How can we own property securely in a digital life?
Digital ownership (NFTs/virtual assets in the metaverse/elsewhere)
Taking a NFT as a core example, it is a digital unit of data built on a digital ledger, a blockchain. It is minted, powered by a smart contract. As a unique token, it is transparent and traceable, providing proof of ownership or a certificate of authenticity either to an associated purely digital asset (such as digital art or a limited edition skin for an avatar for gaming), to a physical asset (such as access to a rare collector’s bottle of spirits or to a limited edition fashion garment) or to an experience (exclusive access to backstage at a concert). It may be redeemed in exchange for the physical asset or traded as a commodity with the corresponding rights to the underlying asset. Unlike traditional forms of title to property, the NFT provides an immutable ledger of ownership. It may also be used to detect or prevent counterfeiting of genuine, branded products (whether trainers or medicines). NFTs play an important part in the numerous metaverses in providing reassurance to consumers who wish to purchase digital assets as a verifiable certificate of title.
Looking forwards, we see developments in the regulation of cryptoassets, that aim to ensure a level playing field for consumers and investors alike, will help in building trust. We see scope to help ensure that the terms of each smart contract associated with digital assets, such as NFTs, are set out in a clear and understandable way, to avoid misunderstandings about the nature and exclusivity of the rights attached to the digital asset (for instance, in digital artwork scenarios, the right to enjoy and use the attached work and whether there are limitations through copyright or whether sale of the NFT is subject to paying any royalty-share or claw back in favor of the original owner for uplifts in value).
Methods of enforcement in relation to digital assets
All over the world, courts have quickly risen to the challenge of applying existing remedies to enforce and protect rights in digital assets and to navigate questions of jurisdiction. However, the technicalities of enforcement and details of how digital assets that have been misappropriated can be seized, differ from country to country. Given that digital asset networks are frequently entirely international and boundary-less, this means enforcement and recovery remains inherently complex.
In general, courts and due process have had to adapt in all stages of a matter. We have seen adaptation in enabling service of process in novel ways, new thinking in pre-judgment protection, including duties or orders to disclose information about digital assets, and interim protective measures during proceedings, such as freezing orders. Once a party has obtained judgment, enforcement in relation to a digital asset will depend upon the precise structure and technicalities of the asset. In most jurisdictions there are already ways to seize or transfer, by way of force, physical hardware devices, software, but also specific digital assets. This includes ways to obtain respective passwords and private keys from debtors, e.g. by threatening fines or even prison.
The law quickly adapts to new phenomena, such as blockchain and digital assets and continues to evolve with new technology. Companies and individuals dealing with or investing in these assets can therefore be confident that courts and the rule of law will adapt with changing technology to continue to protect property rights. It remains to be seen whether lawmakers deem it necessary to provide special rules for digital or cryptoassets. Despite lively discussions, Germany, has not deemed it necessary to adapt its Civil Code so far. However, in the UK there have been several consultations in this area, along with a recommendation to introduce a new category of property into the law.
As we have already seen, certainty of ownership rights with respect to the digital property we rightfully possess is one of the most important aspects of digital trust. As digitization advances, individuals and businesses will seek increasingly to own natively digital property and real world assets, via digital means. To avoid the descent of digital systems into lawless chaos, we must have confident property ownership structures, the ability to effectively acquire and dispose of property and to enforce against those who may seek to dispossess others of their property unlawfully, to recover lost property and to receive financial compensation, where it cannot be fully returned. To date, there has surprisingly been little policy development from a property law perspective. The most notable development is that of the Law Commission of England and Wales ("The Law Commission") earlier this year.
In light of the central importance of property rights to trust in digital assets, it is helpful that the common law courts have already started to recognize digital assets as personal property and have made a number of decisions to protect property holders’ rights within existing definitions and legal frameworks, as noted above. However, noting the increasing importance of digital assets to society, the Law Commission made recommendations to reform the legal status of digital assets.
The law of England and Wales currently recognizes something as personal property, if it is a chose in action or if it is a chose in possession; however, the Law Commission has proposed to create a new, third category of data objects to cover digital property, the definition of which will be developed by the courts. The recommendation was made noting that this new category would cement the current common law position and provide clarity. It also harnesses the flexibility of the common law in permitting the courts to define it. However, there remain questions about how to develop trust and legal certainty in an entirely new category of property, and noting the technical nature of this, it is important that courts are well supported and equipped with tools to help them in getting this right.
Therefore it is also recommended that a technical panel be created which is tasked with creating non-binding guidance on the definition. The DIFC took an alternative approach to this, opting for a specialist court to be put in place. This is also an option; however, it could be quite costly to have a separate court and requiring applicants to make separate applications. In contrast, a technical guidance panel could slot into the current system.
Whilst not yet in force, the reforms proposed by the Law Commission are likely to set the standard for how other jurisdictions will proceed. Whilst the recommendations are made based on the law of England and Wales, its principles are likely to have a global effect given the large number of commercial contracts governed by the law of England and Wales and jurisdictions which have the Supreme Court of England and Wales as their highest court of appeal. Nonetheless, given the global nature of this technology, it is imperative that jurisdictions do not operate in silos and there is legal certainty and clarity as to the legal status of digital assets across the board; only then can boundary-less trust be developed. As such, we would endorse other common law jurisdictions to consider taking a similar approach.
We also further consider digital property in the context of digital gaming in chapter Digital Gaming.
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