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5 December 2022

December 2022/1 – 2 of 3 Insights

Tech predictions 2023

Graham Hann makes his annual predictions for tech and digital in the year ahead.

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Graham Hann

Graham Hann

Partner

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Author
Graham Hann

Graham Hann

Partner

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As 2022 draws to a close we once again take a look ahead at what the next 12 months and beyond might hold for the tech sector.  We expect the digital economy – the internet – to mature in the way we engage online, but painting a landscape that seems more about evolution than revolution.

Metaverses are here, and enterprise use will lead the way

Ask ten people to define the Metaverse and you will get ten different answers, and some of these may refer to emperors and new clothing.  However, we believe 2023 to be the year we start to see evidence of real, although perhaps still embryonic, growth.  But back to what the Metaverse is - US consulting firm Gartner defines a metaverse as "a collective virtual shared space, created by the convergence of virtually enhanced physical and digital reality, accessible through any type of device, from tablets to head-mounted displays.   JP Morgan defines the Metaverse as a seamless convergence of our physical and digital lives, creating a unified, virtual community where we can work, play, relax, transact and socialize".  That said, the concept behind the metaverse is not new - multi-player, role-playing worlds such as Second Life has been around for many years with more recent evolved platforms such as Minecraft, World of Warcraft and Fortnite hosting hundreds of millions of users. 

In a report issued earlier in 2022, Gartner predicted that by 2026, 25% of people will spend at least one hour each day in 'the' Metaverse.  The report predicts the activities will include work, shopping, education along with socialising and entertainment.  Gartner's Research VP, Marty Resnick, commented: “From attending virtual classrooms to buying digital land and constructing virtual homes, these activities are currently being conducted in separate environments. Eventually, they will take place in a single environment – the metaverse – with multiple destinations across technologies and experiences.” 

Despite the big bets already made by Meta and other players, Gartner recognises that the adoption of metaverse remains embryonic and fragmented. Organisations are likely to invest in their own private metaverses, resulting in no single vendor owning the metaverse, and creating opportunities for multiple players.  A separate Gartner release states that, despite hype about “the” metaverse, it isn’t yet a single entity – and rather it comprises multiple emerging technologies.  It  warns that organizations should be careful when investing in a specific metaverse at this early stage. JP Morgan concurs, stating that "There is no one virtual world but many worlds, which are taking shape to enable people to deepen and extend social interactions digitally".

Growth of metaverses depends on multiple developing technologies and trends, from virtual reality (VR), augmented reality (AR), flexible work styles, head-mounted displays (HMDs), an AR cloud, the Internet of Things (IoT), 5G, and AI.  Given the multiplicity of changes on which metaverse models will be based, it is very difficult to predict which use cases will be the early winners.  However, what does seem clear is that enterprise use is likely to be key to traction, with Resnick sayingEnterprises will have the ability to expand and enhance their business models in unprecedented ways by moving from a digital business to a metaverse business…. By 2026, 30% of the organizations in the world will have products and services ready for metaverse”.

Brands are already vying for first mover advantage – it was widely reported that JP Morgan became the first major bank to enter the metaverseearly in 2022, opening a virtual room on Decentraland.  The bank also issued a report  in which it stated: "We are now at an inflection point, where it seems that not a day goes by without a company or celebrity announcing that they are building a presence in a virtual universe …. "  This is also backed up by its observation around the growth of the virtual real estate market  where the average price of a parcel of land doubled in a six-month window in 2021.

Growth of business and consumer engagement within metaverses does not of itself raise new legal issues but will bring into sharper focus the evolution and application of existing laws relating to privacy, brand protection (which we explore here), reputation management, bullying, stalking, harassment, and employment, as more individuals (whether business users or consumers) congregate and communicate in virtual environments.

Web3 will power the metaverse despite its growing pains

Much like 'Metaverse', the term 'Web3' means different things to different people, but the general thematic focus is about a distributed internet supporting a distributed economy.  Gartner defines Web3 as "a new stack of technologies built on blockchain protocols that support the development of decentralized web applications and enable users to control their own identity, content, and data", and goes on to predict "The metaverse will require many features that Web3 enables. For example, the metaverse can benefit from Web3’s tokenization to store and exchange value in a purely virtual context. The metaverse and Web3 won’t merge into one entity, but they are complementary visions of a future internet.".

How does Web3 differ from Web 2.0? JP Morgan describes a large number of evolutionary differences including:

  • Web3 is community-governed generally through a decentralised autonomous organisation (DAO) – see below, unlike the centrally owned nature of Web 2.0
  • Data storage is similarly decentralised in Web3 contrasting the centralised data storage in current Web 2.0 models
  • Crypto wallets will likely become more ubiquitous in Web3 models contrasting traditional credit/debit card payments in Web 2.0
  • Digital assets will move closer to being truly 'owned' through NFTs as opposed to licensed by platforms
  • Content creation becomes more democratised in Web3 with a greater portion of content being created by the community of users rather than studios and publishers, with rights in work represented through NFTs
  • New activities based on novel models such as play-to-earn game mechanics become more common, with users sharing the profits of growing platforms
  • Creators also benefit from long-tail revenue streams with revenue models based on secondary sales generating royalties for original creators, often delivered through smart contracts encoded within NFTs
  • Creators will also be able to monetise their work more directly, and without the need for partnerships with stakeholders such as publishers - a musician for example will be able to tokenise their new music directly to their fan base.

Web3 has had a rocky ride in 2022, and suffered from some very bad press around systemic risk in some platforms, as explored further here, but there are powerful incentives to resolve these issues.

The law will develop to harness a decentralised economy

What effect will all the increased tokenisation of the real-world economy have on law?  How will the law need to develop to support a fair digital economy that is safe for users?  To answer this question it is worth looking at the way NFTs are treated currently under law in order to identify what needs to change. 

Ownership

NFTs can be a powerful technological structure to link to (and to transfer) a wide variety of other legal rights.  Yet purchasing an NFT doesn't necessarily mean acquiring other legal rights, at least not in the way the proposition is often put to users. When a user buys an NFT, the unique token ID allows them to prove ownership of the NFT (ie the token itself), but does not automatically mean that they have any rights in the underlying asset represented by the NFT (whether digital artwork, a physical item like a book, or a debt security).

How NFTs and other digital assets exist and operate as a matter of law is unclear; traditional English law concepts such as possession and ownership do not fit neatly with intangible digital assets (although courts have been creative in finding ways to overcome this). As a result, the Law Commission of England and Wales is consulting on the legal treatment of digital assets. It proposes creating a new category of personal property, recognising "data objects" as a third category of personal property distinct from the current categories of things in possession and things in action.  Resolution in this area would answer some of the ownership questions and could well progress in 2023, at least in the UK.

Smart contracts

Returning to the musician that tokenises their work through issuing NFTs - they will need to enter into an agreement with each purchaser - essentially a set of terms that set out the value that the NFT will represent. This is most likely to be a licence over the intellectual property in the underlying musical work, or a more exotic structure such as a trust to approximate ownership, and the agreement (or the rights granted under it) must be capable of being transferred to subsequent owners.  

NFTs often operate according to smart contracts, which are encoded into the NFTs themselves and performed automatically, but in many cases these may not have the characteristics to qualify as contracts legally.  For example, a platform might have minted several digital images (let's say of pixelated lawyers) and may use an electronic ledger to represent ownership of each image, including all rights in the image.  The platform could allow the creation and execution of a smart contract which, upon payment of a pre-determined sum of money by a buyer to a seller, assigns ownership of the digital image and related rights from seller to buyer, and as a result the buyer is represented on the blockchain as the new owner.  Technologically this is fine, however the law – at least in England and Wales – requires that intellectual property rights be assigned in writing in order to be effective.  Another example could be selling a car, ownership of which is represented on a blockchain – the DVLA would not recognise this without the correct process being undertaken to update the vehicle registration documents. 

This illustrates that while NFTs may represent value, such as assets or contractual rights, a smart contract may not be sufficient to assign ownership effectively in the desired asset or rights.  

Regulation

The regulatory treatment of NFTs is developing, but currently differs substantially across jurisdictions. This means businesses wishing to invest in Web3 models lack certainty and often need to carefully consider where they conduct  business.  For example, in the UK, anti-money laundering (AML) legislation, the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 or MLRs, place significant regulatory burdens on cryptoasset platforms that are in scope, including formal customer due diligence, a nominated AML officer, and the need to be registered with the FCA  for AML supervision purposes - with such registration being mandatory, time consuming, expensive and difficult to obtain (the FCA has rejected the bulk of applications to date).  Broadly, the MLRs will capture parties that enable the exchange of cryptoassets, including for other cryptoassets or fiat currency ("cryptoasset exchange providers") or that safeguard or administer cryptoassets or private cryptographic keys ("custodian wallet providers"), in each case when doing so by way of business in the UK.

The key test for most NFTs is therefore whether they are classed as cryptoassets, which are defined as "cryptographically secured digital representation of value or contractual rights that uses a form of distributed ledger technology and can be transferred, stored or traded electronically".  This rather sweeping definition can easily catch many NFTs linked to digital or physical assets or that confer certain rights (such as the right for a fan to attend a concert).  Many platforms rely on small print (T&Cs) to try to escape this categorisation but regulators are generally more interested in substance than form, and it is hoped that 2023 will bring more clarity for platforms.

That's not all; ads for NFTs or cryptoassets also need to comply with UK ad regulation, in the face of active enforcement by the ASA which has highlighted this as a 'red alert issue'. To future-proof arrangements, NFT businesses should also ensure their NFTs are genuinely "fungible"; otherwise, they risk being in-scope of the UK's strict financial promotion' regime which the UK government is looking to extend to promotions of "qualifying cryptoassets" in the UK. Businesses that issue or use stablecoins as a means of payment should also monitor the UK government plans to regulate stablecoins used as a means of payment.

Read more about NFTs and cryptoassets on Interface here.

DAOs will grow personality

The decentralisation principles of Web3 are not limited to assets or rights, as we see them extend to organisations themselves.  Digital Autonomous Organisations are based on the principle that an organisation basically comprises (1) people and (2) the pre-determined rules which govern how it operates, and that the latter can be achieved autonomously through distributed technology.  The governance, which can in theory extend to traditional corporate governance such as the appointment, removal and powers of directors, rules for meetings and shareholder rights, can be enshrined in smart contracts running on a blockchain. DAOs essentially provide resilient, decentralised systems of governance which do not require centralised authority and can function largely autonomously.  

Examples of DAOs include social structures or organisations involving multiple participants set up for investment purposes, or fundraising, crowdsourcing or charitable purposes.  Many DAOs are involved in software development, often focused on open-source software infrastructure such as blockchain systems or decentralised finance applications.

In their natural state, DAOs can function efficiently and without centralised control.  However in the absence of legal form (such as a partnership, a company or other vehicle), DAOs lack legal personality, and cannot perform a number of functions needed to truly scale.  See here for a deeper exploration into the characteristics of DAOs, their inherent risks and ongoing review of how the law applies to them. 

Social media – storms on the horizon

The last few months of 2022 have seen seismic changes in social media and 2023 will undoubtedly continue to be a time of evolution in user demands, but also platforms competing with each other for audience.   Some of the elements we have come to take for granted, in particular with Twitter and Meta, may be challenged.

Twitter

Earlier in November, Elon Musk took full possession of Twitter, and it's not an exaggeration to say there has been something of a bloodbath since, with more than 50% of the workforce summarily fired (including online safety and misinformation detection teams), and others deciding to quit in the face of Musk's 'extremely hardcore' vision of working hours, threats of charging for the much coveted blue ticks, and proclamations about re-enshrining free speech (at the same time as bizarre – and worse - tweets from the new owner).   Musk has made a number of promises, including "making the algorithms open source to increase trust, defeating the spam bots, and authenticating all humans".

Even though loss-making for some time, the future of Twitter looks far less certain than it did this time last year. As Musk joked on Twitter Thursday: "How do you make a small fortune in social media? Start out with a large one." And hashtags such as #RIPTwitter have gained traction.  Will Twitter survive?  High profile users and ex-execs reflect on the dopamine hits it delivers and echo that as long as there is nothing to replace it, it most likely will.  2023 will be pivotal to its long term health, and one thing we do know when it comes to the new owner – it won't be dull.

TikTok

Perhaps due to the storm at Twitter, a development on the day Musk took charge of Twitter, was less widely reported. FCC commissioner Brendan Carr called for banning TikTok because of its intimate ties to Chinese government and Communist Party. Carr stated:  “I don’t believe there is a path forward for anything other than a ban". This follows the US delivering on its threatened ban of Chinese telecom equipment giant Huawei.

As Forbes commented, the stage is set for two models for social media platforms in the future: either a tool for government to influence and control its citizens, or a sounding board for citizens to influence government through the free exchange of ideas and opinions".

Meta

2023 could also be critical for the survival of Meta platforms Instagram and Facebook, at least in the EU.  European data protection regulators are currently reviewing the Irish Data Protection Commissioner's draft 'own volition' decision which could prevent Meta from continuing to transfer personal data from the EU to the US under Standard Contractual Clauses.  If this were to happen prior to the proposed replacement EU-US adequacy decision, Meta would either have to localise EU personal data or change its business model substantially.  A final decision is currently expected early next year. 

Google

And  what about Google?  Are Instagram and TikTok eating Google's core products? Recently, a Google executive, Senior Vice President Prabhakar Raghavan, who runs Google’s Knowledge & Information Organization, seemed to suggest this was a threat.  In a discussion at Fortune’s Brainstorm Tech conference about the future of Google’s products and its use of AI, he noted that younger users were now often turning to apps like Instagram and TikTok instead of Google Search or Maps for discovery purposes.  He said: "We keep learning, over and over again, that new internet users don’t have the expectations and the mindset that we have become accustomed to”. He explained that younger users more rarely use search keywords but instead look to discover content in different, more immersive ways.  According to studies he quoted, almost 40% of young people, when they’re looking for a place for lunch, don’t go to Google Maps or Search, but use , TikTok or Instagram instead.  They may use maps to get to the restaurant, but they are less likely to do so (or to use Search) to discover it in the first place. 

In 2014, Susan Philips was among the first to put forward a revolutionary new idea: in the near future, we won’t search for products; companies will find us through social media.  Maybe this is now being borne out. While 18 to 24 year olds enjoy their lunch, TikTok and Instagram may well be starting to enjoy Google's.

Will the US Supreme Court impact social media?

In October 2022, the US Supreme Court agreed to hear the case of Gonzalez v Google.  Nohemi Gonzalez was a US citizen killed in the 2015 Bataclan terrorist attack in Paris.  Relatives filed a complaint in a California Federal District court against Google (as owner of YouTube) under the Anti-Terrorism Act.  The plaintiffs allege that by recommending ISIS videos to users, Google was itself disseminating terrorist content.  The plaintiffs failed at first instance, thanks to intermediary liability protections.  However, the case has now worked its way up to the Supreme Court.  The plaintiffs' argument does not rest on issues around intermediary liability for user generated content.  Instead, they argue that YouTube's recommendation algorithms are to blame for pushing radicalising content, but do not fall within the scope of intermediary immunity, and, therefore, that YouTube should be held responsible. 

This is not the first case of its kind to go through the US courts, but it is the first to be heard by the Supreme Court.  If the Court finds that social media platforms are liable for issues arising out of their recommendations to users, the decision will have a major impact.

Sustainability will drive the big trends

With COP27 placing climate change commitments in the spotlight, consumer demand for action will continue to intensify on brands.  Earlier in 2022, the founder of outdoor apparel  company Patagonia transferred the entire company to a trust dedicated to the company's sustainable values. In his words "Earth is now our only shareholder". In addition, profits that are not reinvested back into the business will be distributed by Patagonia as a dividend to the Holdfast Collective to help address climate change, according to a news release.   Big Tech is following suit – earlier in 2022 Samsung partnered with Patagonia to combat microplastics in the ocean, as announced here, and it also announced its Global Goals platform aiming to "eliminate hunger, fight inequality, and clean up the planet".

Alongside some of these small steps is the fact that Proof-of-Work networks underlying certain distributed ledger technologies like bitcoin consume enormous amounts of energy. The bitcoin blockchain alone is reported to use the same amount of electricity as the power consumption of Thailand annually.  While efforts are being made to use sustainable energy sources, they aren't currently sufficient to meet demand.  Given the growing number of use cases for distributed ledger technologies, some of which we've looked at here, this is a problem which needs to be solved quickly. 

The likely developments in the tech sector to combat climate change are a subject much bigger, and more important, than this piece, and we will cover this separately in 2023.  We hope that the sector is able to step-up sustainability commitments rapidly as it plays a key role in our ability to control temperature rises, and in holding governments to account.

The final frontier will get closer

According to McKinsey, private-sector funding in space-related companies topped $10bn in 2021. This is an all-time high and about a tenfold increase over the past decade.  Certainly the number of satellites launched year on year is a good indicator of a growing sector. According to WFO, for the past 60 years, the number has been between 70 and 130 per year, however, in 2020 it was 1283 and in 2021 over 1400.  The European Space Agency puts the number of satellites currently orbiting the earth at over 9600 (of which 6800 are still functioning), a rise of around 2000 year on year.  As the number of launches increases, so will the number of collisions, and that is where the Space Fence comes in.  The Space Fence is a second-generation space surveillance system operated by the United States Space Force in order to track artificial satellites and space debris in Earth's orbit.

McKinsey cites another dramatic shift - investors are now focusing increasingly on lunar and beyond orbital regimes, which have traditionally been below lower orbit projects in investors' priorities.  Areas of key investment include spacecraft components, propulsion, mission services, launch vehicles, in-space transportation, communications, mining, infrastructure, and robotics.

Morgan Stanley speculates that with declining launch costs, advances in technology and rising public-sector interest, space exploration may be the next trillion-dollar industry.  It estimates that the global space industry could generate revenue of more than $1 trillion or more in 2040, up from $350 billion currently.  Space may be infinite but as a sector it is growing.  For more on space law, see our Interface edition.

Now, here as we sit only two Prime Ministers away from mince pies and mulled wine, we wish you all the best for the rest of this year and a happy and prosperous 2023.

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