Discussion Post: Creating Digital Uniqueness

CTA: “In these threads, we attempt to further the discussion of a key problem in this category and evolve our understanding of the domain space where research work has not yet answered the specific problem or question being considered. These posts are living documents, and it is our hope that the community will continue to contribute to their structure and content.”

Citation: Fairfield, Joshua, Tokenized: The Law of Non-Fungible Tokens and Unique Digital Property (April 6, 2021). Indiana Law Journal, Forthcoming, Available at SSRN: Tokenized: The Law of Non-Fungible Tokens and Unique Digital Property by Joshua Fairfield :: SSRN

Background

This work argues that Non Fungible Tokens (NFTs) are personal property, instead of contracts or pure intellectual property. Because NFTs are personal property, the law of sales of personal property should apply. This framework could establish grounds for digital personal property, permitting the law to characterize those who buy and sell digital assets as true owners.

This Discussion post specifically addresses the issue of Creating Digital Uniqueness.

Non-fungible Token - An NFT represents a unique digital property of which a copy would not hold the same unique properties as the time-stamped version that exists on a blockchain, unlike cryptocurrencies in which one token within a currency’s network is no different than another.

Distributed Ledger Technology - A DLT system is a system of electronic records that enables independent entities to establish a consensus around a shared ‘ledger’ - without relying on

a central coordinator to provide the authoritative version of the records

Blockchains - A distributed system that in general includes a Peer-to-Peer (P2P) network made of all those nodes that either read or cooperatively write transactions in the blockchain, and a consensus protocol, namely, a set of policies agreed upon and implemented by all nodes, which are the rules that regulate which and how new transactions can be added to the blockchain.

PoW - A blockchain sybil-protection protocol that requires miners to use computational power to identify a “hash” that meets protocol-defined parameters. Often, block headers are hashed and a hash digest with a leading number of zeroes unlocks new monetary units to the miner who produced it. The more miners competing to identify the correct hash the more secure the network is.

PoS - A Sybil-protection mechanism with a corresponding consensus protocol where validators lock (stake) their coins and the protocol mechanism randomly assigns the validator the right to mine the next block. The probability of a validator being selected to mine the next block is typically proportional to the value of the coins they have staked. In other words, the more a validator stakes the more likely they are to be randomly chosen to mine the next block and receive the reward.

Smart Contract - A contract which is executed automatically depending on the criteria of the contract being met. They do not need intermediaries to be successfully executed. In terms of asset settlement, Delivery vs Payment can be ensured using the autonomous nature of smart contracts.

Off-Chain Storage - The usage of an oracle network to store data off-chain whose storage on-chain is undesirable due to various factors such as costs, scalability, and privacy, therefore complementing blockchains.

On-Chain Storage - The usage of a blockchain network’s storage to store the data within hashed blocks rather than using an off-chain oracle network for storage

Intellectual Property Agreement - Under an intellectual property licensing agreement (also known as an intellectual property license or an intellectual property license agreement), a party retains ownership of their patent, copyright, or trademark, but gives another party permission to use some or all of that intellectual property for a specific amount of time for a fee or royalty. These intellectual property contracts typically specify termination dates and procedures. There are several types of intellectual property licenses embodied in a typical intellectual property agreement. The following three are the most common:

  • Exclusive License: An agreement preventing the grant of any other licenses and rights concerned, including the owner themselves.
  • Sole License: An agreement not to grant any other licenses of the invention and rights concerned, but the license holder retains the right to use them.
  • Non-Exclusive License: An agreement providing the licensee certain rights, but reserving the right to grant licenses of the invention and rights concerned to third parties.

Metadata - Metadata summarizes basic information about data, making finding and working with particular instances of data easier. Metadata can be created manually to be more accurate, or automatically and contain more basic information.

Transfer Control - This command gives an NFT owner the capacity to transfer control or effective ownership of an NFT to a new owner.

Pausing - Stops all transfers of tokens

Wrapping - Exchanging one set of standards for token interaction with another set of standards.

Replevin - An action seeking return of personal property wrongfully taken or held by the defendant. Rules on replevin actions vary by jurisdiction.

Trespass to Chattels - A claim that a person has so interfered with another’s use and enjoyment of their property as to give rise to damages.

Conversion - An intentional act by a defendant causing the serious and substantial interference with or the destruction of the chattel of the defendant.

Key Problem / Topic Area

How can the law keep pace with unique digital property? Intellectual property licenses and online contracts tend to define owners as users of digital assets instead of owners.

Specific Question or Problem Statement

Where does copyright law and legal protection intersect with smart contracts and NFTs concerning the capacity for smart contracts to be legally enforceable?

Approach / Methodology

The researcher establishes a taxonomy that will define the concepts analyzed within the work. From that point, the researcher analyzes different legal frameworks and assesses how they would affect smart contracts and NFTs concerning legal enforcement of ownership and transfer of ownership. The researcher argues that NFTs are “Personal Property” and not “Contracts” due to the nature of NFTs generally being traded in the form of a “sale”.

Conclusions / Key Takeaways

The researcher suggests that framing NFTs as property instead of contracts creates a framework in which the legal remedies of conversion, replevin, and trespass to chattels could be used as a supplement to the smart contracts as a means of ensuring that transfer of an NFT on-chain equates to transfer of legal ownership of property.

CTA: Future Work / RFP

In the context of reframing NFTs as property and focusing less on the NFT as a legal contract itself, the researcher suggests that legal frameworks that currently exist would protect transfer of ownership of property. If so, that would not necessarily have the same enforceability relative to a legal agreement for transfer of Intellectual Property or licensing of property rights.

The researcher suggests that a clear articulation of NFTs as digital property would create a pathway to get closer to treating NFTs and IP the same as physical property relative to transferring ownership. The researcher suggests that although smart contracts underpin NFTs, the sale and transfer of ownership of NFTs has been treated in the same manner as personal property and that changing the narrative to describe NFTs relative to property rather than a contract may be a better metaphor for garnering legal support for wider adoption.

8 Likes

It’s a remarkable framework. It’s still a prevalent viewpoint that digital asset is some kind of interest that comes from contracts, rather than personal property. I think it should move toward affirming its eligibility as personal property because its practical meaning for users becomes more like a chattel nowadays. For instance, in some life applications in the virtual world or VR/AR scenarios, the sense or meaning of using digital assets for users is the same as using physical things, chattels. Maybe this could be one reason that digital assets have the same legal meaning as tangible things. It can also simplify many legal issues result from the development of digital assets.

4 Likes

As you allude to, the notion of an “individual item” or “property” in a virtual environment would be tantamount to “digital chattel” and by proxy digital property is then just chattel. It takes some reframing to think of digital items as “property,” but after assessing the framework logically it is difficult not to concede the personal property framework as superior.

4 Likes