns. The fear is that, if data isn’t stored and processed locally, countries will not be able to secure their own security.

That’s actually quite a difficult discussion to have because, for a country’s perception of what's necessary to guarantee its own security and survival, one person's idea of that might be very different from another’s.

As we’re seeing in global politics at the moment. So, if you’re Mark Zuckerberg, and you’ve staked your extremely large company on this vision of a metaverse, how big of a worry is this?

Lowe: It’s not necessarily something to be worried about. Facebook itself is the nascent metaverse to a degree. You don’t have the virtual reality, but you have lots of people interacting and sharing personal data. So you’ve already got proof of concept.

If it succeeds, if it brings in the numbers of people desired, if you have people living large quantities of their personal and working lives on it, it will come under greater regulatory scrutiny. And there are already a number of existing trends when it comes to trade in services, when it comes to restrictions on movement of people, of data, that suggests that it will come to a head at some point, and some governments will go in different directions. It's not like everyone's going to be a problem here. But it certainly could. Managing that and educating people will be quite important to ensuring success.

It’s a bit more speculative than "Can we eat U.S. beef in the EU?"

Lowe: But it’s speculative in a nice way: You can be pretty confident that issues are going to emerge, then it’s just trying to work out what they are and how they could be managed.

Indeed. One to keep a close eye on.

Lowe’s blog on Trade Policy in the Metaverse is here, and you can follow him on Twitter at @SamuelMarcLowe.


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