Seemingly every week there's another blockbuster transaction in the metaverse, like the Yuga Labs "land" grab from a few weeks ago that saw users spend the equivalent of more than $300 million on virtual real estate, nearly crashing the Ethereum network. Even in its nascent form, the metaverse already has a robust economy for digital goods like such "deeds" to virtual property, or outfits for users' avatars. In many spaces those sales are verified by NFT tokenization. That's a crucial part of the trade in digital goods: The NFT serves as both an authenticating token and theoretically allows for "interconnectivity," or the idea that digital items can be seamlessly and securely ported from one virtual world to another. The next step might be a metaverse economy that crosses over into the real world of atoms, not bits, as they say. What if you could do your shopping not from an Amazon list, but in a sort of virtual supermarket, or shopping mall, without leaving your home? Is it possible that the metaverse could upend commerce in the same way current web titans like Amazon did? And, perhaps most importantly for both vendors and regulators, how are those transactions tracked and taxed? "These marketplaces are new, small, and still evolving," said Mark Jamison, an economist and a senior fellow at the American Enterprise Institute who has studied the metaverse. "You're involved in trying to project into the future whether it's going to be a viable product, and a viable place to engage in your transactions." We've yet to figure that out with purely digital goods and the role they play in the real-world economy. There's been a great deal of hype, for example, around the metaverse in the fashion world, which just might have the potential to spark the kind of widespread adoption that would take metaverse commerce beyond just something for early adopters and hobbyists. McKinsey researchers note in a recent report that users spent $110 billion on digital goods in the metaverse in 2021, with roughly 30 percent of that on "virtual fashion." But there's still no answer to the thorny question: How do we situate these transactions within the real-world economy when there's no "physical" location to which your virtual Nikes, or Gucci handbag, are delivered? This isn't the first time the tech industry has forced the government to take notice of such issues. When Amazon first started to expand its e-commerce empire, for example, it took years for states to catch up and collect their share of sales tax from its transactions. "With e-commerce, we're thinking still in terms of a physical delivery of something," Jamison said. "In the metaverse, how do you know if someone's actually taken delivery of it, where do they take delivery of it, where did it come from?... we're going to have to jump through some additional hoops before the states can get comfortable with how they might tax those transactions." The most common ties between virtual reality and the real-world market are so far in augmented reality, where various products help users make online purchases. Ikea and Amazon have allowed users to see what an item would look like in their home before they buy it; eyeglass company Warby Parker allows customers to try on glasses virtually; clothing companies allow users to try on outfits for both their virtual and real-life selves simultaneously. Still, the authors of that McKinsey report note there's still relatively little appetite to buy real-life goods from a marketplace in the metaverse, with virtual goods still presenting "the biggest short-term revenue potential." More likely virtual fashion assets will serve as a sort of token of users' loyalty to various brands like Nike or Gucci that have made early metaverse efforts. (Or, potentially, a token showing that they own that same pair of Nikes in both the digital and analog worlds.) Which means that for now, the NFT and digital goods market is still the biggest game in town when it comes to the metaverse economy. As of now that space is largely unregulated — even lagging far behind crypto, as some critics have directly accused metaverse merchants of offering unregistered securities in high-profile cases like the Yuga metaverse land sale. Those cases might not remain unregulated for long, as the SEC has already opened a broad investigation into the NFT market. "The feds have already stepped into this space," Jamison said. "They say, 'well, a lot of these look like securities. We know how to tax those."
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