The blockchain is the future. That’s what we’re told anyway. If you’ve heard of the blockchain, you’ve probably also heard its proponents talking about the utopian ideal of decentralized ownership.
While the future seems exciting, promises like these and the utopian picture many people paint bring me to one central question: What do you actually own in the ownership economy?
The answer is more complicated than you might think.
Nick Ducoff is a partner at G20 Ventures, a co-founder of ON_Discourse and a founding member of OurNextDAO.
Many people assume owning a non-fungible token means you own the associated asset – in reality, all you can prove you own in many cases is the tokenID and contract address. The legal right to control the item may or may not be intrinsically part of the NFT.
Copyright law introduces additional complexity: Transferring ownership does not inherently transfer copyright. U.S. copyright law has stringent requirements for transferring copyright, which are not guaranteed to be met by smart contracts.
When purchasing an NFT, many people assume they’re buying the work it represents. The reality is a little more complex. In fact, when you purchase an NFT, what you actually own is the token’s metadata (including its tokenID and the contract address) – not necessarily the work itself.
Furthermore, the token doesn’t actually reside in your wallet, but rather the token’s ledger is updated to reflect that your wallet owns one. This introduces a number of issues related to ownership and copyright.
See also: What You Own When You Own an NFT | Opinion
Physical objects and ownership
Say you buy an NFT associated with a physical object. What you have definitely purchased is the tokenID and contract address connected to that physical item. Other assets, like the physical object itself and whether you have the legal right to control the item, may or may not be intrinsically part of the NFT.
Buying an NFT representing a physical object doesn’t guarantee that you will receive the goods. Purchasing the NFT doesn’t trigger a process wherein a robot fulfills and ships an order from a warehouse, for example. There’s a human in the loop.
And if the order isn’t fulfilled, the blockchain remains immutable. You can’t get a chargeback as you could with a purchase you made using a credit card. You’re just SOL (no pun intended).
It gets even more complicated when the NFT is connected to a digital creative work, in part because of rampant confusion about the relationship between NFTs and copyright law – and specifically U.S. copyright law, which sets a high bar for selling copyright.
If you purchase an NFT of a digital creative work – let’s say a piece of visual art that someone else created – you have, once again, definitely purchased the tokenID and contract address for the artwork. What’s murkier is figuring out who has the ability to create (and profit from) derivatives or copies of that art.
Part of the confusion comes from the fact that, under U.S. copyright law, there is a difference between transferring a copy of something (like a piece of art) and transferring copyright (as in, the right to make other copies of that art). Transferring copyright requires that the transfer occurs in writing, with a signature from the copyright owner – something smart contracts can make surprisingly difficult.
Let’s say, as an example, that Person A creates a piece of digital art. Person B buys an NFT, acquiring full ownership of the copyright as part of the original contract. At some point, Person B decides to sell the NFT.
What happens when Person C buys it? Does copyright automatically transfer to them? Not necessarily! If the smart contract does not specifically include mention of copyright transfer, Person B might still legally hold the copyright – even if Person C now has the NFT.
And what happens if Person B created a ton of derivative material around their NFT before they sold it? Do those revenue streams go with the NFT to Person C, or do they remain with Person B, the copyright holder?
There’s no crystal clear answer to those questions, and yet the legal and financial ramifications of those answers are significant.
Read more: The End of the 'Centralization Era' in Crypto | Opinion
The promise of NFTs is that of a form of true digital ownership entirely counter to the current model of licensing and streaming (in which buying something like a song, book, or movie online does not mean you truly own that digital item, much less its copyright).
However, the legal landscape of copyright and ownership – especially where digital assets are concerned – has not yet adjusted to NFTs and other Web3-related assets. Nor do all NFT sellers seem to fully abide by the ethos of true digital ownership.
One article on NFTs and digital property in the Indiana Law Journal notes that while Axie Infinity, for example, sells “axies … on the grounds that they are owned and may be resold for profit,” Axie’s actual license asserts that the company still has copyright control. As the author points out, the inconsistencies between what buyers are told and what’s in the licensing agreement make for an unstable market and legal environment. The legal issues here are complex and thorny.
Vanishingly few existing NFT projects have been released with explicit copyright terms baked into the smart contract and, as in the case of Axie, there can be conflicts between what the buyer thinks they’re getting and the licensing terms. The potential for expensive, complicated legal issues down the line is real, and it’s likely that many such cases will be litigated in court in the coming years.
What this means in a practical sense now is that when you purchase an NFT, it’s entirely possible that the only things you actually own are the tokenID and contract address. Everything else, unless explicitly spelled out, is very much a gray area.
A governance token makes you a decision-maker – but does it make you an owner of that organization? It’s unclear how governance tokens define the relationship of rights and accountability between token holders and organizations. Governance tokens might be considered securities or equity, but that definition remains murky for many token holders.
Bad actors can manipulate governance tokens and technical loopholes to cause significant financial damage.
When you receive a governance token, you also gain the right to vote on governance questions – holding the token makes you a decision-maker within the organization that issued it. But does it make you an owner?
In a more typical corporate organization, if you purchased shares of a company in the form of securities or were issued them as stock options, you might be considered a shareholder, depending on the organization’s structure and your connection to it.
Shareholders have certain rights based on state law and common law from years of court precedent, especially in Delaware. While governance tokens are not equity in a literal sense, they are often regarded as being similar to more traditionally understood forms of equity.
However, in the Web3 space, there are no widespread, commonly agreed upon mechanisms for holding people accountable the way there are in a company with shareholders, a board of directors and management teams.
Much of the excitement about Web3 is about doing away with unnecessary hierarchy – but in this case, what’s important isn’t that hierarchy. It’s the relationship between ownership (like stock) and accountability.
See also: The Pitfalls of 'Community-as-Company' | Opinion
Shares vs. governance tokens
To take just one example, let’s say you own one IBM share. That means you own one share’s worth of IBM and are a shareholder (and likely a shareholder who expects the value to increase).
The more shares you own, the more weight your voice will carry when it comes time for IBM to make decisions. Also, you get one share of dividends. There are also systems in place to ensure IBM’s actions are held accountable to its shareholders.
However, if what you own is a governance token, there are no such guarantees of accountability, no clear indication of whether you can expect your token to be exchangeable for value, and no well-defined sense of what holding that token really means.
This leads to another set of questions, the answers to which are often equally unclear, such as:
- Is a governance token a security?
- Is it a claim on the treasury?
- What liquidity is available, and what will continue to be available?
- Does owning a token confer governance of the specific product/project, the whole organization or both?
- What happens if the organization is “wrapped” – that is, if there’s an LLC or corporate structure on top?
- Is a governance token transferable?
Questions about governance tokens and what you own are already complex, and the fun doesn’t stop there. It’s also possible for bad actors to manipulate governance tokens and decentralized structures in incredibly harmful ways.
Mango Markets, for example, experienced a painful market manipulation. Exploiters found loopholes in the smart contract that allowed them to dramatically increase the value of their collateral and siphon money from the Mango Markets treasury in the form of loans – to the tune of more than $100 million.
Not only that, but one of the exploiters went on to offer to settle bad debt using the stolen funds and used stolen tokens to vote for their own proposal.
While they lacked sufficient tokens to pass the proposal, this type of market manipulation and exploitation makes it imperative to answer questions about what you truly own when you own a governance token.
So, what do you own?
As you think through these issues – and these are just a handful of examples from an increasingly complex landscape – you might find yourself wondering whether the ownership economy is actually a mirage.
What do you actually own? In too many cases, there is no clear answer to this question, and there’s plenty of ambiguity when answers do exist.
The ownership economy is not currently what it’s made out to be. Rather than a utopia of decentralized ownership, we see increasingly complex legal questions with increasingly high financial stakes.
Fortunately, there are ways we can start addressing that complexity. Reversibility, for example, is something to consider.
Right now, the market has a major caveat emptor hanging over it – and while buyers should be aware of what they’re purchasing, too few have real access to the information they need. Although the blockchain’s immutability is one of its selling points, there are proposals for reversibility that work with the blockchain while offering recourse to consumers.
One such proposal focuses on ERC-20 tokens on Ethereum, and suggests a short reversal dispute period during which decentralized panels of judges determine whether or not a transaction should be reversed.
Another element to think about is ensuring more information is available for buyers. It should be possible to list information in the transaction to spell out exactly what it is you’re getting when you make a purchase. Easy access to the rights and licensing information associated with a token, for example, will help buyers understand exactly what their token enables them to do.
The ownership economy is a promising space. But right now, those promises are not being fulfilled. Legal and market realities are clashing and high-profile scandals are drawing attention to shortcomings in the system. What’s presented as utopia looks more like a pipe dream, if the headlines are anything to go by.
However, it’s not too late to get closer to that utopian ideal. It will take work, and likely quite a lot of legal wrangling, but there are opportunities to ensure everyone who enters the ownership economy knows exactly what they own.
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