Do you also already have digital real estate?

A consideration of NFTs and real estate in the metaverse

With your VR glasses on, you wake up in a Virtual Reality. You get up and look directly into a water tank in which several sharks are swimming. Past this water tank, you walk through your garage with dozens of sports cars. You take the elevator up to the living room. Meanwhile, you hear a helicopter landing on a large platform on top of the house; your business associate has just arrived. Through the glass walls you look from the living room past an "infinity pool" to the wildly undulating sea. Today you are going out and so you take the elevator back down to the dock. You enter your own private yacht and while calling out, ask your business associate if he/she is also in the mood for oysters and champagne.

OK, back to reality. Because this all sounds too good to be true, right? Well, not in the "metaverse"; a kind of digital 3D world. The property we just described is called Supervillain House and it is one of the many "real estate properties" you could buy in this world. So we are talking about digital real estate! In this blog, we explain in a nutshell what the metaverse is, how digital real estate objects can be interpreted and how the transfer takes place. 

Metaverse

So in the metaverse, "digital real estate objects" exist. What exactly is the metaverse? It is a digital world in which an enterprise is responsible for data storage and monitoring. For convenience, we refer to this enterprise as data manager. What does this digital world look like? For those who remember the computer game The Sims: it is reminiscent of that. One major difference between The Sims and the metaverse is that now you do not control an avatar through your computer like an all-powerful figure, but instead you yourself are the avatar. From the eyes of the avatar, you move through a digital reality; a sequence of virtual 3D spaces. In this digital world, you meet others who - like you - participate in the capacity of an avatar. In reality, you are in bed or elsewhere with VR glasses.

The technology is still in its infancy, but companies such as Meta (formerly: Facebook) and Microsoft are pouring billions into ever-developing the metaverse. Nice and all, but what is the point of the metaverse? Is this just a pastime for a bunch of nerdy gamers? Not necessarily. Mark Zuckerberg describes it as a new version of the Internet. Think of a virtual world as a tourism industry, where marketing takes place and job interviews are conducted, for example. Where digital offices exist where actual business meetings take place. And a place where thus digital objects are for sale such as art, clothing and - central here - real estate. Objects in the metaverse can be settled with a local currency, such as the currency MANA in the metaverse Decentraland. Many companies are already trying to purchase "offices" in the metaverse. So with this, the metaverse is providing a whole new office concept.

Digital real estate objects: what is the legal situation?

Many legal questions arise. First, under what legal figure do these objects fall? One thing for sure: exactly what a digital real estate object is is still completely uncertain. We'll do a kickoff though.

Digital real estate does not fit into the legal figure of so-called "immovable property," or tangible objects (things) that are permanently united with the land (immovable). Digital real estate is neither tangible nor permanently united with the ground. But then what is it?

As far as we are concerned, digital real estate objects will rather qualify as property rights. This requires that:

1. there is a right;
2. that is transferable; and
3. Aims to provide material benefit.

As far as we are concerned, digital real estate meets all these requirements. First, we believe that a digital real estate property confers a right. Namely, after delivery, the right holder gets "right" to the exclusive enjoyment of his plot. But since the right holder is permanently dependent on the data controller (for maintenance of the metaverse) for his exclusive enjoyment, we tend to argue that this is a right of claim against the data controller.

Second, digital real estate objects are actually transferable as this exclusive enjoyment is regularly transferred from one person to another. Digital real estate objects, as claims, are also legally transferable; transfer of claims is called assignment.

Third, as far as we are concerned, a digital real estate object can aim to provide material benefit. After all, digital real estate objects have asset value. A brief online search tells us that a plot currently costs an average of approximately €10,000 (note: this does not mean that you have a large office or a real Supervillian House).

Intermediate conclusion: digital real estate objects are not real estate, but property rights.

Mode of transfer: purchase agreement, blockchain and NFT

Assuming that digital real estate objects are receivables: how is this right transferred? Normally, transfer of receivables - assignment - takes place by:

1. an agreement between the parties;
2. By someone authorized to transfer it; and
3. delivery by "public" or "silent" assignment.

The first requirement is not very exciting. As with real property, the transfer of digital property is accomplished by a purchase agreement.

In contrast, the authority question (2) lends itself to a more exotic answer. With real property, a notary will check through the public records to see if someone is actually authorized to transfer the property in question. In other words, is the person actually the owner? With the transfer of digital real estate this works differently. In such transactions, there is no notary. The public records are a blockchain. For the question of what a blockchain is, see our article "blockchain: the equivalent of public registers?". However, unlike the notary with respect to public registers, the blockchain (usually Ethereum) is usually not within the sphere of power of the data controller (although it is possible).

Now that the transactions concerning digital real estate take place on a blockchain and these transactions are visible to everyone, the blockchain is in our view the equivalent of the public registers as a notary uses them. Apart from the fact that the rightful owner, by means of complex encryption, is most likely the only one who can transfer his digital real estate object (c.q. has power of disposal), it may already follow from the mere registration on a blockchain that someone is authorized to transfer his digital real estate object. Based on that information, the data controller can guarantee someone's "property rights." This makes the data manager a kind of supervisor or policeman within the metaverse. This is also necessary, because consider: you would also want a supervisor to intervene when someone else just takes a dip in your infinity pool, right?

The method of delivery (3) is even more interesting. Whereas delivery for real estate takes place via a notarized deed of delivery, delivery of digital real estate takes place by sending a non-fungible token called an NFT. An NFT is a particular type of crypto-asset on a blockchain. NFTs are authenticated with a unique code, so only one of each NFT exists. Associated with the NFT is an external value object. NFTs are always "in the name" of a pseudonym (an "address") of a specific participant in the blockchain. Those external value objects can be - you guessed it - digital real estate objects. So with the delivery of an NFT, the external value object (i.e. digital real estate) is delivered. For this reason, we see an NFT primarily as a deed of delivery. As far as we are concerned, delivery is public now that all transactions are visible on the blockchain to everyone, and by extension to the data controller.

In short, the delivery of digital real estate objects takes place through an NFT. An NFT in this case is a deed of delivery that is registered in a blockchain that acts as a public register. Since the data controller acts on the basis of the blockchain, registration of the deed of delivery counts as communication to the data controller. For this reason, we qualify the transfer of a digital real estate asset as a public assignment. This makes it possible for the data manager and all other participants to continuously check who is the rightful owner of which piece of digital real estate in the metaverse.

In a nutshell: no real estate, but receivables

We realize that digital real estate is (still) a dire niche and its legal qualification is not yet a done deal. In any case, it does invite thought (and imagination). Suppose you pay the same price for both real estate and digital real estate. Would you rather have a tangible plot of land with buildings that you actually own in the property law sense? Or would you rather own a digital real estate property as a claim against the data controller in the contract law sense? So, a claim that perhaps only the data controller needs to take into account and, moreover, does not need to perform maintenance on the real estate object. We, as lawyers in traditional real estate law, do know: real estate. Nevertheless, should you wish to learn more about digital real estate? Then Google "Supervillian House." And note: between June 14 and 17, 2022, the first metaverse festival in the Netherlands is coming to Amsterdam. See you there!