If Mark Zuckerberg is to be believed, the Metaverse is the next step in our digital evolution, a  virtual reality space where users can interact with a computer-generated environment and socialize among user-created avatars.

And it’s already here.

The Metaverse is a new virtual frontier that combines many aspects of the virtual world we already know: social media, Zoom, online gaming, augmented reality, virtual reality, blockchain, and cryptocurrencies. The Metaverse allows its users to interact with each other in ways that mimics real-world interaction. Users can virtually surf, race, go to a bar, or engage in combat – the possibilities are endless.

Now, you can even buy land in this virtual frontier.

Just as in the real world, you can finance your virtual property with a virtual mortgage. In this virtual world, can virtual mortgages be foreclosed and how can loans be enforced? This new paradigm implicates both loan enforcement and bankruptcy.

Let us break down a few of the basics.

Where can you buy virtual real estate?

In the Metaverse, virtual real estate exists on platforms such as Sandbox, Decentraland, Cryptovoxels, and Somnium Space. A user can purchase the virtual real estate and then build on it, just as they could in the physical world. A user can build anything from a house to an entire entertainment district.

Much like in the real world, there is a finite amount of virtual real estate on each platform. But unlike the real world, new platforms with new virtual real estate can be created.

How do real estate purchases work in the Metaverse?

While real-world cash can be used to purchase this virtual real estate, instead of a deed, ownership is represented by Non-Fungible Tokens (NFTs).

An NFT is an unique digital identifier that cannot be copied, substituted, or subdivided. NFTs are recorded in a blockchain, and that is used to certify authenticity and ownership of a specific digital asset and specific rights relating to it. NFTs are stored on a digital ledger and can be sold or traded.

However, unlike cryptocurrencies, NFTs are not mutually interchangeable because each NFT may represent a different asset and thus a different value.

How big is the Metaverse real estate market?

The value of transactions involving virtual real estate exceeded $500 million in 2021. That’s expected to double in 2022.

How are Metaverse real estate deals financed?

With the increasing amount of capital invested in real estate in the Metaverse, mortgages have now appeared in the Metaverse to help finance this virtual real estate boom.

For example, the Metaverse developer TerraZero issued a two-year mortgage for a $45,000 piece of virtual real estate.

The way the mortgage works in the Metaverse is that a client of TerraZero who wants a mortgage uses NFTs as digital collateral (a land NFT). A Metaverse user goes to the TerraZero platform, explores the offerings and listings (just as in the real world) and then runs their NFT collection by the mortgage broker to see how much real estate the NFT collection can buy.

If the user decides to enter into the lending relationship, then TerraZero will hold the land NFT until the loan amount is paid back. TerraZero becomes the registered owner, but it grants its client the right to build and use the land. This way, the client can use the land even though TerraZero still technically owns it.

The user makes monthly payments to TerraZero and, once the mortgage is paid off, the land NFT is transferred back to the user.

How are these transactions regulated?

This new virtual real estate market is not (yet) heavily regulated.

At this point in time, there is no guidance on how loan enforcement, foreclosure, or bankruptcy might affect virtual real estate and virtual mortgages.

The mortgages offered by TerraZero for real estate in the Metaverse are secured by TerraZero holding the land NFTs until the loans are paid in full. While called a “mortgage,” the lending relationship (and enforcement remedies related to these Metaverse mortgages) parallels Article 9 of the UCC in that a creditor can immediately take possession of collateral after a debtor defaults.

In the TerraZero context, instead of having the ability to immediately take possession, they would already have possession of the land NFT—almost like a deed held in escrow.

What if something goes wrong?

Significant important questions abound over what will happen if there are legal disputes over whether or not the loan is in default, and potential due process arguments made by borrowers. For instance:

  • How can a virtual lender ensure that it enforces its security interest in virtual collateral, or monetize its virtual property, in the event of a default?
  • How are virtual assets valued?
  • What court would have jurisdiction over disputes regarding virtual real estate?
  • Would it be a court where the servers for the platform are located, a court where the mortgage provider’s corporate headquarters are located, or a court in the real world analog of the virtual real estate?
  • What law would govern these transactions and how would foreclosure work?
  • Would the lender have any restrictions on what it could do with the virtual real estate or procedures it must follow to sell loan collateral after a default, as with Article 9 sales?

These are just a few of the questions raised by this emerging field of virtual real estate.

Please watch this space for more “Mining the Metaverse,” where we hope to address these topics and more in this evolving virtual world.