Cyber – New and emerging cyber risks in the Metaverse

Author: Will Gow

Luxury Fashion, Crypto & Insurtech… what’s next?
Following the pandemic and the challenges faced by businesses globally, companies had to get creative to survive. This included many luxury brands and fashion events which responded by going virtual. We saw brands such as Louis Vuitton, Gucci and Ralph Lauren try out virtual fitting rooms, also seeing the likes of LVMH trial virtual reality showrooms and designers creating digitalised catwalks. Gucci even collaborated with a popular gaming company ‘Roblox’ to create the “Gucci Garden”, where one of their digital bags sold for the equivalent of over $4,000 – more than the value of the physical bag in real life. The future of luxury fashion is in a virtual space (the so-called ‘Metaverse’), where you can see it, touch it, interact with it as if you were there – but also that the same clothing or ‘skins’ can be worn using augmented or virtual realities, where they can be integrated with your own individual ‘avatar’ (or digital presence) for gameplay, socialising, business and far more. What’s more, the technology ensures authenticity and makes re-sale for investment purposes far more accessible and seamless. For this reason, digitalised assets are already outperforming their physical counterparts significantly which in turn has many well-known brands and businesses investing more heavily in this area. This requires evermore analysis and understanding by Brokers and Insurers as to how their clients can protect assets and mitigate risk effectively.

In the crypto space, we have seen a boom in Non-Fungible Tokens (NFTs), a means by which luxury items can be digitalised as ‘unique assets’ using blockchain technology (a secured digital ledger). In a recent twist, we saw the iconic high-end British department store Selfridges (in partnership with Paco Rabanne) sell fixed-price NFTs over the counter in its physical outlets. Parallel to this, Selfridges created a digital environment (named “Electric/City”) inspired by the game Pokémon together with the iconic designer Charli Cohen and Yahoo. Its customers can explore online through a customised ‘avatar’, which enables them to purchase both physical and digital garments using an augmented reality body-tracking lens. In another turn, we witnessed the iconic luxury bag outlet Hermès initiate legal action against the NFT creator Rothschild. This was on the basis that his sale of digital assets called ‘MetaBirkins’ were said to replicate the luxury bags sold by Hermès. Some of those digital depictions were sold online for over $40,000, and the collection has been said to have turned over more than $1.2 million, with some of those bags selling for more than the official physical version would fetch. Hermès in its filings to New York’s Southern District Court, referred to Rothschild as “a digital speculator who is seeking to get rich quick”. Hermès argues that ‘MetaBirkins’ takes advantage of their reputation and has potentially prevented them from launching into the ‘Meta’ space, also possibly damaging their reputation for quality. They are seeking that Rothschild ceases his activities, surrenders the ‘MetaBirkins’ domain name, and pays damages including profits from the digital sales. This raises numerous questions about how IP protections for physical assets will be enforced in the digital world and how Insurers will write that risk.

Insurtech will be more key now than ever. As businesses and communities in general adapt to the ‘Metaverse’, with the increase in shopping, socialising, and gaming in the digital environment, so will it also be necessary for Insurers to understand and respond to that evolving opportunity and growing social community. They can only achieve this through technology and responding to the needs of this expansive community. Most eminently, as more brands move into the ‘Metaverse’, so will the need to insure their digital assets. Where digital assets are correlated to real-world items, they will need insurance to cover the difference of any fluctuations in price on re-sell or when the NFT is so-called ‘burned’ (redeemed in the real-world). There is also the need for cybercrime cover that responds to the niche dynamics of NFTs, where they are a prime target for threat actors due to their value, as such pricing metrics and a response plan must be established as part of writing that risk. There is a real opportunity for traditional insurers to expand their enterprises through insurtech, along with the real risk that if they don’t, the emerging tech-carriers certainly will!”