How to buy land in the metaverse
What is the metaverse?
Good question. The metaverse is best described as an alternative digital reality. Virtual land is intangible land that exists solely in a series of digital realms or 3D virtual reality platforms. It is important to note that there is not a single metaverse though some have developed more quickly than others and the various providers have different markets of users. Established providers such as The Sandbox and Decentraland sell parcels of virtual land to cryptoinvestors and there is a burgeoning digital real estate market for the use of virtual land for gaming, events, advertising and retail. An example is the American rapper Snoop Dogg hosting an exclusive party in a digitally reconstructed version of his real life mansion. Guests bought non-fungible tokens (NFTs) in order to access the event. Similarly investors buy virtual private islands, build virtual homes or event spaces on their land which they can rent out. PWC has bought virtual land to host meetings and conferences. Earlier this year an investor paid $2 million for virtual land in Decentraland.
A Non-Fungible Token (NFT) is a digital asset hosted on blockchain technology that can be bought and sold online. Each token is evidence of ownership of an asset (whether digital or physical). The tokens are unique and immutable given unique identifiers held within the metadata of the smart contract.
So, what am I buying?
The most popular way to acquire virtual land is to buy an NFT which represents a plot of virtual real estate and to either ‘develop’ the site yourself or hire virtual land developers to build it for you. You can also rent existing virtual land.
There is burgeoning interest in the creation of NFTs which represent ownership of real property as well as property in the metaverse.
For example Fine & Country is marketing a new build stately home, Hampton Hall, in Surrey both as physical and virtual property in what may be one of the world’s first super-prime NFT deals. The developer is selling the designs for the house as an NFT which means that the buyer could recreate the mansion in the metaverse.
It remains to be seen whether the real estate market will embrace the shift towards using blockchain technology to create NFT that represent ownership of physical properties. In theory the speed with which a real estate transaction could conclude using blockchain technology is compelling provided appropriate measures are in place to manage the authentication of identity and legal ownership and risks of fraud or breaches of security and data integrity. It would also need the use of cryptocurrency to be commonplace and regulated with proper safeguards for transacting parties.
How does it work?
- First you need to choose a metaverse platform such as The Sandbox or Decentraland;
- Set up a cryptocurrency wallet ensuring that it supports the metaverse platform’s blockchain;
- Connect your wallet to the relevant NFT marketplace;
- To purchase or bid on land you will need the relevant cryptocurrency in your wallet. Ethereum is the most commonly accepted cryptocurrency; and
- Select the parcel of land you wish to acquire and commence the bidding process or agree a fixed price.
Due diligence considerations
As with all acquisitions it pays to do your homework. That said, buying virtual land is particularly speculative and therefore risky. Alongside ensuring that you are well-versed in cryptocurrency and cryptocurrency transactions, it is wise to use an established and reputable marketplace and learn about the project containing the land you wish to acquire. A clear idea of what you plan to use the land for will help with assessing potential ‘traffic’, investment potential and the likely user experience. On price it is worth noting that cryptocurrency is notoriously volatile and plots in some virtual lands are just as expensive as real world property. However, unlike real world property there is potentially unlimited scope for virtual land.
HMRC has published a Cryptoassets Manual which indicates that a transaction involving an NFT is likely to be subject to income tax where it can be attributed to a trading activity. As HMRC regard cryptocurrency to be an intangible asset where an NFT is bought as an investment and then sold, any gain realised will be subject to Capital Gains Tax.