THE METAVERSE SOCIETY - REPORT UK METAVERSE 120623.pdf

1. Report – June 2023
Building the UK
Metaverse:
A Pro-innovation
Vision for Virtualised
Environments
twitter.com/@themvsociety
linkedin.com/company/ the-metaverse-society
medium.com/@themetaversesociety

2. 2
Executive Summary
- The metaverse, and the revolutionary technologies that underpin it, will
enable companies to integrate the physical and digital world in a way that
creates far-reaching social and economic opportunities. The UK is
well-placed to capitalise on these given its existing technology clusters,
thriving creative sectors and broad skills base.
- However, the UK should take a more proactive approach to the metaverse
to ensure it does not miss out on future investment and talent. The EU
and other jurisdictions are already considering their own strategies for
developing and regulating the metaverse.
- The UK must ensure its regulatory frameworks continue to support the
growth and development of the metaverse. The UK is in the process of
regulating to address harms arising from content, competition and privacy
in Web 2.0 technologies. While these legal requirements are intended to be
future proof, in some instances this is not the case. The UK must adapt its
existing regulatory framework to provide certainty to businesses
developing metaverse technologies and citizens and businesses operating
within the metaverse.
- The UK’s approach to other technologies has demonstrated it can be a
world leader in developing pro-innovation proportionate legal
frameworks that support businesses to grow without compromising the
safety of its citizens.
- The UK should work with metaverse developers to create its vision for the
metaverse and positively differentiate itself from other less innovative
jurisdictions. As part of this, the government should provide
pro-innovation guiding principles for future regulation, review existing
regulation, ensure consistency and cooperation between regulators and
provide central oversight of regulation.

3. 3
Primary recommendations
- The UK government should set out a metaverse strategy to support the
development of the metaverse. This approach should highlight the need to
let metaverse technologies develop before adopting specific primary
legislation. Instead, the government should (i) provide principles for
regulators to follow when considering the regulation of metaverse
technologies and (ii) develop a central coordination function.
- At the heart of the government’s strategy should be the principle of an open,
decentralised, competitive metaverse that enables firms to trade on fair and
reasonable terms. This should be primarily delivered by providing the CMA
with the powers outlined in the Digital Markets, Competition and
Consumers Bill.
- As the market continues to develop, the Competition and Markets Authority
should conduct an initial review of the market for metaverse technologies to
ensure the market remains competitive.
- The UK government should ask the UK Intellectual Property Office (UKIPO)
conduct a study into the impact of the metaverse on the infringement and
enforcement of intellectual property in the UK.
- As part of its strategy the UK government should identify metaverse use
cases and business models that could drive investment in the UK and
support businesses in those areas to grow and export.
- The central coordination function and regulators should maintain a regular
dialogue and collaborate with metaverse service providers and other
stakeholders to review existing regulations and co-design new regulations
where gaps may exist. This report also makes a number of secondary
recommendations relating to specific regulation and regulators.

4. 4
I. Introduction
The metaverse has been the subject of much discussion, excitement and speculation. While some
commentators have prognosed the premature death of the metaverse1
, most analysts, market players and
policymakers agree that this is a hasty verdict.2
As a concept, the metaverse is still a work in progress. While some wrongly focus exclusively on virtual
reality or augmented reality, others understand that the metaverse is something much more expansive. In
the future, the metaverse is capable of being an open, decentralised, interoperable network of virtualised
environments where people will interact, explore, create, work and entertain in new ways.
Multiple market players and promoters, Improbable among them, are currently developing the
technologies - some established, some emerging - that will become the foundations of the metaverse as it
grows in potential and in popularity. These technologies include interconnected virtualised environments
created and enabled by, for example, 3D modelling software, distributed ledger technologies, artificial
intelligence and Web 3.0.
At this stage, assessments of the impact of the metaverse are speculative in nature due to the ongoing
evolution of the technologies underpinning it. However, it is clear that as emerging and complementary
technologies forge together to form the metaverse they have the potential to unlock valuable economic and
social benefits, as well as far-reaching social and economic effects.
Analysts at Citi and McKinsey estimate that the resulting ecosystem and market for the metaverse could
reach trillions of USD globally.3
In the UK, the total revenue in the metaverse is projected to reach £1.84bn
in 2023,4
and UK metaverse-related industries are expected to grow at an annual rate of 34% between 2023
and 2030, creating new businesses and jobs in the UK.
Beyond its economic benefits, the metaverse will provide social benefits in areas such as healthcare,
education, security, and defence by providing new training and learning experiences. For example, digital
users could gain an enhanced appreciation of real-world history and culture through immersive education.
In security and defence, the metaverse will help security services and armed forces plan more effectively
for security risks. Improbable’s own work demonstrates that enabling more complex and sophisticated
simulations enables security services to prepare for increasingly complex modern threats and challenges.5
For all their potential benefits the metaverse also raises novel challenges due to the application and use of
emerging technologies. Furthermore, if done badly, there is a risk of reinforcing the problems and
exacerbating the harms present in Web 2.0, such as unfair market competition and the spread of illegal
content. Therefore, an extensive and ongoing dialogue between governments, market players and civil
society is needed to develop open, decentralised, interoperable virtualised environments that respect
privacy, intellectual property and secure and empower users.
The potential opportunities and risks of the metaverse have not gone unnoticed by global policymakers
and regulators. Several governments, including South Korea and France, have either commissioned
fact-finding missions or announced metaverse strategies to assume a leadership position.6
Similarly, the
European Commission is expected to adopt a Communication to unveil its vision for the development of
6
South Korea was a first mover in the development of a strategy for the metaverse industry (2022). Also in 2022 the French
government commissioned academics to conduct an exploratory study into the economic, societal and cultural issues related to
metaverses and more recently opened consultations to inform a forthcoming French metaverse strategy.
5
Improbable, “Welcoming the UK Integrated Review’s call for investment in UK Science such as AI and synthetic environments to
counter the security threats of the future” (16 March 2021): https://www.improbable.io/blog/uk-integrated-review
4
Statista, “Metaverse - United Kingdom | Statista Market Forecast” (accessed May 2023):
https://www.statista.com/outlook/amo/metaverse/united-kingdom
3
Citi GPS (30 March 2022) – 13 trillion USD; McKinsey (June 2022) – 5 trillion USD.
2
Bajarin, T., “Is The Death Of The Metaverse Exaggerated?” (4 April 2023). Forbes:
https://www.forbes.com/sites/timbajarin/2023/04/04/is-the-death-of-the-metaverse-exaggerated
1
Kelly, J., “Whatever happened to the metaverse?” (16 February 2023). Financial Times:
https://www.ft.com/content/bddec314-3f4c-4296-ae6f-eb2a5328c109

5. 5
‘virtual worlds’ in July 2023. The Communication will likely outline the economic and social opportunities
of virtualised environments and the challenges to the uptake and development of emerging technologies
that underpin metaverses.7
The UK government has committed “to lead on the future of web technology” (Web 3 or the metaverse)
and work to maximise their potential to spur UK growth and innovation.8
The UK possesses many
strengths that could allow it to achieve this goal, from advanced research facilities to an enviable talent
pool and a growing tech ecosystem. A UK metaverse strategy would provide industry with a welcome
roadmap, and provide greater clarity on how the UK government aims to to help the metaverse develop,
and reap the subsequent benefits.
As a first step, the UK regulators in the Digital Regulation Cooperation Forum (DRCF) are researching the
new products and services that may develop in virtual environments and will consider the drivers for
developing and adopting these innovative technologies.9
However, examining how current regulations
may affect metaverse service providers and mitigate foreseen harms in virtualised environments is also
necessary to highlight possible challenges to market players and consumers and the opportunities for the
government to ensure regulatory flexibility for emerging technologies.
This paper intends to encourage a more joined-up approach to metaverse policy in the UK. In the first
section of this paper, we seek to clarify the various elements of the metaverse. The second section
discusses the potential positive socio-economic benefits the metaverse and its underlying technologies
could bring to the UK. The third section, and the main body of the paper, reviews the UK’s regulatory
approach in some of the key policy areas that are significant for the development and governance of
virtualised environments. Finally, we compare the UK’s approach with EU policy and regulations to
highlight opportunities, risks and potential lessons to be learnt.We conclude by suggesting policy
recommendations that would support the metaverse development in the UK.
9
Digital Regulation Cooperation Forum (DRCF), “2023/24 Workplan” (27 April 2023):
https://www.ofcom.org.uk/__data/assets/pdf_file/0018/260712/DRCF-Workplan-2023-24.pdf
8
UK government, “Spring Budget 2023” (March 2023):
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1144441/Web_accessible_
Budget_2023.pdf
7
European Commission, “Virtual worlds (metaverses) - a vision for openness, safety and respect”:
https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/13757-Virtual-worlds-metaverses-a-vision-for-
openness-safety-and-respect_en

6. 6
II. What is the metaverse?
While not new10
, the metaverse and its underlying technologies continue to develop so quickly that the
scope of the metaverse and its potential impact continues to grow every day. Early definitions of the
metaverse have been shaped by an overly narrow conception of the metaverse in the media; attempts to
adopt and define the metaverse by individual companies; and the conflation of terms, such as the
metaverse, Web 3.0, immersive technologies and virtual reality (VR).
Innovative technologies, much like new discoveries, are rarely easily defined in their early stages, but
regardless, we can already see what the metaverse could entail. In fact, many of the definitions of the
metaverse share similar foundational elements, the most common being 3D virtualised environments that
are open and interoperable. The technologies enabling these elements, such as blockchain, AI and
distributed computing, are developing and progressing independently but are coming together to underpin
the metaverse.11
Virtual environments can be fictional representations of the world, for example, popular video games like
Roblox or Fortnite or a simulation of the real world known as ‘digital twins’. However, the virtual
environments that will populate the metaverse will distinguish themselves from predecessors due to their
extensive use of 3D design and rendering to create high-fidelity virtual environments with high pixel
count, photorealism, and low latency.12
Furthermore, Artificial Intelligence (AI) is likely to play an
increasingly important role in the creation of virtualised environments by helping reduce computing
power needed for simulations13
and make it easier for creators to populate them.14
Metaverse virtualised environments will not only distinguish themselves from predecessors
technologically, but also in terms of use cases.. For example, digital twins are today predominantly used in
industry to provide virtual representations of objects and simulations of operations.15
Yet despite their
benefits, the widespread adoption of twins has been slow, mostly due to a combination of lack of
investment, few clear business cases and organisational siloes.16
However, in the metaverse, companies
can connect multiple digital twins of different functions and operations to gain insight and offer new
consumer experiences.17
Two other common concepts of the metaverse are the interoperability and openness of virtualised
environments. The metaverse will comprise many interoperable virtualised environments where the
transfer and use of information, including digital assets and identities, are both technically feasible and
allowed. As such, it is important that the metaverse and access to it are not owned or controlled by a single
or few large companies as this will only see a repeat of the competition issues observed in digital markets
today. For example, virtual reality (VR), augmented reality (AR) or mixed reality (XR) headsets could be
used to control access to the metaverse. Such hardware is not necessary to access virtualised
environments: it is still possible to access them through applications on personal computers, portable
devices and TV screens and there is a risk that headsets could be used to grant access only to their selected
17
McKinsey, “Digital twins: From one twin to the enterprise metaverse” (October 2022):
https://www.mckinsey.com/capabilities/mckinsey-digital/our-insights/digital-twins-from-one-twin-to-the-enterprise
metaverse
16
Turner, J., “Digital twin: overcoming the challenges to adoption”, Orange Business Service (28 July 2022):
https://www.orange-business.com/en/blogs/digital-twin-overcoming-challenges-adoption
15
Attaran, M. and Celik, B.G, “Digital Twin: Benefits, use cases, challenges, and opportunities”, Decision Analytics Journal, 6, (March
2023): https://doi.org/10.1016/j.dajour.2023.100165
14
Salian, I., “NVIDIA AI Research Helps Populate Virtual Worlds With 3D Objects” (23 September 2023):
https://blogs.nvidia.com/blog/2022/09/23/3d-generative-ai-research-virtual-worlds/
13
IBM Research, “AI-enriched Simulation” (accessed May 2023): https://research.ibm.com/science/ai-enriched-simulation/
12
Enders Analysis, “Welcome to the metaverse: A toolkit for the next 24 months” (4 October 2022):
https://assets.ctfassets.net/77i4pkf08zk1/1dKuMwk68OBBK0H9wBEUtB/1e58cf1000ab1708f41be909e68c1ac2/Welcome_to_the_
metaverse_-_A_toolkit_for_the_next_24_months_-2022-097-.pdf
11
For example, see the NVIDIA and Microsoft partnership to accelerate AI through graphics processing units (GPU) powered by Azure
Solutions.
10
The term metaverse was coined in 1992 by the science fiction novelist Neal Stephenson in his novel Snow Crash.

7. 7
virtualised environments. Interoperability promises to increase consumer choice and decrease the risk of a
few companies becoming dominant by creating and maintaining “walled gardens”.
Interoperable virtualised environments will require common technical standards to make the different
technologies underpinning the metaverse work together. So far, industry and standards organisations
have led on metaverse standardisation through initiatives such as the “Metaverse Standards Forum”.18
However, governments will likely become more active in overseeing standardisation related to the
metaverse to ensure their national champions are reaping the benefits.19
This vision of the metaverse that allows people to experience and use virtualised environments together is
not without infrastructure demands and will, require networks with higher bandwidth, lower latency, and
more powerful computing capabilities. For example, research conducted by Enders Analysis suggests that
higher resolution in real time may require bandwidth of around 300-900Mbps.20
However, these are only
estimates based on assumptions on the uptake and design of metaverse technologies. While challenging,
companies, including Improbable, are investing in technologies to optimise networks and distributed
computing to support the development of the metaverse. Though nascent, distributed edge computing
could become an integral part of the metaverse because of its potential to minimise network latency and
reduce bandwidth demand as data processing and storage are moved closer to the metaverse consumer.21
Metaverse & Web 3.0
The metaverse and Web 3.0 are often used interchangeably. However, it would be more accurate to view the
two concepts as parallel digital transformations.
The main difference between the current internet, Web 2.0, and Web 3.0 is decentralisation in architecture
and governance of the Web. In terms of architecture, Web 3.0 allows users to connect without the need to
connect their devices to centrally owned servers. If successful, Web 3.0’s architectural decentralisation
could make it harder for individual companies to monopolise access to the web and lead to further
democratisation.22
The decentralisation of the Web will rely on different technologies, central among which is distributed
ledger technologies such as blockchain. Simply put, a technology like blockchain is an underlying data
structure of a distributed ledger where blocks of data, for example, transactions or stored records, are
linked together using cryptographic measures. If implemented correctly, blockchains enable Web 3.0 by
providing transparency and integrity in a decentralised environment and allow users to conduct secure
peer-to-peer agreements without a centralised authority.23
Blockchain is key to the metaverse because it allows users to share ownership and self-govern virtual
worlds as decentralised autonomous organisations (DAOs).24
Blockchain and smart contracts or other
open-source software systems enable such organisations to make decisions and conclude agreements free
from centralised oversight. This is seen in decentralised finance (DeFi) – the range of financial services,
24
According to the World Economic Forum, Decentralised autonomous organisations (DAOs) are entities that leverage blockchains,
digital assets and related technologies to deploy resources, coordinate activities and make decisions.
23
The National Cyber Security Centre defines Distributed ledger technology (DLT) as “a type of append-only data storage mechanism
that can provide high levels of transparency, integrity and availability in a decentralised environment.
22
Digital Regulation Cooperation Forum (DRCF), “Insight Paper on Web3” (January 2023):
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1135634/DRCF_Insights_
Paper_on_Web3_-_Publication_copy_Updated.pdf
21
Wolber, A., “How edge computing will support the metaverse” (4 October 2022). Tech Republic:
https://www.techrepublic.com/article/edge-computing-supports-metaverse/
20
Enders Analysis, “Welcome to the metaverse”.
19
The European Commission has stated that standardisation will be a key element for the development of the metaverse and it will
have to ensure that European companies are sufficiently involved in the standard-setting processes.
18
Launched in June 2022, the Metaverse Standards Forum, is an independent non-profit industry consortium aiming to encourage
and enable the development of open interoperability standards essential to an open and inclusive Metaverse.

8. 8
including lending, exchange, asset management and insurance conducted without traditional financial
intermediaries.25
Blockchain also allows data to move across virtualised environments seamlessly and securely. The
metaverse will need to be interoperable to allow the exchange of data across different virtual worlds.
Virtual worlds built on blockchains using the same cross-chain protocols could allow data exchanges, for
instance of exchanges of avatars, non-fungible tokens (NFTs).26
For example, blockchain authentication,
access control, and consensus mechanisms could make account verification for digital identities more
resilient to cyber-attacks, thus improving consumer confidence.27
For similar reasons, reliable blockchain
based cryptocurrencies allow secure peer-to-peer transactions at the scale needed to build an economy
system between virtualised environments without shared currencies.28
28
Huynh-The, T., Gadekallu, T.R., Wang, W., Yenduri, G., Ranaweera, P., Pham, Q.-V., da Costa, D.B. and Liyanage, M., “Blockchain
for the metaverse: A Review”, Future Generation Computer Systems, 143, pp.401–419 (June 2023):
doi:https://doi.org/10.1016/j.future.2023.02.008.
27
VentureBeat, “Why the fate of the metaverse could hang on its security” (January 2022):
https://venturebeat.com/uncategorized/why-the-fate-of-the-metaverse-could-hang-on-its-security/
26
According to the UK government, Non-Fungible Tokens (NFTs) are a “digital asset that represents a real-world object, such as a
digital only artwork, music, or game. Like other cryptoassets, NFTs use a technology such as DLT to record and verify ownership.
Unlike some other cryptoassets, NFTs are not fungible; each NFT is unique and cannot be mutually traded or substituted for another
token.”
25
UK government, “Future financial services regulatory regime for cryptoassets: Consultation and call for evidence” (February 2023):
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1133404/TR_Privacy_edits_
Future_financial_services_regulatory_regime_for_cryptoassets_vP.pdf

9. 9
III. Economic and Social Impact of the metaverse in the UK
Metaverse value chain
The metaverse is a complex ecosystem of different technologies used and operated by a multitude of
players at different parts of the value chain. Broadly these are:
- End-users – Individuals and consumers in virtualised environments will be able to engage in social and
economic activities , from consuming content to exchanging ideas and creating and purchasing products
and services.
- Businesses and economic actors – Creators and business users will form new economic models in the
metaverse. Sectors leading the way are sports, gaming and music. The World Economic Forum has found
several business models that could emerge in consumer-led virtualised environments. These include
economic models centred on selling metaverse goods and experiences, generating revenue from digital
products and assets, to immersive commerce advertising and marketing and content creation in
virtualised environments.29
Additionally, digital twins will continue to be used to improve the efficiency
of design and manufacturing processes for industry.30
- Software and platforms – Providers and operators of virtualised environments will provide creators and
business users the tools to conduct economic activities.
- Infrastructure and networks – Providers of hardware, software and networks will move to provide
products and services that enable access to the operation of virtualised environments. For example,
some telecom providers are investing in optimising mobile networks to offer metaverse experiences.31
Potential Benefits of the Metaverse in the UK
Assessing the impact of the metaverse is challenging because many of its underlying technologies are still
being developed and use cases explored. However, several companies have attempted to estimate the
potential benefits of the metaverse for the UK economy. For example, a survey by KPMG finds that almost
half of UK consumers think the metaverse will become widely used in the next 10 years. This high level of
receptiveness among people in the UK suggests that unlocking the potentials of the metaverse may be
easier, as there is already a significant portion of the population who are anticipating and open to its
widespread adoption.32
Economic benefits
According to some estimates, the total revenue of the metaverse in the UK could reach £1.84bn per year in
2023 growing to £15.87bn in 2030.33
UK metaverse-related industries are expected to grow with a
compound annual growth rate (CAGR) of around 35% from 2023 to 2030.
With novel growth in many sectors, the metaverse is a huge employment opportunity for the UK . As the
metaverse starts to feature more prominently in our day to day lives, it will play a bigger role in our
33
Statista, “Metaverse - United Kingdom | Statista Market Forecast” (accessed May 2023)
32
Briggs, F., “Almost Half Of UK Consumers Think The Metaverse Will Become Widely Used In The Next 10 Years, New Survey From
KPMG UK Finds, Retail Times (3 May 2023):
https://retailtimes.co.uk/almost-half-of-uk-consumers-think-the-metaverse-will-become-widely-used-in-the-next-10-years-
new-survey-from-kpmg-uk-finds/?utm_source=www.immersivewire.com&utm_medium=newsletter&utm_campaign=meta-ties
-ar-closer-to-its-ads-offering
31
BT, “Could the Metaverse be the internet’s successor?” (17 January 2023):
https://www.globalservices.bt.com/en/insights/whitepapers/could-the-metaverse-be-the-internets-successor
30
Siemens, “What is the Industrial Metaverse and why should I care?”:
https://www.siemens.com/global/en/company/insights/what-is-the-industrial-metaverse-and-why-should-i-care.html
29
World Economic Forum, “Demystifying the consumer metaverse” (January 2023):
https://www3.weforum.org/docs/WEF_Demystifying_the_Consumer_Metaverse.pdf

10. 10
economy, transforming existing work and creating new jobs and opportunities for individuals and
businesses to showcase themselves in new ways.
The range of economic activities that will become available in the metaverse offers growth opportunities
across many sectors. The metaverse is already transforming the gaming sector, but it is also expected to
transform other sectors as diverse as e-commerce, education and health and fitness. Even industries like
tourism could be affected, presenting innovative opportunities that can greatly enhance the overall travel
experience or replace it altogether. Through the metaverse, travellers could be granted the freedom to
virtually explore any destination worldwide, to look around hotels in advance of travel, consider places to
eat, or check whether the terrain is suitable for elderly relatives. Moreover, as sustainability takes centre
stage in the global consciousness, the metaverse could be a powerful tool to provide the immersive
experience of concerts or special occasions without the need for travel.
Industries as established as auction houses can be seen taking pioneering steps into the metaverse. In
2021, Sotheby's hosted their first digital art auction in Decentraland, a decentralised virtual reality
platform supported by blockchain technology. Sotheby's recreated their renowned London headquarters
digitally and provided visitors with the opportunity to interact with artworks from 27 NFT artists.34
This
groundbreaking event demonstrated the metaverse's capacity to foster new and immersive ways for
creators to connect, transcending the limitations of physical spaces.
Societal benefits
Virtualisation could also positively impact UK society by helping to educate and upskill people, as well as
help solve complex problems such as climate change and mitigate national security risks.
There are various potential applications of the metaverse in education, and universities across the UK are
considering how to offer virtualised experiences. For example, Cambridge University has partnered with
AR publishing company, Ludenso to offer interactive educational materials.35
Limited mathematical ability
is an enduring cause of disengagement from STEM subjects, and immersive technologies are the perfect
environment for students to learn the spatial reasoning and physical abstraction skills that are the core
predictors for success in STEM.36
For languages especially, comprehension and retention are greatly
improved when students are immersed in realistic scenarios rather than textbooks.37
The metaverse also allows people to test scenarios that would be impossible or expensive to create
physically and to visualise information that would be otherwise impractical to present. In medicine, for
example, VR has the potential to improve training and the accuracy of surgery. Last year, medical students
at Queen Mary University received their first lecture in a virtualised environment, with one Professor and
surgeon at the university explaining that 3D virtual environments, though not a replacement for in-person
teaching, can allow students to interact with anatomical models and simulate a real-life medical procedure
in VR in a way they cannot on other communication platforms.38
Similarly, Guy’s and St Thomas’ London
hospital is using VR to train surgeons.39
While the use of virtualised environments in surgery may not be
rolled out to scale yet, the results could be miraculous, as was the case when two surgeons in separate
countries wore headsets and operated in the same "virtual reality room" to successfully separate conjoined
twins.40
40
McCallum, S., “Conjoined twins separated with the help of virtual reality” BBC News (August 2022):
https://www.bbc.co.uk/news/technology-62378452
39
Guy’s and St Thomas’ NHS Foundation Trust, “ Guy’s and St Thomas’ uses virtual reality to boost surgical training” (30 August
2022): https://www.guysandstthomas.nhs.uk/news/guys-and-st-thomas-uses-virtual-reality-boost-surgical-training
38
Queen Mary University of London, “Queen Mary students receive first lecture in the metaverse”(19 January 2022):
https://www.qmul.ac.uk/media/news/2022/pr/queen-mary-students-receive-first-lecture-in-the-metaverse.html
37
Tai, T.-Y. and Chen, H.H.-J., “The Impact of Immersive Virtual Reality on EFL Learners’ Listening Comprehension”, Journal of
Educational Computing Research, 59, 7 (2021): https://doi.org/10.1177/0735633121994291
36
Prisms VR, “The new paradigm for maths education” (accessed May 2023): https://www.prismsvr.com/
35
Cambridge University Press, “Transforming the student experience with augmented reality textbooks (24 November 2022):
https://www.cambridge.org/partnership/research/transforming-the-student-experience-with-augmented-reality-textbooks
34
Falon, F., “The Metaverse Will Radically Change Content Creation Forever”, Forbes (7 March 2022):
https://www.forbes.com/sites/falonfatemi/2022/03/07/the-metaverse-will-radically-change-content-creation-forever/

11. 11
The metaverse, through digital twins, could also help us reach solutions to complex climate and security
issues. Digital twins are recognised for their power to advance monitoring and system-level decision
making. The efficiency and scalability of metaverse technologies are enabling the creation of digital twins
that reach new levels of speed, security and availability increasing efficiencies in industries.41
With regard
to sustainability, the metaverse could simulate and test sustainability measures, before implementing
them in the physical world. In the energy sector, Tech UK believes that utilising digital technology could
help find solutions to facilitate the renewable transition through, for example, improved cross-sectoral
modelling and energy infrastructure management.42
Similarly, shared synthetic environments support training, operational planning and real-time
decisionmaking in the Ministry of Defence. The UK Strategic Command (UKSC) commissioned Improbable
to develop the Single Synthetic Environment (SSE) Technology Demonstrator to investigate the
large-scale, multi-domain simulation of military scenarios. This evolved into the Skyral platform, used to
run massive multi-domain simulations that consolidate intelligence from operational domains into a
virtual layer accessible to planners and units on the ground via various immersive technologies.
Distributed technology enables unprecedented interoperability between data sources via a platform that is
agnostic about the user’s method of access.
Building an open, interoperable and safe metaverse
For all its potential benefits, a poorly designed and governed metaverse could also pose challenges. As we
will highlight in the next section, several societal and consumer issues could emerge in a variety of policy
areas, ranging from online safety and data protection to competition and cybersecurity.
Tackling them requires industry and democratic governments to work together to set the vision of the
metaverse that will allow UK citizens to use and benefit from virtualised environments without incurring
the potential harms that may materialise. As many of the issues that may emerge in the metaverse are
similar to those experienced in Web 2.0, a critical exercise to set this vision is to assess the applicability of
existing and forthcoming regulations to metaverse technologies and ensure they are applied consistently.
At the same time, it will be equally important to explore how these interventions will affect metaverse
providers and their ability to innovate at pace. The next section will seek to start this task for several policy
areas.
42
TechUK, “Whitepaper Highlighting the Power of Digital Twins in the Energy Sector” (14 October 2022):
https://www.techuk.org/resource/new-techuk-whitepaper-highlights-the-power-of-digital-twins-in-the-energy-sector.html
41
Also increasing productivity across high value sectors like aerospace, automotive and telecommunications.

12. 12
IV. The UK regulatory environment
Introduction
In the Spring Budget 2023, the UK government committed “to lead on the future of web technology” (Web
3 and the metaverse) and work to maximise their potential to spur UK growth and innovation.43
To date,
the government’s legislative priorities have been on addressing issues related to Web 2.0 through
legislation that could also impact the metaverse. The UK government has yet to develop a holistic strategy
to support the development of metaverses or consider how legislation might affect it.
However, UK regulators have not remained idle. The Digital Regulation Cooperation Forum (DRCF) has
sought to initiate a more joined-up approach to the regulator’s engagement and learning about
metaverse-related technologies. In May 2022, the DRCF hosted, in partnership with Digital Catapult, the
‘Metaverse Symposium’ to exchange views with industry, analysts, academics and other stakeholders
interested in promoting the development of metaverses.44
Following this initial exercise, the DRCF’s joint
horizon scanning programme will explore how new products and services may develop in virtual
environments and consider drivers for developing and adopting these innovative technologies.45
In its recent paper - Smarter Regulation to Grow the Economy46
- the government outlined its principles
for regulation, including ensuring regulation “is a last resort, not a first choice” and improving
“regulators’ focus on growth”. The UK is also considering placing a ‘Growth Duty’ on all regulators. To
ensure that regulators follow the government’s preferred approach to regulating the metaverse, the
government will need to act and provide a clear strategy. This should follow the same approach the
government took in its recent AI White Paper - providing clear regulatory principles for regulators to
follow but stopping short of direct legislation to allow for further technological innovation to progress.
The government also outlined in it ‘Benefits of Brexit47
’ paper that “better regulations, co-created with
businesses, will also benefit the future industries”. The government must ensure it practices this when
regulating the metaverse. In order for the UK to grasp the opportunity to lead the way on online safety,
greater and continuous emphasis will be needed on forging a deeper collaboration between metaverse
service providers, government and regulators. It will be essential to work pragmatically to avoid creating
hurdles for an industry that is in its infancy.
By contrast, the European Commission is expected to adopt a Communication to unveil its vision for the
development of ‘virtual worlds’ in July this year.48
The Communication will likely outline the economic and
social opportunities of virtualisation and the challenges to the uptake and development of emerging
technologies that underpin metaverses.49
The European Commission is unlikely to propose new
metaverse-specific legislation as it believes that current EU digital regulations are sufficiently futureproof
to address harmful behaviours and practices in metaverses.50
However, the European Commission is likely
to acknowledge the growing complex regulatory regimes and the need to assess how laws like the Digital
Service Act (DSA) and AI Act interplay and apply to metaverses.
50
Wenzel Bulst, F. and De Vinck, S., “DG COMP | Understanding the metaverse – a competition perspective” (17 October 2022):
https://eaccny.com/news/chapternews/dg-comp-understanding-the-metaverse-a-competition-perspective/
49
European Commission, “Virtual worlds (metaverses) - a vision for openness, safety and respect”.
48
The European Commission Communication has already been delayed twice, and its adoption may be pushed back further. The
European Commission has publicly stated that the delay is purely an ‘administrative’ decision to give priority to legislative initiatives.
47
UK government, “The benefits of Brexit: How the UK is taking advantage of leaving the EU” (January 2022):
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1054643/benefits-of-brexit.pd
f
46
UK government, “Smarter regulation to grow the economy: An introduction to the UK government’s vision for regulation” (10 May
2023): https://www.gov.uk/government/publications/smarter-regulation-to-grow-the-economy
45
Digital Regulation Cooperation Forum (DRCF), “2023/24 Workplan” (27 April 2023)
44
Howe, J., Digital Regulation Cooperation Forum (DRCF) “The Metaverse and immersive technologies - A regulatory perspective”
(22 June 2022):
https://competitionandmarkets.blog.gov.uk/2022/06/22/the-metaverse-and-immersive-technologies-a-regulatory-perspective/
43
UK government , Spring Budget 2023, p. 66

13. 13
Like the EU, the UK has proposed numerous regulations and policy initiatives to address specific
challenges or to support the development of nascent technologies, such as the Online Safety Bill, the Data
Bill and the AI White Paper. These regulations and policies will also likely apply and impact metaverse
services. Yet, while the EU and UK have acted to address similar issues, their approach to tackling harms
has at times been different, with the UK government proposing less prescriptive regulations seeking
greater flexibility and proportionality. And a lack of strategic vision means the UK risks falling behind the
EU, and missing an opportunity to positively differentiate itself and shape the rules and regulations
governing the metaverse.
Recommendations:
- The UK government should set out a metaverse strategy to support the development of the metaverse.
This approach should highlight the need to let metaverse technologies develop before adopting specific
primary legislation. Instead, the government should (i) provide principles for regulators to follow when
considering the regulation of metaverse technologies and (ii) develop a central coordination function.
- The central coordination function and regulators should maintain a regular dialogue and collaborate
with metaverse service providers and other stakeholders to review existing regulations and co-design
new regulations where gaps may exist.
- As part of its strategy the UK government should identify metaverse use cases and business models that
could drive investment in the UK and support businesses in those areas to grow and export.
User safety
The extraordinary growth led by the advent of Web 2.0 has been coupled with the proliferation of illegal
and harmful content online, which has occupied the minds of European legislators for the last few years.51
The UK’s response has been the Online Safety Bill (OSB), which seeks to protect users, especially children,
from harmful and illegal content online by requiring online service providers to take appropriate steps to
prevent its dissemination. With similar aims, the EU has developed the Digital Services Act (DSA), which
will apply to all EU Member States from 17 February 2024.52
Both the OSB and DSA are expected to affect
metaverse service providers. In the UK, the government stated that while there is no explicit mention of
the metaverse in the OSB to keep the bill technologically neutral, the law will include a broad range of
services, including virtual reality spaces.53
The OSB requires that online service providers, including metaverse content providers, take measures to
prevent children encountering harmful content, which may include age verification or other age assurance
methods.In addition, firms will have to comply with specific duties if services are likely to be accessed by
children including a children’s risk assessment. In addition, companies would also be bound to the Age
Appropriate Design Code which was produced by the UK Information Commissioner, however is not legally
enforceable This statutory code under the Data Protection Act 2018 includes any online service that is likely
to be accessed by children.
In the EU, the DSA does not explicitly give mention to age verification, the Act addresses the protection of
children in broader terms with no specific obligations. In that regard, the EU’s broader policy may be
deemed more flexible avoiding unforeseen obstacles for metaverse service providers.
The Bill also imposes a duty of care on online service providers to ensure their platforms are safe for users,
including protecting them from harmful content. Metaverse service providers would have an overriding
duty of care to ensure risks are actively identified and mitigated. This would include an annual
53
Lord Parkinson of Whitely Bay (27 April 2023), “Online Safety Bill”, Hansard (Vol. 829):
https://hansard.parliament.uk/Lords/2023-04-27/debates/958CAC63-A345-45E8-9DE3-7CBA46611DCA/OnlineSafetyBill
52
Regulation (EU) 2022/2065, “Digital Services Act”, OJ (L 277), 27.10.2022: http://data.europa.eu/eli/reg/2022/2065/oj
51
Ofcom, “Internet users’ experience of potential online harms: summary of survey research” (Jan/feb 2020):
https://www.ofcom.org.uk/__data/assets/pdf_file/0025/196414/concerns-and-experiences-online-harms-2020-chart-pack-acce
ssible.pdf

14. 14
transparency report issued by OFCOM. The EU’s approach to the duty of care is narrower and more specific,
underpinned by four key principles: transparency, empowering users, risk management obligations, and
industry cooperation. Metaverses would also be bound to publish transparency reports at least every six
months as well as publishing trading information.
The OSB includes fines of up to 10% of a provider’s worldwide qualifying revenue or £18 million
(whichever is higher) if firms fail to remove harmful content54
. This could also result in criminal sanctions
against senior business managers. Similarly, the DSA also proposes potential fines of up to 6% of global
turnover as well as giving Member States or the Commission the power to impose fines of up to 1% for not
transparently complying with request for information. However, there is no reference of criminal liability
for non-compliance.
As a result of strict penalties and personal criminal liability, there is a potential to discourage metaverse
content providers from experimenting with new and innovative approaches that could be deemed
controversial or risky. This in turn may make the UK a less desirable place to invest, in comparison to the
EU and slow down the industry’s growth. Investors are particularly sensitive to legal risks and
uncertainties, and the proposed strict liability provisions in the Online Safety Bill could significantly
increase the risk profile of online companies operating in the UK. This could deter potential investors and
make it harder for UK-based companies to compete globally.
Businesses, policymakers and regulators all agree that ensuring the protection of children is vital, but it
must be acknowledged that this will involve costs for businesses. To fulfil the duty of care obligations,
measures will have to be taken to safeguard young people from harmful content that may require
investments in technology for content filtering, the employment of more staff to monitor content, and
training costs. For small metaverse service providers, these costs could be substantial and impede their
ability to compete with larger entities and to scale up or ever get off the ground in the first place. The UK
should ensure that the implementation of these obligations by regulators is flexible and proportionate and
done in collaboration with relevant businesses.
Recommendation:
- When implementing the Online Safety Bill, the government and regulators should collaborate with
businesses and take a flexible and proportionate approach to support start-ups and innovation in the
metaverse. This could include providing greater flexibility to SMEs and using regulatory sandboxes and
safe harbours from criminal liability.
Artificial Intelligence (AI)
The economic and social potential of the AI industry is quickly being noticed and acknowledged in the UK.
A report commissioned by the government identified 3,170 UK AI companies that generated £10.6bn in
AI-related revenues.55
The UK government released the AI White Paper that puts forward proposals based
around five broad overarching principles to regulate AI with the aim of fostering responsible innovation as
well as building public trust. These are - safety and security; transparency and explainability; fairness;
accountability and governance; and contestability and redress.
The UK’s approach to regulating AI is arguably the area where it has been most divergent from the EU
approach. EU policymakers published their own policy document in 2020 which was followed by the
European Commission’s legislative proposal on AI regulation. This is currently going through the
legislative process with the expectation of the Act being formally approved later this year and coming into
force after two years.
55
Pespective Economics, “Artificial Intelligence Sector Study Research report for the Department for Science, Innovation &
Technology (DSIT)” (March 2023):
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1145582/artifical_intelligence
_sector_study.pdf
54
UK government, “ A guide to the Online Safety Bill” (16 December 2022):
https://www.gov.uk/guidance/a-guide-to-the-online-safety-bill

15. 15
The UK White Paper does not propose the creation of a new regulator but rather passes responsibility to a
newly formulated central function that will convene regulators by empowering them to create tailored
sector-specific regulatory frameworks based on the above principles. The government intends to publish
an AI regulatory roadmap and a monitoring and evaluation report next year.
In contrast, the EU’s AI Act advances the establishment of a new European AI Board tasked to oversee the
consistent enforcement of AI regulation coupled with national competent authorities with the role of
enforcement at the national level.56
Furthermore, in contrast to the UK’s White Paper which puts forward
broad principles, the EU’s AI Act presents a more robust four-tiered risk framework with obligations and
conditions needing to be complied with.57
For metaverse service providers in particular, a less stringent
framework could allow them to experiment with new technologies and business models more easily.
The UK approach to regulating this nascent and emerging technology that could be utilised in multiple
sectors and contexts is to be applauded and should be adopted more widely, including for the metaverse.
While each regulator may have varying interpretations of the rules, and enforcement could be uneven
across different sectors, the central coordination function should prevent this.
Another challenge for the UK is the potential difficulty in coordinating with international partners on AI
regulation if there are significant discrepancies between their regulatory frameworks. This could create
barriers to trade, create divergent experiences of the metaverse and hinder the UK's ability to participate in
international AI research and development collaborations. The government should continue to work with
international partners to export their approach more widely.
Recommendation:
- The UK government should ensure there is regular communication and coordination between
regulators, the AI central coordination body and AI businesses, including a wider group of companies
where the impacts relate to the metaverse or other technologies. If this model of central coordination is
adopted for the metaverse (recommended above), it should adopt a similarly collaborative approach
with stakeholders from other relevant technologies.
Data Privacy & Protection
Enabling people to enjoy immersive experiences in different interconnected virtualised environments is
expected to require the collection and processing of personal data, potentially sensitive data, for example,
to build identities for avatars, as well as greater data sharing and portability to allow people to move such
avatars and other digital assets across the metaverse.
The prospect of large amounts of personal data being collected, processed and moved around virtual
worlds has attracted the attention of UK and EU data protection authorities concerned about the negative
data protection and privacy implications.58
Some foreseen issues relate to the application of current data
regulations in a decentralised metaverse where the roles of data controllers and processors may become
blurred, making it challenging to determine responsibilities and liabilities. However, a more pressing
concern for the Information Commissioner’s Office (ICO) appears to be the collection of large amounts of
sensitive personal data by immersive technologies such as AR and VR headsets.59
This focus may also be
due to the relative maturity of the AR/VR market compared to other metaverse technologies.
59
Information Commissioner’s Office (ICO), “Tech Horizons Report” (December 2022):
https://ico.org.uk/media/about-the-ico/documents/4023338/ico-future-tech-report-20221214.pdf
58
European Data Protection Supervisor (EDPS), “Tech Sonar 2022-2023 Report” (November 2022):
https://edps.europa.eu/system/files/2022-11/22-11-10_techsonar_report_22_23_en.pdf
57
Feingold, S., World Economic Forum “The EU's Artificial Intelligence Act, explained” (28 March 2023):
https://www.weforum.org/agenda/2023/03/the-european-union-s-ai-act-explained/
56
Osborne, C., “The European Commission’s Artificial Intelligence Act highlights the need for an effective AI assurance ecosystem” -
Centre for Data Ethics and Innovation Blog (11 May 2021):
https://cdei.blog.gov.uk/2021/05/11/the-european-commissions-artificial-intelligence-act-highlights-the-need-for-an-effective-
ai-assurance-ecosystem/

16. 16
The EU General Data Protection Regulation (GDPR) and the UK GDPR should be able to address some of the
new issues arising in the metaverse. For example, the GDPR and the Data Protection and Digital
Information (No. 2) Bill, which will reform the UK GDPR, prohibits processing sensitive personal data
classified as ‘special category data’, such as personal data revealing race, religion or sexual orientation or
biometric data, unless certain conditions are met. However, there is still the risk that technological
advancements will allow for the collection of novel types of data, such as neural data, which may cause
legal ambiguity and which will require additional safeguards.
As the metaverse will be more immersive and interactive than Web 2.0, further consideration will need to
be given to the balance between user verification and the existing public expectation of a right to
anonymity online. For example, if websites become more like places or rooms where we can see and
interact with others it may be easier to identify and trace an individual's interest in particular topics. This
will no doubt concern governments, who will also need to consider the implications for national security.
Therefore, while existing rules will apply to the metaverse, they may also have to be adapted to the
specificities of the metaverse should the need arise. However, when making decisions on data protection
policy towards the metaverse, the UK government and ICO should continue to consider the speed at which
metaverse technologies could develop and how to ensure rules do not hamper innovation in the sector. To
this end, the UK government should prioritise encouraging organisations to embed privacy by design in the
technical infrastructure, policies and standards of emerging technologies.
Recommendations:
- Once the Data Protection and Digital Information (No. 2) Bill is enacted, the UK government should
include in its first statement of priorities to the ICO the development of data privacy initiatives in
metaverse technologies as a key component of its future work.
- The ICO should continue its efforts to develop regulatory sandboxes, especially on emerging
technologies, and discuss with the industry whether more initiatives on other maturing metaverse
technologies are needed.
Cyber security
The increased volume of data collected and shared in the metaverse will likely make virtual environments
attractive to cybercriminals. Existing cybersecurity challenges, such as phishing, malware and hacking,
will likely endure in the metaverse and may expose vulnerabilities in both hardware and software.
In addition, cybercriminals could also seek to commit new cyber crimes, such as committing fraud or theft
of nonfungible tokens (NFTs) and cryptocurrencies, as well as identity theft of avatars. To add to these
issues’ complexity, the anonymity provided by digital wallets through blockchain transactions makes it
increasingly hard to identify cyber criminals.60
The UK61
and EU62
have existing comprehensive cybersecurity laws to deal with cybersecurity issues, which
could help deal with some vulnerabilities that may manifest in the metaverse. For example, the UK Product
Security and Telecommunications Infrastructure Act sets mandatory security requirements for
consumer-connectable products, including AR/VR headsets.63
Similarly, the EU is passing the EU Cyber
Resilience Act, which will create common cybersecurity conditions for the design, development and
production of goods and existing cybersecurity rules for all products with ‘digital elements’.64
However,
64
Proposal for a Regulation (EU) on horizontal cybersecurity requirements for products with digital elements and amending
Regulation (EU) 2019/1020, https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex:52022PC0454
63
Product Security and Telecommunications Infrastructure Act 2022 (c. 46),
https://www.legislation.gov.uk/ukpga/2022/46/contents/enacted
62
European Commission, “Cybersecurity Policies”: https://digital-strategy.ec.europa.eu/en/policies/cybersecurity-policies
61
UK government, “National Cyber Strategy 2022”(December 2022):
https://www.gov.uk/government/publications/national-cyber-strategy-2022/national-cyber-security-strategy-2022
60
UK CyberWeek, “Cybersecurity in the Metaverse” (2022): https://www.ukcyberweek.co.uk/cybersecurity-metaverse-

17. 17
the effectiveness of these pieces of legislation in addressing vulnerabilities of immersive connected
technology will depend on how the laws are practically implemented.
Current cybersecurity rules may not cover all cyber threats emerging in the future metaverse. For example,
further consideration must be given to whether existing laws can sufficiently protect against avatar
identity theft in a decentralised metaverse. In the interim, enhancing citizens’ awareness of the cyber
threats that could materialise in the metaverse will be vital to mitigating such risks.
Recommendation:
- The UK government should task the National Cyber Security Centre to assess whether current
cybersecurity legislation is fit to meet the potential cyber threats in the metaverse.
- As the metaverse grows, the UK government should include warnings about the risks to cyber security in
the metaverse into their education initiatives.
Competition
The UK government has recently introduced the Digital Markets, Competition and Consumers Bill which is
expected to receive Royal Assent in the first half of 2024. This follows numerous reports and research by
external advisors, academics and by the UK competition authority. The Bill will provide new powers to
tackle competition issues in digital markets and give new powers to the Competition and Markets
Authority (CMA) to impose requirements on, or make interventions in relation to, major tech firms which
could see the CMA enforce interoperability, licensing and, in extremis, to break up businesses where they
have entrenched market power. Such interventions will be made through ‘conduct requirements’ and
‘pro-competitive interventions’ to firms designated by the CMA as having ‘Strategic Market Status’.
The UK regime is notably more flexible than the EU’s equivalent Digital Markets Act (DMA) where the
legislation itself puts firms in scope where they meet specific criteria and requires them to abide by a set of
obligations that may not be appropriate or necessary in the context of certain markets. Under the DMA, the
European Commission can designate so-called ‘emerging' gatekeepers that are on a clear path to
entrenched market power. Some metaverse services could be captured under the existing ‘core platform
services’ definition, but the Commission is also able to regularly review the list of ‘core platform services’
and is required by statute to do so every three years so the scope could grow in the future but this will be
dependent on the EU conducting the necessary detailed analysis of the market.65
Similarly, the UK has yet
to enact its legislation so the UK competition authorities will need to enhance its analysis of the metaverse
and relevant sectors. Therefore, both the UK and EU authorities are confident their regimes and the powers
within them are future proof enabling them to capture companies developing and operating in the
metaverse. But the UK regime has more flexibility, as the law is essentially a framework of powers for the
CMA, which has broad discretion on how to use them.
It is clear both authorities intend to use these powers to prevent companies from maintaining or
developing entrenched power over new or existing technologies. The CMA in the UK is already undertaking
an “initial review” into the AI market for foundation models to consider whether competition issues may
emerge. As the metaverse develops, it is plausible that the CMA may similarly look to ensure that the
metaverse remains an open and interoperable technology that is not dominated by companies operating
‘closed’ virtual worlds and that relevant Standard Essential Patents can be licensed on fair and reasonable
terms. Many small and large firms should have the opportunity to develop and enhance the metaverse if
they are able to access it on these terms. A decentralised metaverse will ensure everyone has the
opportunity to build a business, a presence or simply explore the metaverse with the same ease and
freedom as they can do on the internet.
New competition issues may arise that are as yet unforeseen. While the metaverse may be open, people
may gravitate towards a single way of navigating it. In the same way that search engines became the
65
Regulation (EU) 2022/1925 “Digital Markets Act” Article 53 states that the Commission shall evaluate the DMA by May 2026 and
every three years after that.

18. 18
‘gatekeepers’ to the internet, new ‘gatekeepers’ may emerge in the metaverse. Similarly, the best ‘real
estate’ in the virtual worlds may be dominated by early adopters that demand unfair terms.
Recommendation:
- At the heart of the government’s strategy should be principle of an open, decentralised, competitive
metaverse that enables firms to trade on fair and reasonable terms. This should be primarily delivered by
providing the CMA with the powers outlined in the Digital Markets, Competition and Consumers Bill.
- As the market continues to develop the Competition and Markets Authority should conduct an initial
review of the market for metaverse technologies to ensure the market remains competitive.
Cryptoassets and non-fungible tokens (NFTs)
A blockchain-based decentralised metaverse and its economy will likely see the extensive use of
distributed ledger technology (DLT) applications, such as cryptoassets66
and non-fungible tokens (NFTs).
While these applications have benefits in the metaverse, like all financial products they require safeguards,
to protect against harms.67
These harms have pushed UK and EU regulators and policymakers to consider
regulatory interventions for cryptoassets and NFTs to varying degrees.
In the UK currently, the FCA can supervise UK cryptoasset companies to ensure they have anti-money
laundering and counter-terrorist financing (AML/CTF) measures in place.68
Similarly, the UK Advertising
Standards Authority (ASA) supervises promoting cryptoassets by scrutinising social media, web pages and
adverts. Yet, cryptoassets have so far not been regulated by default, and most cryptoassets are not subject
to existing rules restricting financial promotions.
The UK government has recently taken steps to regulate cryptoassets through different policy initiatives.
The government has proposed to bring certain stablecoins69
into financial services regulation via the FS&M
Bill, currently in the House of Lords. The Bill would also amend the Financial Services and Markets Act
2000 to clarify that the government could use its existing powers in that act to regulate cryptoassets.70
In
February 2023, HM Treasury also published a consultation paper on its regulatory approach to
cryptoassets. On top of the current AML/CTF regime and changes brought by the FS&M Bill, the
government proposed to create a new regulatory framework, based on the rules which apply to comparable
traditional financial services activities, to cover cryptoassets. The government is also in the process of
bringing certain cryptoassets into the scope of the Financial Promotions Regime through secondary
legislation.71
The EU has sought to balance innovation and consumer protection when regulating cryptoassets. However,
the EU has taken a somewhat different approach to its cryptoasset regulatory framework. While the UK has
sought to reform the existing UK regulatory framework to cover cryptoasset-related activities in a
piecemeal and step-by-step basis, MiCA sets out a new single legislative framework for cryptoasset
markets. Yet the definition of “cryptoasset” in MiCA and the UK proposals is not dissimilar, and both the
EU and the UK have sought to implement the “same risk, same regulatory outcome” for crypto activities.
While cryptoasset activities will be regulated by both the EU and UK, the recent regulatory initiatives
mentioned above do not seem to cover or set concrete plans for decentralised finance or NFTs, which as
explored in previous sections of this report, are elements of importance to the finance and economy of a
71
UK government, “Future financial services regulatory regime for cryptoassets: Consultation and call for evidence” (February 2023)
70
House of Lords Library, “Cryptoassets: What does the future hold?” (9 March 2023):
https://lordslibrary.parliament.uk/cryptoassets-what-does-the-future-hold/
69
Stablecoins are a type of cryptoasset. Stablecoins are generally created once an individual deposits the equivalent amount in a
national currency.
68
Financial Conduct Authority (FCA), “Cryptoassets: AML / CTF regime”,
https://www.fca.org.uk/firms/financial-crime/cryptoassets-aml-ctf-regime
67
UK government Department for Science, Innovation and Technology (DSIT), Written evidence to Parliamentary inquiry into NFTs
and the blockchain, https://committees.parliament.uk/writtenevidence/119519/pdf/
66
According to the UK government, Cryptoassets are a digital representation of value, the ownership of which is cryptographically
proven (using computer code).

19. 19
decentralised metaverse. NFTs do not fall within the remit or definitions in MiCA, except where they
qualify as cryptoassets within the scope of the regulation, or the FCA’s Guidance on Crypto-Assets or in the
upcoming UK government secondary legislation focused on the promotion of cryptoassets. Similarly, DeFi
is not directly covered by MiCA or the FS&M Bill.
However, European and UK regulators are unlikely to remain idle. The European Commission has already
started work on a targeted review of MiCA that will focus on DeFi and NFTs to finalise a report in 2024. The
UK government’s approach is also being formulated but appears less developed at this stage. The HM
Treasury consultation includes a Call for Evidence on DeFi and outlines various potential regulatory
options but does not commit to concrete actions.72
Similarly, the UK government has been prompted to explain its approach to NFT regulation by the UK
Parliament’s Culture, Media and Sport Committee but has not committed to introducing specific NFT
regulation. Instead, the government limited itself to stating that NFTs used in financial services activities
could be considered cryptoassets and fall under existing regimes. Therefore, while existing UK financial
regulations covering cryptoassets will likely affect the financial services in the metaverse, the ambiguity
around NFTs and DeFi suggests that gaps remain, creating uncertainty for financial services providers
developing applications in the metaverse.
Recommendation:
- HMT and the FCA should consider whether it is appropriate for all NFTs to fall within existing regulatory
regimes. Any proposed regulation should also consider a proportionate approach to potential risk factors
and recognise that NFTs are used for a wide range of activities, for which different regulatory
approaches are appropriate. The FCA and other regulators should first consider using regulatory
sandboxes and existing conduct and customer protection rules to address issues arising from the use and
trade of NFTs in virtualised environments.
Intellectual Property (IP) Protection
The metaverse has offered brands the promise of a new space to reach consumers. The fashion industry
has started building digital stores, selling digital products and minting NFTs in virtualised environments.
According to some analysts, despite the increased volatility in the NFT market due to speculation, their use
by luxury brands will likely continue for the foreseeable future.73
However, brands face new challenges as IP rights holders in virtualised environments. These challenges
have stemmed from the lack of legal clarity on how IP protections such as trademarks and copyright apply
to virtual goods and NFTs and the difficulty with identifying infringers on decentralised networks.74
Some
commentators have noted that the metaverse could also introduce potential challenges in enforcing
copyright due to the intricate nature of virtual replication. As noted above, complicating matters further is
that the anonymity provided by blockchain technology can hinder efforts to identify infringers.
The UK Intellectual Property Office (IPO) and its EU counterpart have started offering some solutions, for
example by classifying virtual goods and NFTs for the purposes of IP. The IPO has also recently published
new guidance on classifying NFTs, virtual goods, and services provided in the metaverse during the
trademark application process.75
Legal practitioners and businesses have welcomed the IPO guidance for
75
UK government, Statutory guidance “PAN 2/23: The classification of non-fungible tokens (NFTs), virtual goods, and services
provided in the metaverse” (3 April 2023):
https://www.gov.uk/government/publications/practice-amendment-notice-223/pan-223-the-classification-of-non-fungible-toke
ns-nfts-virtual-goods-and-services-provided-in-the-metaverse
74
Pinsent Masons, “Brands need an IP audit before engaging in the metaverse” (9 May 2022):
https://www.pinsentmasons.com/out-law/analysis/brands-ip-audit-metaverse
73
Withersworldwide, “Luxury brands, the metaverse and NFTs: the issues and opportunities in the UK” (21 December 2022):
https://www.withersworldwide.com/en-gb/insight/read/luxury-brands-the-metaverse-and-nfts-the-issues-and-opportunities-i
n-the-uk
72
UK government, “Future financial services regulatory regime for cryptoassets: Consultation and call for evidence.

20. 20
clarifying the classification and appropriate terminology to protect trademarks covering NFTs and virtual
goods and services.76
While the UKIPO, should assess how best to protect IP in the metaverse, together with the government, it
must also consider the balance between respecting IP rights and allowing innovation.
Recommendation:
- The UK government should ask the UK Intellectual Property Office (UKIPO) to assess the impact of the
metaverse on the infringement and enforcement of intellectual property in the UK.
Conclusion
The UK has established itself as a global leader in innovation, boasting a vibrant and diverse technology
sector housing some of the world's fastest growing companies. Despite recent financial and political
uncertainties, small and medium-sized enterprises (SMEs) and start-ups continue to be major drivers of
employment and turnover in the UK private sector.77
With a digitally mature, service-based economy and a favourable investment climate, the UK offers a
fertile environment for the growth and success of early-stage sectors and industries. This conducive
environment is further reinforced by substantial investments in gigabit-capable broadband infrastructure,
renowned academic institutions driving ground-breaking research and innovation, and significant inflows
into the UK tech industry. Additionally, the recent establishment of the Department for Science,
Innovation and Technology (DSIT) holds transformative potential for technology sectors including
metaverse developers to work with government on getting the right regulatory environment to deliver
substantial social and economic benefitsLeveraging this strong foundation, the UK is uniquely positioned
to foster the growth of a metaverse ecosystem and emerge as a global hub for innovation and technological
advancement.
However, as we have noted in this report, the absence of a strategy taking a holistic approach to the future
development of the metaverse and the need to properly understand how existing legislation will impact the
metaverse, could put the UK behind other jurisdictions. The UK risks not making the best use of its existing
early advantages. The recommendations in this report, if adopted by the government, would ensure the UK
reasserts itself as the primary destination for metaverse technologies in Europe, if not wider. As the UK and
Europe’s leading metaverse developer, Improbable stands ready to work with government and regulators
to support the implementation of these recommendations.
–
This report was prepared for The Metaverse Society by Flint Global, a consultancy advising on policy, regulation
and competition.
77
The Federation of Small Businesses, “UK Small Business Statistics”, https://www.fsb.org.uk/uk-small-business-statistics.html
76
Burges Salmon, “ UKIPO issues NFT and metaverse guidance” (28 April 2023):
https://www.burges-salmon.com/news-and-insight/legal-updates/intellectual-property/ukipo-issues-nft-and-metaverse-guidan
ce

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Appendix – Comparison of UK and EU regulatory regimes
This table illustrates the already numerous number of important rules that will apply to the metaverse services
providers. It is not intended to be an exhaustive list of regulations, however, it covers some of the main regulations
in the policy domains pertinent to the development of the metaverse explored in the report.
UK
legislation/policy
Status Potential impact
on metaverses
Comparison with
EU legislation
Online Safety Bill (OSB) Currently in the House of
Lords
Metaverse services are
within the scope of the OSB
and must comply with
specific obligations
pertaining to the
protection of children.
The OSB imposes a duty of
care on metaverse service
providers to ensure
platform safety which will
result in the issuance of
transparency reports and
risk assessments.
Non-compliance with the
OSB can result in fines and
potential criminal liability.
Compared to the OSB, the
EU Digital Services Act
(DSA):
- Has more of a regulatory
driven approach
compared with the OSB
which is more
collaborative.
- Makes mention of the
protection of children in
more broader terms
without specific age
verification obligations.
- Does not include criminal
liability for
noncompliance.
- The DSA will fully come
into force from 17 February
2024, although some
provisions already apply.
AI White Paper The government to consult
on new processes to
improve coordination
between regulators.
The government to consult
on the AI framework.
Regulators to issue
practical guidance over the
next 12 months to
organisations including
risk assessment templates.
A £2 million sandbox will
be established to facilitate
innovation and introduce
fresh concepts to the
market.
The UK's flexible approach
may allow metaverse
service providers to
innovate more easily.
There is a risk of a
fragmented regulatory
landscape and inconsistent
enforcement due to the
empowerment of sector
specific regulators. Leading
to concerns for businesses
operating in multiple
sectors.
Coordinating with
international partners on
AI regulation could be
challenging if there are
significant discrepancies
between regulatory
frameworks which could
lead to investor uncertainty
and legal complexities.
Compared to the AI white
paper, the EU AI Act:
- Provides a rigid definition
of AI aligned with
international institutions
like the OECD.
- Establishes a European AI
Board and national
competent authorities for
consistent enforcement
of AI regulation.
- Introduces a four-tiered
risk framework with
specific obligations and
conditions.
- The EU AI Act is expected to
come into force near the
end of 2023.
Data Protection and Digital
Information (No. 2) Bill
Currently in the House of
Commons
The principles and rules set
in the UK GDPR and
subsequently in the Data
Protection and Digital
Information Bill should
apply to personal data
processed in virtualised
environments.
While the UK Bill is still
being scrutinised by
lawmakers, its principles
and rules have not diverged
significantly from the
GDPR. Therefore the
foreseen impact of the two
regimes on the metaverse

22. 22
The Bill should be
sufficiently future proof
but it is too early to tell as
metaverse technologies are
still in development.
is likely to be similar at this
point.
However, there is a chance
of greater divergence in the
future as EU data
protection authorities
continue to interpret and
enforce the GDPR.
UK Product Security and
Telecommunications
Infrastructure Act
The UK law was adopted in
2022.
The UK's consumer
connectable product
security regime will come
into effect on 29 April
2024.
The UK law and EU
proposal are expected to
set mandatory security
requirements for wearable
tech and devices.
These devices may be used
to access virtualised
environments or provide
data to the metaverse.
EU Cyber Resilience Act is
expected to be adopted by
legislators in the first half
of 2024.
Digital Markets,
Competition and
Consumers Bill
Currently in the House of
Commons
The Bill puts the Digital
Markets Unit (DMU) on a
statutory footing with new
powers to regulate digital
businesses with 'strategic
market status’.
The DMU will be granted
additional enforcement
powers, allowing it to
impose fines on businesses
for noncompliance, which
can amount up to 10% of
their annual global
turnover.
Moreover, senior managers
will be held personally
accountable for ensuring
compliance with the
instructions issued by the
DMU.
Compared to the Digital
Markets, Competition and
Consumers Bill, the Digital
Markets Act:
Creates a specific
framework for identifying
gatekeeper platforms.
Requires or proscribes
gatekeeper practices.
Gives the EU Commission
new powers to conduct
investigations and impose
both behavioural and
structural remedies, such
as divestitures.
UK Financial Services and
Markets Bill (FS&M Bill);
HM Treasury’s future
financial services
regulatory regime for
cryptoassets proposals
HM Treasury published its
cryptoasset regulatory
framework consultation on
1 February 2023.
The regulatory framework
is unlikely to take effect
until around H2 2025.
Cryptoasset activities will
be regulated by the UK.
However, the recent
regulatory initiatives do
not seem to cover or set
concrete plans for
decentralised finance
(DeFi) or NFTs (expect
when they are considered
to be cryptoassets)
Similarly to the UK, the EU
regulation on markets in
cyrptoassets (MiCA)
regulates cryptoassets but
does not cover NFTs and
DeFi.
MiCA is expected to enter
into force before summer
2023. The European
Commission is also
expected to conduct a
“mini” review of MiCA that
will focus on DeFi and
NFTs and issue a report in
2024.