Bitproperty and commercial credit.

Author:Odinet, Christopher K.


In the past several years, the growth of virtual property in today's economy has been explosive. The everyday use of virtual assets, ranging from Twitter and Facebook to YouTube and virtual world accounts, is nearly absolute. Indeed, by one account, Americans check social media over seventeen times per day. Further, a growing number of savvy virtual entrepreneurs are reporting incomes in the six- and seven-figure range, derived solely from their online businesses. Nevertheless, although the commercial world has come to embrace these newfound markets, commercial law has done a poor job of keeping up. Scholars have argued that laws governing everything from taxation, to bankruptcy, to privacy rights have not kept pace with our ever-changing virtual world. And nowhere is this truer than in the law of secured credit. Doubtlessly, virtual property has come to represent significant wealth and importance, yet its value as a source of leveraged capital remains, in large part, untapped. This unrealized potential is not without good reason; the law--specifically Article 9 of the U.C.C. and the law of property more broadly--suffers from a number of deficiencies and anomalies that make the use of virtual property in secured credit transactions not only overly complex and expensive, but almost entirely untenable. This Article shines light on these shortcomings, and, in doing so, advances a number of guiding principles and specific legislative recommendations, all geared toward a reformation of the law of secured credit in virtual property.

Table of Contents Introduction I. The Rise of BitProperty and its Value A. Overview of BitProperty 1. A Techie's "Bundle of Sticks" Analogy 2. A Poor Fit for Traditional Property Frameworks B. The Matter and the Money of BitProperty 1. Website Domain Names 2. Virtual World Accounts 3. Social Media Accounts II. Conventional Lending, Secured Credit, and Intangible Collateral A. U.C.C. 9 and Conventional Lending 1. Secured v. Unsecured Credit Generally 2. Secured Credit Under U.C.C. Article 9 B. Security in General Intangible Property 1. Tensions in Copyright Law 2. Tensions in Trademark Law 3. Tensions in Patent Law III. Failures and Future Solutions for Bitproperty Collateral A. Critique of U. C. C. 9's One-Size-Fits-All Approach to General Intangibles 1. Jurisprudential Confusion in Valuation 2. Competing, Mixed, and Overlapping Legal Regimes 3. Anti-Assignment Clauses and Empty Enforcement B. Recommendations: Guiding Principles for Reform 1. A New U.C.C. 9 Collateral Category 2. A Unitary Federal Perfection Scheme 3. Addressing Third Party Control and Alienability Conclusion Introduction

"We need to make sure people trust the technology on their desks and in their pockets. And people won't trust technology if they lose their rights when they hit the send button on an email. It's important that we find ways to preserve our values while advancing technology."

--Brad Smith, General Counsel, Microsoft Corporation (1)

Americans spend literally countless hours interfacing with virtual, or what one might call "bit" property. (2) Whether scrolling through one's Facebook newsfeed while waiting in the doctor's office or posting a picture to Twitter while riding the elevator to work, the ubiquity of virtual property's impact on everyday life is undeniable. (3) According to one study, in 2015 alone Americans checked social media seventeen times a day, totaling nearly two hours of social media interaction in a 24-hour period. (4) Not only this, but the number of users of virtual property is huge. (5) As of October 2016, there were 1.7 billion active Facebook users, (6) 73.5 million Pinterest users, (7) and over 695 million Twitter accounts. (8)

Perhaps because of their ubiquity, websites are tremendously valuable in many respects. Hardly any campaign, organization, or cause can claim even a shred of credibility without its own domain name. (9) Organizations spend a great deal of time, money, and human capital in determining the correct website name, branding, structure, and design. (10) In fact, some SEC rules even require that certain information be specifically disclosed on a corporation's website." Similarly, political campaigns will often purchase a number of different domain names when preparing to enter a political race. (12) Some presence on the web, mostly through a website, is practically a prerequisite to relevance in today's economy. (13) The world of websites and their connected domain names is tremendous. At the end of 2013 there were a total of 271 million registered domain names, representing an increase of 18.5 million (or 7.3%) from 2012. (14) While not all of these domain names come with a heavy price tag, many cost a substantial sum. For instance, and both sold in 2010 for $35.6 million and $13 million, respectively. (15)

But virtual property extends beyond these platforms to even more complex models. For instance, the worlds of, Second Life, World of Warcraft, and similar systems are immensely popular. With these platforms individuals can create their own virtual worlds--complete with mountains, fields, buildings, weather, and essentially anything the imagination can conjure--that work to turn the wheels of a digital economy. (16)

As time goes on the realm of virtual property continues to grow and develop in ways that could hardly have been imagined when the digital age first began. And along with this growth has come an increasing recognition of the tremendous value of virtual property. (17) Nevertheless, with traditional property law virtual property is a bit of a poor fit. (18) It is different from tangible property in that although its various parts-networks, cables, software, chips, servers, hardware, and other related technological items--all enjoy a level of physicality, the true value is not in these sundry parts, but rather in the intangible good and service that they can together produce. (19) Virtual property has a number of other unique aspects. For instance, its value and utility often rely upon the recognition of the thing's existence by other servers and users across a vast network that can cover the globe. (20) For instance, a Facebook account is only valuable to the extent that the Facebook corporation's servers grant that account space and allow the user to upload and receive data. (21) The same can be said of Twitter. And surely Second Life accounts and other virtual world-platforms can only exist by computers talking to computers and sharing data and information through both wired and unwired channels. (22) Even when conceptualized as purely an intangible asset, the law of property struggles with how and when bitproperty can be bought, sold, bequeathed, or otherwise transferred from one person to another. (23) Is one free to alienate one's Facebook or Twitter account? And for that matter, does one even really own such a thing? Or rather does the host company grant a mere license of use that allows the individual to create a profile, post pictures, and manipulate his newsfeed, but only for so long as the host company allows it? Or perhaps it is a mixture of all of the above that makes virtual property what we know today.

In thinking about these questions, commercial and property law scholars have explored the complex world of bitproperty and how it might fit into existing legal schemes in the United States and abroad. (24) One topic, however, that has been little discussed by commercial law scholars and commentators is what were to happen if a user desired to collateralize his particular piece of virtual property. (25) Without question, virtual property is valuable (26)--and that is particularly true in the business and entrepreneurial sense: the context which concerns this Article. For instance, people use social media, surf the web, and spend time in Second Life on a regular basis (27)--and that presents an opportunity for businesses and entrepreneurs to engage with their potential customers through these mediums. The results of making use of this opportunity are valuable. Most of the value likely is tied to the ongoing nature of the virtual or online business (such as with a virtual shop in Second Life), but sometimes the use's value can be divorced from the business (such as with URL website addresses). Regardless, the value that a business gets from making use of these opportunities is value that businesses may want to borrow against on a securitized basis. To that point, what would happen if a lender, eager to extend credit but equally concerned with collateralizing the debt, wanted the virtual entrepreneur to grant a security interest in his Facebook account, Second Life account, or website domain name? (28) Could this be done? Should it be done? And, if it should, what body of law would apply? (29) Further, can such a task be effective against third parties and therefore give the creditor the legal preference upon which secured lending so heavily relies?

The most obvious contender to govern these types of transactions is the law in Article 9 of the Uniform Commercial Code (U.C.C. 9).30 Since U.C.C. 9 covers personal property that is otherwise generally intangible, and since all virtual property meets this general definition, the provisions of this widely adopted statutory framework seem most appropriate. There is some argument to be made, however, that virtual property should not be able to be securitized. In other words, perhaps societal goals--such as spurring creativity and challenging existing norms with an aim toward greater efficiency--may be frustrated by allowing virtual property to serve as collateral. This Article argues that such arguments are misplaced due to the fact that using U.C.C. 9 to facilitate this type of secured transaction furthers larger U.C.C. and public policy goals, such as increasing the flow of credit and augmenting the potential for economic growth and further...

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