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: https://ssrn.com/abstract=3821102
Background
Bank Secrecy Act of 1970 (BSA) - Legislation establishing financial reporting standards to keep organizations from laundering money, and assist law enforcement in detecting and preventing money laundering.
Convertible Virtual Currency (CVC) - According to the U.S. Department of Justice’s Financial Crimes Enforcement Network (FinCEN) guidelines, the term “virtual currency” refers to a medium of exchange that can operate like currency but does not have all the attributes of “real” currency, including legal tender status. A CVC is a type of virtual currency that either has an equivalent value as currency, or acts as a substitute for currency, and is therefore a type of “value that substitutes for currency.” Bitcoin is a CVC.
Legal Tender Digital Assets (LTDA) - Digital assets with legal tender status. Distinguished from CVCs in that they are a substitute for legal tender, and distinguished from a currency in that they do not have a coin or paper money associated with them. Like a CVC, LTDAs have value that substitutes for currency.
The DAO Report - The United States Securities and Exchange report which determined that issuing a cryptocurrency token likely violated the Securities Exchange Act of 1934 as an unlawful securities offering.
Intellectual Property (IP) - A work or invention that is the result of creativity, such as a manuscript or a design, to which one has rights, and for which one may apply for a patent, copyright, trademark, etc.
Intellectual Property License - IP licenses allow individuals or businesses to use another’s IP rights in exchange for a fee. The person or company granting the licence is the licensor, and the person receiving the licence is the licensee.
License Conditions - The terms of agreement to which a licensee agrees to abide by when using IP granted by the licensor.
Personal Property - Synonymous with chattel. Any movable thing or intangible item of value that is capable of being owned by a person and not recognized as real property (i.e. land and property permanently attached to a piece of land).
Intangible Personal Property - Intangible personal property is an item of individual value that cannot be touched or held. This can include any item of worth that is not physical in nature but instead represents something else of value such as images, social and reputational capital, and recently, personal social media pages and other personal digital assets.
Contract - An agreement between private parties creating mutual obligations enforceable by law. The basic elements required for the agreement to be a legally enforceable contract are: mutual assent, expressed by a valid offer and acceptance; adequate consideration; capacity; and legality.
Sales Law - The Uniform Commercial Code (UCC) Article Two is the main body of law regulating sales and leases of goods in the United States.
Goods - All things movable and identified to a contract of sale. It does not include secured transactions, leases, money exchanged as the price, or real property (land and property permanently attached to a piece of land). To be identified to the contract, a good must exist and be one of the objects that is or will be exchanged.
RAM-copy Doctrine - A 1998 case concluded that although a copy made by a computer’s virtual memory was a copyright “copy,” the defendant was not liable for infringement.
Key Problem / Topic Area
Joshua Fairfield argues that NFTs are personal property, not contracts (despite being called “smart contracts’'). This discussion post covers the second section of “Tokenized: The Law of Non-Fungible Tokens and Unique Digital Property,” which argues that because NFT transactions take the form of a sale, the law of sales of personal property should apply, placing them within existing legal frameworks.
For a discussion of how NFTs are framed as personal property instead of intellectual property please refer to “Creating Digital Uniqueness.”
Specific Question or Problem Statement
Does the use of NFTs as collectables more closely resemble the way people buy personal property or the way people license intellectual property? How much control should a seller have over an immediate or eventual buyer’s use of a fully bought-and-paid-for digital asset?
Approach / Methodology
This discussion is devoted to the second of three sections in Fairfield’s article. The current legal regime allows an intellectual property holder to claw back significant rights from purchasers. NFTs, according to the author, are expressly sold on the basis of ownership narratives. Yet the past two decades of legal development have all but eradicated ownership interest online in favor of a contract and licensing regime.
The name “Smart Contract” evolved from crypto-theorists’ desire to do away with the law, which Fairfield says was born out of technologists’ misunderstanding of what a contract is: it is the making of promises, not their means of execution. Automatically executing programs, he says, are not contracts if there has been no bargained-for exchange of promises or intent to enter into binding legal relations. Nearly every legal analysis concludes that while code might help execute a contract, smart contract programs are not themselves contracts.
Existing legal literature on cryptocurrencies suggests that the legal regulation of blockchain depends not on the technology, but on how humans are using it. For example, if a blockchain is transferring value, it is a money substitute under the Bank Security Act of 1970. If a coin is issued to raise funds for a business, it is treated as a security by the SEC. This “use-drives-regulation approach” has held as tokens create property interests. If a token is sold as property, treated by humans as property and passed down through wills as property, the law has begun to take it seriously as property.
If owners treat digital assets as personal property, the law of personal property should apply; therefore NFTs should be treated as a personal property, according to Fairfield.
The few existing legal analyses of NFTs focus heavily on intellectual property. This is largely because ledger technology provides a way to create digital uniqueness. But if this technology is analyzed within the framework of IP and contractual licensing, NFTs simply become copyright licenses with extra steps and lose the characteristics that interest vendors and purchasers. As NFTs enter the mainstream, they will be sold, invoking the law of sales of goods. They will be used as collateral, inherited, etc. and each of those rely on the assets being characterized as personal property rather than intellectual property.
Conclusions / Key Takeaways
Existing legal literature has held that use-drives-regulation applies to blockchain technologies. However, to date most legislation (such as Dapper Labs 2018 decision to retract their Stephen Curry-based Cryptokitties) has reinforced the past two decades of treating digital assets as intellectual property, and therefore as contracts. Fairfield argues that currently NFTs are treated as contracts and property simultaneously, akin to a contract to buy a car (as opposed to a lease) with sellers retaining certain rights. Courts must ask whether parties entering an NFT transaction contemplated conveying a property interest, and if so, whether they intended that contract as an immediate contract with little or no long-term control or a longer-termed contract like a lease or license.
Fairfield argues that NFTs should be treated as full personal property and that sales of NFTs should follow the law of sales of property. Defining NFTs as personal property will have the benefit of “[beginning] to heal the longstanding and growing infection of online spaces with overbroad intellectual property licenses by providing a clear counterexample for courts to build on when differentiating digital property and intellectual property.”
CTA: Future Work / RFP
In establishing the current legal frameworks that adjudicate NFTs, the researcher has laid a foundation from which to extrapolate a new legal framework that combines existing property law with the expected utility that comes with digital personal property having explicit legal contracts explaining what intellectual rights are associated with the sale of an NFT.
Currently, U.S. courts treat NFTs as a combination of IP and personal property. Fairfield argues that users treat NFTs more like personal property than IP and should be regulated as such. As the lawyer/researcher writing the article is licensed in the US, his framing is specifically restricted to the U.S. jurisdiction but the rationale could be used in other common-law using countries.