Opinion: What cannabis companies should consider before entering the metaverse

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Image depicting the metaverse

Image of Vijay Choksi(Editor’s note: This story is part of a recurring series of commentaries from professionals connected to the cannabis industry. Vijay Choksi is a Florida-based attorney in the cannabis law practice at Fox Rothschild.)

Venturing into the unknown requires grit, premonition and a little ignorance.

When the pioneers settled the West, they faced perilous turmoil and regularly encountered danger in every direction.

Luckily, the Wild West of cannabis regulations has gotten a bit more settled as time has passed.

Yet many regulatory questions remain, from marketing and advertising to dispensing products to consumers and patients.

To pile on top of that, regulations differ from state to state, adding complexity to an already fluid operational environment.

Cannabis enters the metaverse

Despite the added layers of complexity, however, some cannabis companies have persisted to stake their claim in a new world: the metaverse.

Case in point – a Florida company, Kandy Girl, became the first cannabis company to advertise in Decentraland, one of several competing metaverses where users can create avatars to explore self-encompassed virtual worlds.

The Sandbox and Cryptovoxels are two other popular iterations.

Companies such as Microsoft, Nike, Apple and PwC have begun to stake their claim in the virtual realm, purchasing plots of digital real estate to engage consumers in this emerging paradigm.

Additionally, Facebook’s recent name change to Meta spurred more companies to provide resources to virtual worlds with the bet of making them more significant in social media and e-commerce sectors.

Cannabis companies are no stranger to e-commerce and social media, as many quickly pivoted to beef up e-commerce and digital advertising capabilities during the ongoing pandemic.

Cautiously proceed to Web3

However, the transition from Web2 – the internet most of us know today, where companies provide services in exchange for your personal data – to Web3 is more nuanced and complex.

As currently envisioned, Web3 would be a decentralized online ecosystem based on the blockchain where platforms and apps will be owned by users rather than a central gatekeeper.

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According to a December news release, Kandy Girl’s virtual storefront allows virtual visitors to “walk on to Kandy Girls plot, visit their website, or their Instagram as well as shop their NFTs.”

Additionally, through the Kandy Girl website, users can shop for hemp-derived delta-9 THC gummy products.

The risk exposure for companies such as Kandy Girl, which operates under federal hemp laws and their state equivalents, is undoubtedly lower than state-licensed cannabis operators.

As such, state-licensed cannabis companies contemplating following suit should heed additional caution.

They must methodically calculate how to enter themselves into digital worlds while balancing the benefit of first-mover advantage.

Check the regs

Among other things, cannabis companies should review the intersection of state-by-state marketing and age-restriction regulations.

For example, do your state regulations restrict online marketing and advertising?

Do they bar marketing and advertising crossing state lines? Do they require evidence that a certain percentage of the target audience is 21 or older?

Before making the digital plunge, it is paramount you dig into your state’s marketing and advertising regulations and determine whether you can abide.

The fine print

Another avenue worth exploring involves peering into the terms of service adopted by different metaverse platforms.

Unlike the “real” world, interactions within the metaverse are framed by contractual relations between the site owner and the participants.

In addition, each digital world (The Sandbox, Cryptovoxels, Decentraland, etc.) has a different mix of authority, oversight and participatory governance that users must follow.

These policies, and many more, will be largely established by the Terms of Service Agreement (ToS) or End-User License Agreement (EULA) provided by the platform and required as a condition of use by any person or enterprise wishing to interact within the virtual world.

For example, The Sandbox Terms of Use stipulate that users cannot:

  • Promote any illegal activity or advocate, promote or assist any unlawful act.
  • Transmit any material or content that is … illegal.
  • Use the site to collect, upload, transmit, display or distribute any user content that is harmful to minors in any way.

Decentraland’s Terms of Use stipulate that:

  • In the event that fraud, illegality … is connected with your account, a decentralized autonomous organization (DAO) may suspend or block your account.
  • You agree to use the site and the tools only for purposes that are legal, proper and in accordance with these terms and any applicable laws or regulations. By way of example … you may not – or allow any third party to – engage in, promote or encourage illegal activity.

Cryptovoxels’ Terms of Use stipulate that:

  • You may not use Cryptovoxels’ products for any illegal or unauthorized purpose nor may you, in the use of the service, violate any laws in your jurisdiction.

Before purchasing digital land parcels, companies should take note of the ToS or EULA of each respective virtual world since restrictions exist because of cannabis’ federal illegality.

Some version of the metaverse is inevitable.

As it becomes home to many online pastimes, including gambling, drug sales and adult entertainment, the state and federal regulators who oversee such activities will likely seek to exercise their regulatory power within metaverses.

Cannabis companies exploring this new medium should do so methodically and exercise reasonable caution in dipping their toes into the digital abyss.

Vijay Choksi can be reached at vchoksi@foxrothschild.com.

The previous installment of this series is available here.

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