Digital Property Recognition Will Guide The Market On Its Innovation Journey

The Kettari Foundation founder Endre Birich on how blockchain has fundamentally changed property relations

The explosive growth of digital technology has forced us to abandon traditional notions of work and life. This applies to property as well. Blockchain has suddenly transformed from an auxiliary tool into a legislator of new rules for business, posing a serious challenge to the legal profession. Will society be able to enact legal rules to ensure that property is handled correctly in an online environment?

For centuries, the law has focused on resolving conflicts over the use of tangible assets such as land, real estate and equipment, financial assets such as cash, receivables and shares, and, finally, intangible assets, which include all types of intellectual property, from copyrights to trademarks.

In recent years, however, a new type of asset, digital assets has been gaining ground worldwide. These are primarily “non-fungible tokens” (NFT) that owe their emergence to blockchain technology. According to The Block Research, the number of people employed in the blockchain industry has grown by 351% since 2019. It has grown from 158 companies with a workforce of 18,200 to 421 companies with a total workforce of over 82,000 people. NFT trading volume on Ethereum reached an all-time high of $5.6 billion, with Statista reporting that 44 million people bought NFT in 2022.

According to NFTGo’s NFT Annual Report-2023, the NFT market is showing similar trends to the crypto industry. Analysts estimate that NFT’s correlation with the ETH market was at its highest in 2022. When the cryptocurrency market fell by 20% in June, the NFT market fell by 15%.

The convergence of NFT with the digital currency market is also reflected in the emergence of the new Ordinals protocol, which allows NFT to be written to the bitcoin blockchain. Discussions about the future of the practice have already become a hallmark of 2023.

According to the report’s authors, despite a growing number of well-known brands and celebrities turning to NFT tools, 2023 could be a challenging year for NFT traders amid the global economic downturn. Recent financial meltdowns are on everyone’s radar – the bankruptcies of cryptocurrency exchange FTX and investment platform Celsius are still fresh in the collective memory.

Today, NFT is used in fields ranging from the arts and sports to the environment and media. The most expensive NFTs from the “Art”, “Games” and “Domain Names” categories were sold last year for 325 ETH, 200 ETH and 300 ETH respectively.

By linking real or virtual objects with a unique entry in the distributed ledger, people raise capital, solve marketing problems and build communities. But most importantly, they are declaring ownership rights in an entirely new way that has not yet been adequately described from a legal point of view in any country.

The fact is that today, by law, a blockchain record is purely data. Data is difficult to classify as property because it does not become larger or smaller in size or volume when transferred from one person to another, especially in the digital age, when copying and sharing files takes a fraction of a second.

In the case of blockchain and the digital rights system it creates, it is not so simple. When I transfer a token, such as a record of an art object or a share in a digital corporation, I no longer own it. It goes from my wallet to the recipient’s wallet; not like a picture that I forward in a message but can still see, but as a physical object that I transfer to another person. What one loses, the other gains.

The only difference from physical reality is that all transactions are recorded in a distributed ledger. For a transaction to take place, it must be validated by the other participants in the network. It cannot be deleted or tampered with. Many enthusiasts even view blockchain ‘digital law’ as an alternative to traditional laws that are drafted by members of parliament and enforced by officials, the police and the courts. It seems that a “peer-based” ledger system where everyone controls everyone could help us get rid of mediation, representation and instruments of coercion.

This enthusiasm is, to some extent, not groundless and is even driving a massive business transformation. The digital asset market is being tapped by big brands trying to gain a foothold in the new technological reality. The companies that pioneered the old Web 2.0-Internet are using NFT to reboot and rebrand their products. These include NetEase, Pixel Gaming, Wildlife, Square Enix, Ubisoft and Zynga. Instagram has become a big market for NFT trading, Reddit uses NFT in its collectible avatar programme. Nor are Pre-Internet companies  sitting idly by. Fashion houses Gucci, Nike, Adidas and Prada make extensive use of the technology for marketing purposes.

It is likely that in the future, any value could be represented in the form of a token. Real estate, music, gold, it could all be tokenised and put into circulation as a digital twin-asset. This would simplify logistics and eliminate the costs we spend on banks, exchanges, lawyers, notaries, patent offices or apps like Spotify.

Unfortunately, an overly optimistic approach is not so perfect in practice. Digital asset scams are also growing and expanding their arsenal. They range from exploiting technical vulnerabilities in specific platforms to simply stealing wallet passwords. Artist copyright infringement in the release and sale of NFTs is spreading as fast as a pandemic. Fraudsters release NFTs of other people’s works, sell them, and the artists don’t even realise how their art is being abused. After all, releasing NFTs is not copying, not translating, not broadcasting or cable, and not even communicating to the public.

The issue of royalties for NFT artists is de facto at the mercy of the platforms on which the tokens are traded. And this is one case where deliberate confusion is not in favour of the creator. To put it mildly, it is technically difficult to prescribe an artist license fee in a smart contract and automate the payments, so often the amounts are set arbitrarily, at random and vary widely. Dealers find themselves in a privileged position vis-à-vis the creators of the works.

The lack of regulation of many blockchain-related FTT processes is becoming a bigger headache every year, but the expert community believes that legislators should not be put off by these issues. The time has come to think about how to properly implement legal innovations in line with best practices for doing business in a digital environment, and to adapt the legal provisions on the circulation of tangible, financial assets and intellectual property to market realities. In short, the time has come to recognise the existence of digital property that complements traditional assets and the unique characteristics of digital trade.