THE METAVERSE AND VIRTUAL CRIMES: REGULATING A LAWLESS DIGITAL FRONTIER

THE METAVERSE AND VIRTUAL CRIMES: REGULATING A LAWLESS DIGITAL FRONTIER
Shruti Jha
LL.B, IV Sem.
School of Law
Manav Rachna University, Faridabad
Date : 28 Feb, 2025

“A crime in the virtual world is still a crime in the real world—only the battleground has changed.”
As the metaverse expands, merging virtual reality, artificial intelligence, blockchain, and digital economies, a new breed of crime is emerging—one that exists purely in the digital realm. From virtual identity theft, cyber harassment, financial fraud, and digital property disputes, the metaverse presents a legal gray area where traditional laws struggle to apply. There are some challenges before lawmakers worldwide that is: how do you punish crimes that exist in a space where physical harm does not? This writeup explores the complexities of the metaverse crimes, legal challenges, and some ways forward for the global and Indian regulations.

Understanding Virtual Crimes in the Metaverse
The metaverse is not just a game—it’s an extension of real life, with virtual economies, property, and interactions mirroring in the physical world. However, crimes committed within it’s challenging conventional legal definitions. The Virtual harassment, for instance, may not leave physical scars, but the psychological trauma for the victims can be real. Digital fraud, including NFT scams and metaverse-based Ponzi schemes, have already cost investors millions. The concept of virtual property theft – stealing a digital land asset or hacking an avatar’s belongings—raises questions about whether such acts should be treated as real-world crimes. Meanwhile, money laundering through metaverse-based cryptocurrencies is becoming a growing concern, with illicit transactions bypassing the traditional financial oversight.
The Challenges of Regulating Metaverse Crimes
One of the biggest hurdles in enforcing law in the metaverse is jurisdiction. Unlike physical crimes, where the location determines legal authority, a virtual offense could involve multiple countries at once. If a user in India defrauds an investor in the U.S. using a platform based in Europe, which legal system should apply? Existing cyber laws provide limited recognition to virtual spaces, meaning many metaverse crimes currently go unpunished.
Adding to this is the issue of anonymity. In traditional online spaces, users are often required to verify their identities to access financial services, but the metaverse allows complete anonymity. This has made it a haven for identity theft, impersonation, and fraud, as the offenders can simply create a new digital persona after being banned. Furthermore, lack of enforcement mechanisms means that there are no dedicated virtual law enforcement agencies, leaving users at the mercy of private platforms to regulate themselves.
Another challenge is platform control vs. government oversight. Major metaverse platforms like Meta’s Horizon Worlds, Decentraland, and The Sandbox operate with self-regulated digital policies, meaning they determine what constitutes a violation and what does not. The question arises: should private companies act as the judge, jury, and executioner in digital spaces, or should governments intervene?
Legal Reforms for India’s Metaverse Regulation
India, being one of the world’s fastest-growing digital economies, needs a metaverse-specific legal framework to regulate virtual crimes effectively. While the Information Technology Act, 2000, addresses cyber offenses, it does not explicitly recognize metaverse-related crimes. The upcoming Digital India Act (expected 2025) is expected to introduce provisions for virtual reality, blockchain fraud, and digital identity protection. However, without specific criminal liabilities for metaverse offenses, enforcing such laws will be very difficult.
To close these gaps, India should introduce a Metaverse Criminal Code (MCC) that clearly defines virtual harassment, avatar identity theft, smart contract fraud, and digital property rights. This could function similarly to the Indian Penal Code (IPC) but focus on virtual offenses. Additionally, Digital Identity Verification (Know Your Avatar – KYA) should be mandatory, ensuring that all metaverse users link their avatars to real-world identities to prevent fraudulent activities.
On an international level, India must work with the Interpol, the United Nations, and other global regulatory bodies to establish a standardized legal framework for metaverse crimes. A Metaverse Criminal Tribunal (MCT)—a specialized digital court—could be set up to handle cross-border virtual crime cases, ensuring that offenders do not escape justice simply by operating in a decentralized digital world.

Global Case Studies: Learning from Precedents
The Silk Road case (2013) set an important precedent for digital crime prosecution. Ross Ulbricht, the founder of Silk Road, used Bitcoin to facilitate illegal trade on the dark web. His arrest proved that real-world laws could be applied to virtual platforms when financial fraud is involved. Similarly, the SEC v. OpenSea (2022) insider trading case showed that NFT-based financial crimes can be prosecuted under existing securities laws. These cases highlight that metaverse crimes can and should be treated with the same severity as real-world offenses.
Meanwhile, the Meta harassment case (2022) exposed the urgent need for laws addressing digital sexual harassment in VR spaces. Following reports of users being virtually assaulted in Horizon Worlds, Meta introduced “Safe Zones”, allowing users to block other avatars from getting too close. While a step forward, platform-based self-regulation is not enough—there needs to be legal accountability for digital sexual misconduct.
In Apple Inc. v. Corellium LLC (2021), Apple sued Corellium for creating a virtual iOS environment without authorization, raising critical questions about digital software rights in virtual spaces, which could apply to metaverse-based software replication. In Hermès v. Rothschild (2023), Hermès won a lawsuit against an artist selling “MetaBirkins” NFTs, setting a precedent that real-world trademarks extend to digital assets and the metaverse, reinforcing brand protection in virtual environments. Similarly, in United States v. Farace (2022), the court convicted a fraudster for running a Ponzi scheme based on metaverse real estate, marking one of the first legal actions against virtual land scams and NFT frauds. These cases highlight the urgent need for metaverse-specific intellectual property, fraud prevention, and digital rights laws. United States v. Craig Wright (2021) – Bitcoin and Identity Theft . The key Issue is that Craig Wright claimed to be Satoshi Nakamoto, the founder of Bitcoin, and attempted to legally seize Bitcoin-related intellectual property. In the judgment the court rejected his claim, emphasizing the need for verifiable digital identity proof in crypto-related disputes. Relevance to the Metaverse: As avatars and digital personas become mainstream, courts may soon face cases involving identity theft, deepfake avatar misuse, and AI-generated fake personalities.
The European Union’s AI and Metaverse Regulation (2023-2024) offers another model, focusing on AI-driven crime detection, taxation for metaverse businesses, and consumer protection laws for digital assets. India could adopt a similar AI-powered surveillance system to monitor illegal transactions and prevent fraud within metaverse platforms.

How to Enforce Metaverse Laws?
The future of digital law enforcement will rely on AI-powered policing. By using smart algorithms to track avatar behavior and blockchain forensic analysis to detect fraudulent transactions, authorities can prevent crimes in real-time. Smart contracts can also be used for self-executing penalties, where offenders are fined or restricted automatically when violating digital agreements.
Another approach is to establish a hybrid system of real-world consequences for virtual crimes. This would mean treating avatar identity theft as identity fraud under IPC laws, recognizing NFTs as taxable, legally owned property, and prosecuting metaverse harassment under cybercrime laws. Holding metaverse companies accountable will also be crucial—just as social media companies are regulated under IT rules, metaverse platforms should be required to report virtual crimes, provide digital forensic data, and assist in legal investigations.
Conclusion
The metaverse is not a lawless world—it is simply an unregulated one. As virtual spaces become more integrated into daily life, the legal system must evolve alongside technology. Defining clear laws, ensuring real-world accountability for digital crimes, and holding metaverse platforms responsible will be key to maintaining justice in this new digital frontier. Governments must act now before the metaverse becomes a safe haven for crime, ensuring that as we move towards an increasingly digital future, justice remains as real as ever—even in the virtual world.