Abstract
Blockchain has the power to revolutionize the way we transact in and track ownership of assets, including by helping reduce counterparty risk, expediting transaction settlement, and improving asset provenance and recordkeeping. As technological innovations make blockchain transactions faster, easier, and more user-friendly, and as blockchain continues gaining widespread acceptance, individuals and businesses will seek to use blockchains to transact in a wider range of assets. Ownership interests in virtually any type of asset can be reposited on a blockchain, including real or personal property and digital assets, as can the right to temporarily use property owned by someone else. There are, however, numerous unsettled issues under U.S. law that could inject uncertainty into transactions in blockchain assets. This article examines some of the key issues that must be resolved if blockchain is going to be more widely utilized and how certain courts and legislatures have weighed in on these issues to date.
Keywords: blockchain, NFT, tokenization, token, tokenize.
Blockchain has the power to revolutionize the way we transact in and track ownership of assets. At its most basic level, a blockchain is a ledger that facilitates the peer-to-peer transaction of information between two parties without a trusted intermediary. That information can comprise a digital representation of value, as in the case of Bitcoin, but the application of blockchain technology has a far broader reach. Ownership interests in virtually any type of asset can be reposited on a blockchain. This can yield significant benefits, including eliminating counterparty settlement risk, expediting settlement and clearance times, reducing the need for transaction intermediaries and associated costs, and facilitating a verifiable ledger of asset ownership information.
As blockchain continues to gain acceptance and technological innovations continue to make blockchain transactions faster, easier, and more user-friendly, individuals and businesses will look to utilize blockchains to transact in a wider range of assets.
Given the importance of property rights in the blockchain space, it is somewhat surprising that relatively little scholarship exists on the subject. This article examines some of the key unsettled issues under U.S. law surrounding ownership interests in blockchain assets involving incorporeal and corporeal property.
A Incorporeal Assets
Incorporeal assets are generally defined as '[a]ny intangible thing without physical substance that can be owned and be the subject of rights (e.g., intellectual property)'.1
Blockchains are uniquely suited for transactions in incorporeal assets. In fact, the first and most prominent application of blockchain technology, Bitcoin, facilitates the transfer of incorporeal value in the form of a chain of cryptographic signatures transferring digital 'coins' from one Bitcoin address to another. Those coins have no physical existence, but users imbue them with exchange value because of the unique properties of the Bitcoin blockchain ledger. While Bitcoin was the first cryptocurrency, many others have followed – either on networks developed as hard forks or code forks of Bitcoin, or as blockchains with entirely different structures and codebases like Ethereum. Other incorporeal assets – including 'Non-Fungible Tokens' or 'NFTs' and other kinds of property interests (like stocks and bonds) – can similarly be transacted on a blockchain. Significant legal issues implicated by these kinds of incorporeal blockchain assets are discussed later.
I Cryptocurrencies
Cryptocurrencies have been described generally as 'any form of currency that exists digitally or virtually and uses cryptography to secure transactions'.2 Cryptocurrencies are typically held in addresses, representing the hash of a public key that is cryptographically related to a private key. As a technical matter, possession of the private key allows the user to transfer the cryptocurrency to another user by digitally signing it over to another address. The transaction is then broadcast to computerized nodes in a network and incorporated into a 'block', ultimately forming part of the blockchain ledger.3
Under this system, the only recognition of a transferee's 'ownership' is a record entry on the blockchain noting the amount of cryptocurrency held in an address. Unlike with traditional currencies, a person who acquires cryptocurrency does not obtain rights to any corresponding tangible item (e.g., a dollar bill). This gives cryptocurrency a wholly incorporeal existence; an entry is simply added to the blockchain detailing the transfer without referencing anything outside the blockchain itself. This raises significant and unsettled legal issues surrounding property rights that are unique to this novel form of incorporeal asset.
Blockchains are not legal constructs. Consequently, they cannot, on their own, establish legal 'ownership'. While the person who possesses the private key associated with an address has the technical ability to transfer a cryptocurrency to another address, that is not conclusive evidence of ownership under the law. Take, for example, a situation where two users generate the same private key. While a properly derived private key should theoretically be distinct from any other, private key collisions can occur where, for example, keys are derived with insufficient entropy (e.g., two users deriving a private key from the words 'private key'). Collisions are theoretically possible even in the case of securely derived keys (albeit improbable). If the private key possessed by two different users can unlock an amount of cryptocurrency in a single address, who owns that cryptocurrency? In this context, the mantra 'code is law'4 provides an insufficient answer. The code would allow both users to spend the cryptocurrency forward. Reference must be made to some external information – some right existing outside the blockchain code itself – and traditional legal constructs supply the mechanism to mediate user disputes.
The same holds true in situations involving theft of a private key. Even the most extreme adherents to the 'code is law' formulation would not argue that a stolen private key provides legal ownership over a cryptocurrency to the thief. Courts would be called upon to address that issue, along with related issues such as whether the thief can transfer good title to innocent third parties.5
Similarly, consider an individual buying cryptocurrency through a custodial service – i.e., an entity that holds the private keys for all cryptocurrency purchased through it, tracking user balances with the entity's own internal database. Who owns those assets? One U.S. court recently touched on these issues. In In re Celsius Network LLC, the Bankruptcy Court for the Southern District of New York answered this question by reference to principles of contract law.6 The court held that the specific terms of use in place between account holders to the company in that case formed an enforceable contract that transferred title from the account holders to the company.7 Interestingly, earlier versions of the terms of service 'did not contain any clauses regarding Celsius taking rights to ownership', but the Celsius court did not address the implications of those terms in light of testimony that 99% of assets had assented to the more recent terms.8 Determining ownership interests in the absence of contractual language addressing it will have to await resolution in another case.
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