OC Business Journal

The Reality of How the Law and the Metaverse Intersect

Increasingly, attorneys from all areas of law are being asked to analyze, structure, and guide participants in this new ecosystem — the metaverse.

A new form of computer code itself seemed to promise to be the governing authority of the next generation of the Internet – “Web 3.0”. A common belief among blockchain and crypto industry participants is that “code is the law.” This principle suggests that the rules and regulations that govern decentralized networks and protocols can be encoded in the underlying technology, rather than in the statutes and regulations of a centralized government or an agency that governs this technology.

In theory, this could eliminate the need for the traditional legal system. Experience in this realm—limited as it is— has already shown us that this is simply not true. Market participants may want to rely on technology, but at the endpoints of that technology are users, all of whom are subject to laws and regulations which were not written with Web 3.0 in mind.

Consider the area of tax law. Despite the decentralized nature of cryptocurrency, digital assets are subject to taxation under U.S. law. However, there is uncertainty about how the IRS will tax cryptocurrency and blockchain activities.

Since the launch of Bitcoin in 2009, numerous questions have emerged, and many remain unanswered. For example, is the act of “wrapping” and “unwrapping” cryptocurrencies a taxable event? What is the tax status of liquidity pools? How are rewards received from cryptocurrency treated for federal income tax purposes? What is the tax status of a decentralized protocol governed by a “smart contract?” What happens if that entity does not issue Form 1099s or K1s to its “partners,” and in fact does not even know their legal names? To date, these questions remain mostly unanswered.

Increasingly, attorneys from all areas of law are being asked to analyze, structure, and guide participants in this new ecosystem, and thread the needle between remaining true to their ethos but also satisfying increasingly attentive regulators.

In another example, Web 3.0 provides for the combination of decentralized digital assets and intellectual property. This has resulted in several lawsuits which assert that the sale and marketing of non-fungible tokens (NFTs) infringe U.S. trademark and copyright law. Although these cases largely rest on established principles of law, they have the potential to provide guidance to the broader crypto industry as they decide whether well-known intellectual property principles translate into the “metaverse.” Similar issues abound in nearly every other legal practice area.

As a result, attorneys must be creative in applying old frameworks to new technology all while counseling clients through regulatory and legal uncertainty. Attorneys cannot sit back and wait for guidance. Instead, over the past several years, the attorneys at Falcon Rappaport & Berkman LLP have learned the necessary skills, both through research and practical experience, to help clients navigate this new technological era proactively. Our firm utilizes an interdisciplinary approach to best confront these emerging issues at the intersection of various areas of law. Through this approach, we have found that despite the refrain of “code is law,” there is still yet a place for attorneys who can address the emerging legal needs of the digital asset industry.

THE LIST

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2023-02-06T08:00:00.0000000Z

2023-02-06T08:00:00.0000000Z

https://ocbusinessjournal.pressreader.com/article/282265259579313

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