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Law Professor Explains Why NFTs Don’t Protect Digital Property

Law Professor Explains Why NFTs Don't Protect Digital Property

In 2021, an investment firm bought 2,000 acres of real estate for about $4 million. Usually they don’t write about it in the headlines, but in this case the ground was virtual. It only existed on a metaverse platform called The Sandbox. By purchasing 792 non-fungible tokens on the Ethereum blockchain, the firm became the owner of the equivalent of 1,200 city blocks.

But did it? It turns out that legal ownership in the metaverse isn’t that easy.

The prevailing but legally problematic view among crypto enthusiasts is that NFTs allow true ownership of digital elements in the metaverse for two reasons: decentralization and interoperability. These two technological features have led some to argue that tokens provide indisputable proof of ownership that can be used in various applications, environments, and games of the metaverse. Because of this decentralization, some also argue that the buying and selling of virtual items can be done on the blockchain itself at any price you want without the permission of any person or any company.

Despite these claims, the legal status of virtual “owners” is considerably more complex. In fact, the current ownership of metaverse assets is not governed by property law at all, but rather by contract law. As a legal scholar who studies property, technical policy, and legal property, I believe that what many companies call “property” in the metaverse is not the same as property in the physical world, and consumers risk being deceived.

When you buy an item in the metaverse, your purchase is recorded as a transaction on the blockchain, which is a digital ledger that no one controls and where the transaction records cannot be deleted or altered. Your purchase assigns you ownership of the NFT, which is simply a unique string of bits. You store NFTs in a crypto wallet that only you can open and that you “carry” with you wherever you go in the metaverse. Each NFT is associated with a specific virtual element.

It’s easy to think that since your NFT is in your crypto wallet, no one can take away your NFT-backed virtual apartment, clothes, or magic wand without access to your wallet’s private key. Because of this, many people think that NFTs and digital goods are one and the same. Even experts conflate NFTs with related digital goods, noting that because NFTs are personal property, they allow you to own digital goods in the virtual world.

However, when you join a Metaverse platform, you must first agree to the platform’s terms of service, terms of use, or end user license agreement. These are legally binding documents that define the rights and obligations of the users and platforms of the Metaverse. Unfortunately and unsurprisingly, almost no one actually reads the terms of service. In one study only 1.7 percent of users found and questioned the “child assignment clause” embedded in the terms of service document. Everyone else unwittingly gave their first child to a fictitious online service provider.

However, when you join a Metaverse platform, you must first agree to the platform’s terms of service, terms of use, or end user license agreement. These are legally binding documents that define the rights and obligations of the users and platforms of the Metaverse. Unfortunately and unsurprisingly, almost no one actually reads the terms of service. In one study, only 1.7% of users found and questioned the “child designation clause” embedded in a terms of service document. Everyone else unwittingly gave their first child to a fictitious online service provider.

It is in these lengthy and sometimes obscure documents that the platforms of the metaverse lay out the legal nuances of virtual property. Unlike the blockchain itself, the terms of service for each metaverse platform are centralized and under the complete control of a single company. This is extremely problematic for legal ownership.

Compatibility and portability are defining characteristics of the metaverse, which means you should be able to transfer your non-real estate virtual property—your avatar, your digital art, your magic wand—from one virtual world to another. But today’s virtual worlds are not connected to each other, and there is nothing in the NFT itself that could be called, say, a magic wand. Currently, each platform must link NFTs to their own digital assets.

Virtual fine print

Under terms of service, purchased NFTs and digital goods received are almost never the same. NFTs exist on the blockchain. On the other hand, the land, goods, and characters in the metaverse exist on private servers that run proprietary code with secure, inaccessible databases.

This means that all the visual and functional aspects of digital assets — the very features that give them any value — are not on the blockchain at all. These functions are completely controlled by the private platforms of the metaverse and subject to their unilateral control.

Due to their terms of service, platforms may even legally remove or give away your items by unlinking digital assets from their original NFT identities. Ultimately, even though you may own the NFT received with your digital purchase, you are not the legal owner or owner of the digital assets themselves. Instead, platforms simply give you access to digital assets, and only for the period of time they want.

For example, one day you may have a $200,000 digital painting for your Metaverse apartment, and the next day you may find yourself locked into the Metaverse platform and your painting, which was originally stored in its proprietary databases, deleted. Strictly speaking, you will still own the NFT on the blockchain with its original identification code, but it is now functionally useless and financially worthless.

Return of your NFTs

While this is admittedly annoying, it’s not a far-fetched scenario. This may be an unwise business move for a platform company, but there is nothing in the law to stop it. Subject to the NFT terms of use and premium terms of use governing the $4 million virtual property purchased from The Sandbox, the Metaverse Company—like many other NFT and Metaverse platforms—reserves the right, in its sole discretion, to terminate your ability to use or even access your purchased digital assets.

If Sandbox “reasonably believes” that you have engaged in any prohibited activities on the Platform that require subjective judgments as to whether you interfered with other “pleasures” of the Platform, it may immediately suspend or terminate your user account and remove your NFT images and descriptions from your platform. It may do so without any notice or liability to you.

In fact, The Sandbox even claims the right in such cases to immediately confiscate any NFTs it believes you have acquired as a result of prohibited activities. How he successfully confiscates blockchain-based NFTs is a technological mystery, but it raises further questions about the legality of what he calls virtual ownership.

legally binding

As if these points weren’t troubling enough, many metaverse platforms reserve the right to make changes to their terms of service at any time with little or no actual notice. This means that users will need to constantly update and re-read the terms and conditions to make sure they are not engaging in any recently prohibited behavior that could result in the deletion of their “acquired” assets or even all of their accounts.

Technology alone will not pave the way for true ownership of digital assets in the metaverse. NFTs cannot bypass the centralized controls that the Metaverse platforms currently have and will continue to have under their contractual terms of service. Ultimately, legal reform is needed along with technological innovation before the metaverse can grow into what it promises to be.

This article has been reprinted from Talk under a Creative Commons license. Read the original article by Joao Marinotti, Associate Professor of Law at Indiana University.

Written by khirou

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