News headlines about facial recognition technology primarily focus on the government’s use and misuse of the technology. Likewise, technology companies and legislators frequently advocate against the government’s use of facial recognition tools to conduct mass surveillance or generate leads in investigations. For example, following widespread claims of the technology’s racial bias, Amazon, IBM, and Microsoft announced that they would stop selling facial recognition tools to law enforcement agencies. And following the arrest of an innocent black man who was falsely identified by facial recognition, major cities like San Francisco and Boston banned law enforcement from using the technology.
However, as industry commentators focus on the government’s use of facial recognition tools, private businesses in the U.S. regularly deploy facial recognition technology to secretly surveil their customers. Companies rely on the technology to gather information about customers’ identities and demographics to tailor their marketing strategies, monitor customers within stores, or sell the information to third parties. Since there are no federal regulations governing the technology, commercial uses of facial recognition technology remain relatively unchecked, even as companies invade their customers’ privacy rights without any warning.
How Does Facial Recognition Technology Work?
Based on photos or still images, facial recognition technology scans, maps, and analyzes the geometry of a person’s face to verify their identity or collect information about their behavior. When mapping a face, the technology creates a mathematical formula — called a facial signature — based on the person’s distinct facial features, such as the distance between their eyes. Facial recognition systems can create and store facial signatures for each scanned image containing a face. When a user uploads a new photo, the system cross-references the generated facial signature with existing ones in the database and can verify the person’s identity with a matched signature.
Businesses have created databases of facial signatures to identify customers of interest in future video footage. In addition, businesses can use facial recognition software from companies like Clearview AI, which cross-references an uploaded photo against billions of public images to verify a person’s identity. Clearview AI is known to offer free trials of its software, luring businesses and rogue employees into using the technology. With such easy access to facial recognition software, private use of the technology has proliferated, hardly slowed by regulatory barriers.
Commercial Uses of Facial Recognition Technology
No matter the industry, facial recognition can help businesses glean more information about their customers, make informed business decisions, and increase their revenues. Shopping malls and mega-stores like Macy’s, Rite-Aid, Apple, and Walmart have used facial recognition to identify shoplifters, target loyal customers, and track customers’ reactions within the store. Amazon has sold facial recognition technology that assesses customers’ faces to discover whether they are attentive or indifferent to certain displays. While customers are surely aware these mega-stores have security cameras, they are likely unaware these stores may know their name, home address, how many times they’ve frequented the location, and whether they are happy with their in-store experience. Outside of retail stores, in cities like Miami, thousands of Uber and Lyft drivers have digital tablets in their backseats that use facial recognition technology to assess a rider’s age, gender, and demographics, in order to display ads tailored to the rider’s perceived characteristics.
In states without biometric privacy laws, any citizen who shops at a mall or grocery store, or attends a concert or sports game, will likely be the subject of unsuspecting facial recognition. Additionally, facial recognition tools can even identify an individual who rarely shows their face in public. Clearview AI created a facial recognition database by scraping ten billion images from public websites. Clearview analyzed the images and developed facial signatures for nearly half the U.S. population.
As of 2020, more than 200 companies had accounts with Clearview, including professional sports leagues, casinos, fitness centers, and banks. These companies can upload a photo of an individual’s face — pulled from security footage or driver’s licenses — and cross-reference it against Clearview’s database to find a match. With limited regulation and easy access to facial recognition tools, consumers will face the technology’s adverse consequences, such as misidentifications and loss of privacy rights.
Misidentifications and Privacy Risks
The accuracy of facial recognition technology to correctly identify a person depends on their age, gender, or race. Research from the National Institute of Standards and Technology revealed that facial recognition systems are less accurate when identifying people of color. The algorithms are more likely to misidentify African Americans, Native Americans, and Asians compared to Caucasians. Researchers also have found these algorithms to be less accurate when identifying women, transgender individuals, and children.
Misidentification can carry damaging consequences to an individual’s liberty and dignity. Robert Williams, the black man who was wrongfully arrested based on a facial recognition match, was a victim of misidentification. These same misidentifications are likely occurring at private establishments, where security guards use the technology to scan for known criminals and remove purported “matches” from their stores.
In addition to misidentifications, facial recognition technology intrudes on an individual’s right to privacy. The technology allows companies to identify customers without their consent, collecting information about customers’ demographics and preferences. Furthermore, companies that store facial templates are subject to data breaches, where thousands of their customers’ faceprints could become compromised. Unlike online passwords, a stolen faceprint is indefinitely compromised — a customer cannot change their faceprint. Last year, thousands of scammers in the U.S. tried using stolen faceprints to fraudulently obtain government-assistance benefits. As facial recognition technology grows, bad actors will attempt to use stolen faceprints for financial gain.
Federal, State, and Local Regulations
There are no federal regulations curbing the private use of facial recognition technology, but Congress’s interest in regulating the technology is increasing. Legislators introduced three separate bills to regulate facial recognition technology in the past few years, yet none passed the introduction stage.
One of the bills introduced in the Senate, the Commercial Facial Recognition Privacy Act, would have required all private entities to obtain explicit consent from customers before collecting faceprint data. The bill’s consent requirement is based on the Illinois Biometric Information Privacy Act (BIPA), one of only three state-enacted biometric privacy laws.
BIPA requires businesses that use facial recognition technology to obtain consent from consumers before collecting their faceprint data. It also requires these businesses to provide information about how they protect and store the biometric data. BIPA permits individuals to sue companies who violate any requirement in the statute and offers significant statutory damages for violations. In February 2021, Facebook paid out $650 million to settle a BIPA class-action lawsuit. To date, more than 800 BIPA class action lawsuits have been filed against Illinois businesses.
Despite BIPA’s teeth, businesses can freely use facial recognition in almost every other state. Texas and Washington are the only other states with biometric privacy laws that regulate commercial use of the technology. Yet, neither state permits citizens to sue companies for violating the statute, meaning there is much less pressure to comply. Enforcement lies with each state’s attorney general, who can impose civil penalties on violators.
Fortunately, bans on private use are growing at the city level. In September 2020, Portland, Oregon, became the first municipality to ban private entities from using facial recognition in public places, such as shopping malls. Since then, two other cities have followed suit. New York City now requires commercial establishments to post notices when using facial recognition technology, and Baltimore banned all private sector use of the technology, even subjecting violators to criminal penalties. The recent wave of restrictions at the city level indicates that regulations may first arise where the commercial sector flourishes — in major cities.
Calls for Regulation and Future Outlook
Despite the pervasive commercial use of facial recognition technology, sixty percent of Americans are unaware that retail stores use the technology. This lack of awareness stems in part from the lack of regulation. Aside from a few states and a handful of cities, most businesses are unregulated: free to implement facial recognition tools without warning their customers. So far, calls for regulation have primarily come from companies that have developed facial recognition technology themselves: Microsoft, IBM, and Amazon. While these calls may be aimed at influencing friendly regulations, Microsoft’s President Brad Smith has called for legislation requiring stores to provide notice and obtain consent, similar to BIPA’s consent requirement. As BIPA has revealed, requiring businesses to obtain consent from consumers would at least hold businesses accountable for their facial recognition uses.
Nevertheless, some businesses may not wait for enacted legislation before shelving their facial recognition products. In November 2021, Meta announced that Facebook will no longer use facial recognition software and plans to delete the faceprint data of one billion Facebook users. Meta’s decision was motivated by concerns about the technology’s “place in our society.” This drastic move may prompt other industry leaders to start influencing the future treatment of facial recognition technology, with the hopes of clearing up the current regulatory uncertainty that threatens innovation and investment. While some may question Meta’s sincerity or true motives, its decision could foreshadow an era of much-needed regulatory action.
Michael Willian is a third-year law student at Northwestern Pritzker School of Law.
The COVID-19 pandemic has brought the issues of personal privacy and biometric data to the forefront of the American legal landscape. In an increasingly digital world, privacy laws are more important than ever. This reality is especially true in the context of remote workplaces, where employers have facilitated a digital migration through a variety of means. The platforms employers use have the propensity to violate personal privacy through the capture and storage of sensitive biometric information. In response, states across the nation are exploring solutions to the potential privacy issues inherent in the collection of biometric data. One of the first states to do so was Illinois, enacting a standalone biometric privacy statute in 2008: the Illinois Biometric Information Privacy Act (“BIPA”). Today, BIPA is more relevant than ever and should act as a statutory blueprint for states looking to protect personal privacy and biometric data amid a global pandemic. Ultimately, though, BIPA must be supplemented by federal legislation drafted in its likeness to effectively protect individuals’ privacy on a national level.
II. Background of the Biometric Information Privacy Act
To fully understand BIPA and all its implications, one must appreciate the context in which it was enacted. The Illinois legislature passed BIPA in October 2008. The Act was passed in the immediate wake of the bankruptcy of Pay By Touch, a company which operated the largest fingerprint scan system in Illinois. Pay By Touch’s pilot program was used in grocery stores and gas stations, and its bankruptcy left users unsure of what would become of their biometric data – i.e., their fingerprints. “Biometric data – a person’s unique biological traits embodied in not only fingerprints but also voice prints, retinal scans, and facial geometry – is the most sensitive data belonging to an individual.”
Understandably, private citizens in Illinois and across the country want to safeguard their sensitive biometric data. With potential issues such as identity theft and data manipulation more prevalent than ever, people have plenty of incentives to ensure their unique identifiers stay private. In response to those concerns, legislatures have passed statutes to address biometric data and personal privacy. BIPA represents one of the most stringent of such acts in the country, setting strict requirements for the management of biometric identifiers in Illinois.
BIPA defines “biometric identifier” as (1) a retina or iris scan, (2) fingerprint, (3) voiceprint, or (4) a scan of hand or face geometry. Further, “biometric information” refers to any information, regardless of how it is captured, converted, stored, or shared, based on an individual’s biometric identifier used to identify an individual. The requirements outlined in Section 15 of the Act – which addresses the retention, collection, disclosure, and destruction of biometric data – implicate a slew of potential legal issues. The section stipulates that a private entity can collect a person’s biometric data only if it first informs the subject that a biometric identifier is being collected, informs them of the specific purpose and length of term it is being collected for, and receives a written release from the subject.
Further, the Act outlines the following concerning retention of such data:
(a) A private entity in possession of biometric identifiers or biometric information must develop a written policy, made available to the public, establishing a retention schedule and guidelines for permanently destroying biometric identifiers and biometric information when the initial purpose for collecting or obtaining such identifiers or information has been satisfied or within 3 years of the individual’s last interaction with the private entity, whichever comes first.
Thus, BIPA represents a statute narrowly aimed at maintaining the security of biometric data. While BIPA was relatively unknown in Illinois between 2008-2015, a wave of litigation has since swept through the state as employees began suing their employers. Such litigation was seemingly inevitable, as BIPA provides sweeping protection for individuals against biometric data abuse. The complexities of such issues have become clearer and potential legislative solutions to them even more important in the midst of a global pandemic.
III. Personal Privacy & Biometric Data in the COVID-19 Pandemic
The issues surrounding data privacy have become increasingly relevant in the ongoing COVID-19 pandemic, which effectively digitized the workplace as we know it. As the pandemic raged in the early months of 2020, workplaces around the globe were suddenly forced to digitally migrate to an online work environment. An inevitable result of newfound online worksites has been an increase in the utilization of biometric data. In an effort to facilitate remote work, companies have had to make work-related information accessible online. Employment attorney Eliana Theodorou outlines the ensuing issues for companies undertaking such efforts in an article entitled “COVID-19 and the Illinois Biometric Information Privacy Act.” For example, Theodorou writes, “Some of these platforms involve video recording or access by fingerprint, face scan, or retina or iris scan, which may result in the capture and storage of sensitive biometric information.” Thus, the collection and retention of biometric data has necessarily increased during the pandemic as companies made information accessible remotely when they shifted online.
Potential privacy issues accompanying the storage of biometric data will become even more difficult to navigate as companies return to physical workplaces with the pandemic still raging. Per Theodorou, “As workplaces reopen, there will likely be an uptick in the collection of biometric data as employers turn to symptom screening technologies that collect biometric data.” This could include, for instance, contactless thermometers and facial recognition scanning technologies used for contactless security access. The issue will thus continue to be the collection and storage of sensitive biometric data as employers return to work with the newfound priorities of social distancing and limited contact. The reality is that biometric data is still a relatively new concept, with its own specific set of issues and potential solutions. Personal privacy becomes ever harder to maintain in a digital world, with the use of biometric information often a necessity both for remote access and in-person return to work. Ultimately, the risks associated with the collection of biometric data remain largely undefined or misunderstood by employers. That lack of understanding has been exacerbated by a global pandemic necessitating a digital work migration.
IV. Possible Solutions to the Privacy Issues Raised by COVID-19 and Remote Workplaces
Illinois has provided a stellar blueprint for biometric data privacy in BIPA. However, other states have been slow to follow. As of November 2021, only a handful of other states have enacted legislation aimed at the protection of biometric data. Texas and Washington, like Illinois, have passed broad biometric privacy laws. Other states like Arizona and New York have adopted more tailored biometric privacy approaches, while others have enacted laws specifically aimed at facial recognition technology. There are also proposed bills awaiting legislative approval in many more states. Ultimately, implementing widespread legislation on a state-by-state basis will be a slow and drawn-out process, rendering countless Americans’ biometric data vulnerable. Rather than continue this state-based campaign to solidify biometric data privacy, citizens must turn to the federal government for a more comprehensive and consistent solution.
The primary roadblock to legitimate privacy in the biometric information space is the lack of a centralized federal initiative to address it. “Despite its value and sensitivity, the federal government currently has no comprehensive laws in place to protect the biometric data of U.S. citizens.” The privacy issues inherent in the popularization of biometric data in pandemic-era remote workplaces demand federal attention. A wide-ranging statute applicable in all states is the first step in properly addressing these issues. Congress should look to BIPA as a blueprint, for it remains the only state law passed to address biometric data privacy which includes a personal call to action. It is unique in that regard, especially considering it was passed in 2008, and consequently provides the most aggressive statutory response thus far to potential privacy concerns. Whether a federal act is feasible remains unclear. In August 2020, Senators Jeff Merkley and Bernie Sanders introduced the National Biometric Information Privacy Act of 2020, which suggests the imposition of nationwide requirements similar to those outlined in BIPA. The viability of such an Act is doubtful, as previous privacy legislation has been difficult to pass. However, it is a sign of movement in the right direction – toward increased protection of personal privacy in a pandemic which has made biometric data more relevant and potentially at-risk for improper management and manipulation.
If nothing else, Facebook’s recent announcement that it plans to change its name to “Meta” is a sign that the metaverse is coming and that our legal system must be prepared for it. As the metaverse, the concept of a virtual version of the physical world, gains increased popularity, individuals will engage in more transactions involving non-fungible tokens, or NFTs, to purchase the virtual items that will inhabit metaverse worlds. Accordingly, the United States will need more robust regulatory frameworks to deal with NFT transactions, especially in the gaming industry, where NFT use will likely rise significantly.
In most other areas of digital media and entertainment, NFTs are often associated with niche items, such as high-priced autographs and limited-edition collectibles. However, in the video gaming sector, existing consumer spending habits on rewards such as loot boxes, cosmetic items, and gameplay advantages provide fertile ground for explosive growth in NFT use. This article will explore the outlook for NFTs in gaming, why gaming NFT creators should consider the potential impact of financial regulations on their tokens, and how current U.S. financial regulations could apply to this ownership model.
A. Current State of Virtual Currencies and Items in Gaming
Gaming has long been the gateway for consumers to explore immersive digital experiences, thus explaining why virtual currencies and collectible items have such strong roots in this sector. Further, given the popularity of virtual currencies and collectibles in gaming, it is no surprise that cryptocurrencies and NFTs have similarly experienced success in this space.
NFTs, or non-fungible tokens, are unique digital assets that consumers may purchase with fiat currency or cryptocurrency. NFTs can be “minted” for and linked to almost any digital asset (e.g., video game items, music, social media posts), and even many physical assets. While NFTs are blockchain-based just like cryptocurrencies, the key difference between the two is that a NFT is not mutually interchangeable with any other NFT (i.e. they are non-fungible). So why are they so special? As digital experiences continue to move to the metaverse, NFTs will serve as a primary means for consumers to connect with companies, celebrities, and, eventually, each other.
In the simplest explanation, metaverse is the concept of a digital twin of the physical world, featuring fully interconnected spaces, digital ownership, virtual possessions, and extensive virtual economies. Mainstream media has already given significant coverage to metaverse activities that have appeared in popular games, such as concerts in Fortnite and weddings in Animal Crossing. However, more futuristic examples of how NFTs and metaverse could transform our daily lives exist in the Philippines with Axie Infinity and Decentraland, a blockchain-based virtual world.
In Axie Infinity, players breed, raise, battle, and trade digital animals called Axies. The game was launched in 2018, but it took off in popularity during the COVID-19 pandemic as many families used it to supplement their income or make several times their usual salary. To date, the game has generated $2.05 billion in sales. Meanwhile, plots of virtual land in Decentraland, a 3D virtual world where consumers may use the Etheruem blockchain to purchase virtual plots of lands as NFTs, are already selling for prices similar to those offered in the physical world. For example, in June 2021, a plot of land in the blockchain-based virtual world sold for $900,000.
The growth in popularity of Axie Infinity has already caught the eye of the Philippine Bureau of Internal Revenue, which has announced that Axie Infinity players must register to pay taxes. As financial regulation of NFTs looms, it will be imperative for U.S. gaming companies to consider how federal courts and the government will recognize the status of NFTs.
B. Financial Regulation and NFTs
As NFT transaction volume grows, there will undoubtedly be greater scrutiny over these transactions by financial regulators. While the current legal and regulatory environment does not easily accommodate virtual assets, there are a two primary ways NFTs may be regulated.
1. Securities Regulation
One of the most hotly discussed legal issues concerning NFTs involves whether these tokens should be recognized as securities. Under SEC v. W.J. Howey Co., a transaction is deemed an investment contract under the Securities Act where all of the following four factors are satisfied: (1) an investment of money; (2) in a common enterprise; (3) with a reasonable expectation of profits; (4) to be derived from the entrepreneurial or managerial efforts of others.
Intuitively, NFTs, in the form of virtual collectible items, don’t seem like traditional tradable securities as they are unique, non-fungible items. Indeed, they do not appear to demonstrate the type of “horizontal commonality” that federal courts have held to be necessary to satisfy the “common enterprise” aspect of the Howey test. “Horizontal commonality” is generally understood to involve the pooling of money or assets from multiple investors where the investors share in the profits and risk.
However, the Securities Exchange Commission has stated that it “does not require vertical or horizontal commonality per se, nor does it view a ‘common enterprise’ as a distinct element of the term ‘investment contract.’” Therefore, the fungibility aspect of the token alone may not preclude it from inclusion under securities regulation.
A more interesting inquiry might involve assessing whether the reasonable expectation of profits associated with an NFT is based on the “efforts of [others],” as outlined in Howey. In evaluating this element of the Howey test, the SEC considers whether a purchaser reasonably expects to rely on the efforts of active participants and whether those efforts are “undeniably significant” and “affect the failure or success of the enterprise.” Under this lens, how an NFT is offered and sold is critical to consider.
For example, if one mints (i.e., creates a NFT for) a piece of graphic art that sits and passively accumulates value, the failure or success of purchasing such a NFT would likely not be highly reliant on the activities of others. As the SEC has noted, price appreciation resulting solely from external market forces (such as general inflationary trends or the economy) impacting the supply and demand for an underlying asset generally is not considered ‘profit’ under the Howey test. Similarly, if a consumer purchases a digital pet, like those in Axie Infinity, that actively accumulates value through winning a series of battles, the success or failure of this digital pet would also not be highly reliant on the activities of others. However, this analysis becomes more complex when considering the recent increased interest in “fractional NFTs,” or “f-NFTs”, where an investor shares a partial interest in an NFT with others. Since these fractional interests are more accessible to a larger number of smaller investors, they may be more likely to drive market trading and, as such, be recognized as securities.
2. Federal Anti-Money Laundering Statutes
Under the Bank Secrecy Act, the Financial Crimes Enforcement Network, or “FinCEN,” is the U.S. Department of Treasury bureau that has the authority to regulate financial systems to fight money laundering. Although it has yet to comment directly on NFTs, FinCEN has released guidance suggesting that the movement of monetary value through virtual currencies could trigger money transmission regulations.
A critical factor determining whether the transfer of an NFT is a money transmission service will be whether FinCEN recognizes the NFT as “value that substitutes for currency.” If the NFT’s value may be substituted for currency then the transfer of such a NFT would likely trigger money transmission regulations. If players can purchase NFTs using a virtual currency that can cash out for fiat currency, then this transfer may be subject to FinCEN regulation. Alternatively, based on FinCEN’s recent guidance, even if NFTs are purchased with virtual currency that users cannot cash out for fiat currency, money transmission regulation may be triggered. Indeed, depending on how the gaming platform facilitates the transfer of in-game currency, regulatory risks may exist when users purchase third-party goods or make virtual marketplace transactions.
Earlier this year, Congress took a significant step towards making money transmission regulations more inclusive of NFT use cases when it passed the Anti-Money Laundering Act of 2020. Under the Act, art and antiquities dealers are now subject to the same anti-money laundering regulations that previously applied to financial institutions under the Bank Secrecy Act. This development will undoubtedly have a significant impact on the potential liability that gaming platforms can face as “dealers” of NFTs.
The United States is still a long way away from having laws that adequately regulate the creation, selling, and purchase of NFTs. However, NFT usage continues to increase rapidly. Nearly half of all U.S. adults are interested in participating in the NFT market, and gamers are 2.6x more likely to participate in the NFT market. As regulators move quickly to keep up with the pace of this market, firms will need to stay alert to ensure that they maintain regulatory compliance.
Rohun Reddy is a third-year JD-MBA student at Northwestern Pritzker School of Law and Kellogg School of Management.