Web 3.0 Digital Assets: Who Owns What and When?
Clarity of ownership is a fundamental precondition to the success of Web 3.0. The decentralization and market disintermediation promised by blockchain technology allows any person to create a digital asset (say, an NFT) and exchange it for another person’s digital asset (say, cryptocurrency), and no centralized intermediary, such as a bank or exchange, is necessary in this truly bilateral ownership-for-value transaction.
But, in the absence of intermediaries, all of the transaction’s risk (on both sides of the ownership and value equation) falls on the parties. One of the critical components of that risk is ownership risk - essentially, uncertainty about who owns what and when.
Accounting for this risk and making informed decisions requires an understanding of the legal foundations that govern rights (and the limitations thereof) in digital assets. (For the purposes of this article, we’ll focus on United States commercial law, given (i) its commonality with the commercial laws of a number of other nations; and (ii) the size of the crypto and financial markets in the United States.) And the most important of these legal concepts governing digital asset ownership is “control.”
Digital Asset Control
In US commercial law, control is a method of establishing ownership rights in digital assets. What, precisely, constitutes control varies slightly among the different laws and asset classes, but, at its core, control is the exclusive power to alter, benefit from, and/or transfer control of the digital asset.
The legal concept of control for digital assets was developed as a digital parallel, where possible, to the existing analog concept of possession. But, so the story went, because a digital asset is really just an electronic file that can be endlessly and perfectly copied, establishing ownership via possession would lead to some extremely chaotic results (e.g., multiple people could each possess identical copies of the same file and make identical claims to ownership).
The new concept of control mimicked the concept of possession in all the important ways – such as requiring the ability to exclude others from possession/control – but in the absence of a singular physical embodiment of the asset.
Control’s most important commonality with possession is the fact that establishing control or possession of an asset affords the strongest claim of ownership. Indeed, taking control of a digital asset can wipe out any prior competing claims to ownership of the asset, such that the introduction of the concept of control makes digital assets “negotiable” - in that parties can freely transfer ownership via control without any worry of some hidden challenge to ownership.
Current Limits of Controllability
Control as a method of establishing ownership is not available to every digital asset. As industries (and particularly those in the financial arena) have moved away from paper-based systems and toward electronic transactions, the applicability of control has expanded under United States eCommerce laws like ESIGN, UETA, and certain provisions of the Uniform Commercial Code (“UCC”). But, today, control still only applies to a handful of digitized financial assets – primarily uncertificated securities, closed-end mortgages, and automobile loans.
For the rest of the digital asset universe - digitized legacy assets like electronic receivables and open-end loans and new blockchain-native assets like cryptocurrency and NFTs - control is not yet a legally effective method of establishing ownership. And the inability to control these assets is a problem, particularly for blockchain assets.
General Intangible Assets Are Not Negotiable
Crypto and crypto-adjacent assets don’t fit into any specific controllable asset category under the eCommerce laws, so they, and most blockchain-native assets more broadly, fall into a catchall category of “general intangible” assets, governed by the UCC.
To establish rights in these general intangible assets (say, when buying or lending against them) a party needs to file and/or check for “financing statements” - documents describing the asset and ownership interests and filed with the appropriate authority (often the secretary of state’s office) in the state where the borrower/seller is located.
Additionally, and even more significantly, general intangible assets are not “negotiable.” Buyers of these digital assets essentially take the asset subject to any prior established ownership interests - and those interests can continue to run with the asset no matter how many times it’s transferred.
These problems combine to undermine the crypto and blockchain worlds’ ideals of disintermediation, frictionlessness, and free transferability, as confident digital asset selling and lending requires some real-world paperwork, along with some investigation into counterparties and the assets themselves.
Future of Controllable Digital Assets
Following a July vote of the Uniform Law Commission, amendments to the UCC are now heading to the state legislatures for adoption. These amendments will expand the concept of control to a host of digital asset types, including most crypto assets.
This is an important step in the (legal) evolution of digital assets with these amendments almost any existing financial asset can be digital and blockchain-native and transferred freely, without intermediaries, and with speed and finality.
However, until there’s large-scale adoption of these amendments by the states, parties operating with non-controllable digital assets in disintermediated, decentralized markets need to be cognizant of the ownership risks carried by their transactions.
Moreover, as long as blockchain-based assets do not enjoy the same protection and rights as analog assets do today (that is, until all digitized assets can be controllable) the path of financial markets from traditional to decentralized will likely be slow and rocky.
So, while the “no keys, no cheese” mantra may be catchy and intuitive, it doesn’t reflect the legal realities of digital asset ownership - even when you hold the keys, it may not be your crypto.
Author: Chris Karlsson
Attorney with Figure Technologies focused on digital lending strategy and the development of new blockchain-based assets and marketplaces.