China metaverse sector is a minefield of legal risks

china metaverse minefiled
Image by grandfailure | Bigstockphoto

ITEM: China’s metaverse market is a potential $8 trillion opportunity – provided companies hoping for a slice of that pie can overcome the monumental regulatory challenges in their way.

That’s according to law firm Baker McKenzie, who has published a report on risks in the Interactive Entertainment (IE) sector in 2022, which includes metaverse-related activity.

Tech companies and investors in China are already developing VR/AR products, investing in metaverse-type apps, and ramping up their VR/AR patent and metaverse-related trademark filings, the report says. Meanwhile, Chinese government agencies and enterprises are also making plans for the metaverse with the creation of the state-backed Metaverse Industry Committee to support metaverse projects, while industry standards are being developed with an eye on incorporating the metaverse into the city development plans of Beijing, Shanghai and Shenzhen.

However, all of this is happening at a time when the Chinese government is clamping down on the tech sector and revising the rules of play (to include investment and fundraising), which means China’s metaverse market presents considerable legal risks to everyone in the ecosystem, says Ruan Zhenyu, a senior corporate/ M&A and regulatory compliance lawyer at Baker McKenzie FenXun (FTZ) Joint Operation (Baker McKenzie’s JV in China).

“With the government’s tight control on the technology sector, businesses are advised to take into consideration the existing rules and regulations concerning data protection, cybersecurity and content compliance, as well as the Chinese regulators’ policy tendency toward new technologies such as cryptocurrencies. In addition, the legal regime concerning virtual assets are still quite nascent in China,” Ruan said. “This would add another layer of complexity and uncertainty around metaverse-related business activities.”

Zhang Hong, head of Private Equity Practice at Baker McKenzie FTZ, says that the complexities in navigating through China’s data security, privacy protection and crypto assets related control policies haven’t deterred interest or capital investment in metaverse and relevant applications.

“We are seeing innovative fund raising structures being deployed by those China-related ‘red-chip’ structured businesses (including tokenized investments that have been accepted),” Zhang says.

However, she adds, “This gives rise to a myriad of cross-border regulatory issues which businesses will need to address, ranging from the equity financing closing in the real world to the depositing, management and trading of digital assets received from investors.”

On a related note, creators of various virtual worlds in China are focused on creating environments in which parties can buy and sell offerings and transact in payments of both fiat and virtual currencies (although not cryptocurrencies, which are currently banned in China). This brings into play complex jurisdiction-specific financial regulations – thus, the report says, companies investing in this space will require acute technical understanding from their legal advisors as a means to control risk in these new ventures.

There’s also the matter of IE assets and the enforcement of related IP rights, which companies aiming to get into China’s metaverse space will need to protect. José María Méndez, partner at Baker McKenzie, advises companies to devise a strategy to put safeguards in place to protect (and where appropriate ring-fence) their assets in the physical world before commencing operations in one or more metaverses.

“Businesses should analyze whether the activities they intend to develop in a metaverse may give rise to assets eligible for protection (e.g. user interfaces, avatars, etc.) and, if so, which type of IP safeguard best suits these assets and provides the highest level of protection, as well as how enforcement measures will take place at this changing interactive space.” Méndez says.

Another challenge lies in the cloud and what to do with all of the massive volumes of data that the average metaverse environment is expected to generate. That means ensuring a robust cloud infrastructure, and proper data management to reduce cyber risks, the report says.

As for the inevitable question of content regulation in the China metaverse – well, it’s complicated, says Dominic Edmondson, Senior Associate at Baker McKenzie.

“The same content may cause different legal issues in different jurisdictions, depending on local regulators and the courts’ views on freedom of speech, child protection, political rights, gambling and other issues,” he says.

The full report is available here.

Related article:

Be the first to comment

What do you think?

This site uses Akismet to reduce spam. Learn how your comment data is processed.