Hadar Yoana Jabotinsky (The Hadar Jabotinsky Center for Interdisciplinary Research of Financial Markets, Crises and Technology (HJC)) & Michal Lavi (Hebrew University of Jerusalem – Faculty of Law; The Hadar Jabotinsky Center for Interdisciplinary Research of Financial Markets, Crises and Technology (HJC)) have posted Regulating the Metaverse: Reducing Diffusion of Trader Responsibility (University of Michigan Journal of Law Reform, Forthcoming) on SSRN. Here is the abstract:
In the wake of the metaverse, some long-solved problems relating to trader responsibility have come back to life. One of these questions is who should be held accountable for harm inflicted by defective or counterfeit products sold by third-party vendors on marketplace platforms? Currently, the law imposes contributory liability on online platforms in some cases, as they are viewed as the cheapest cost avoiders and are in the best position to distribute the damage. However, as the metaverse, an augmented reality platform, gains momentum, the allocation of liability to it does not necessarily follow the same rationales as imposing liability on e-commerce platforms. Holding metaverse platforms responsible for the merchandise sold on them might be undesirable. This is because, unlike traditional e-commerce platforms, these platforms are operated on the blockchain and are governed by decentralized autonomous organizations (DAOs) enabled by algorithms. These are Web 3.0 platforms that do not reside on a single server. Rather, content is distributed across an infinite number of servers in a peer-to-peer network. As such, there is no single point of authority. Even if it were possible to assign liability to individual DAO members, there would be less economic justification for assigning such liability as the members lack the ability to monitor transactions on the platform, and they may not be the cheapest cost avoiders. This results in an accountability gap and diffusion of responsibility where many entities are involved in a transaction and no one acts to prevent the harm. Victims of defective products or fraudulent transactions remain without recourse.
In this Article, we propose a "know your trader" rule for marketplaces. Traditional online marketplaces and innovative metaverse marketplaces would have to verify the identity of their traders before they enter the system (or the blockchain, in the case of the metaverse). Trader identity would be held confidentially by the marketplace. However, the veil of anonymity could be pierced when a plaintiff presents prima facie evidence that the case could survive a motion to dismiss. This idea follows several statutory proposals and laws in the EU and U.S., and extends them to metaverse platforms. Finally, the Article addresses Free Speech objections regarding trader anonymity and concludes that the proposed framework is in line with the First Amendment.