BLOCKCHAIN REAL ESTATE AND NFTS.

• Author: Moringiello, Juliet M.

TABLE OF CONTENTS

Introduction 1135 I. Recording Systems: Old and New 1138 A. The Traditional Real Estate Recording System 1139 1. Historical View 1140 2. Modern View 1143 B. Distributed Ledger Technology Recording Systems 1147 1. Introduction to Blockchain 1148 2. Ethereum's Open-Ended Blockchain 1150 3. The Fuel of Ethereum: Ether 1153 4. Smart Contracts and Decentralized Apps 1154 5. Cryptographic Keys 1157 6. Crypto Intermediaries 1159 7. Non-Fungible Tokens (NFTs) 1160 II. Do Blockchain and Crypto Assets Have a Role in Real Estate Transactions? 1164 A. The Hype 1164 B. Crypto- and Blockchain-Enabled Real Estate Transactions: The Practice 1166 1. Land Transfers by NFT 1167 2. Crypto-Enabled Loans 1169 3. Moving Recording to the Blockchain 1171 C. Crypto, Blockchain, and Real Estate Transactions: The Reality 1172 III. Problematizing Crypto in Property & Commercial Law 1174 A. Impediment # 1: Overhauling the Law 1175 1. The U.C.C. Today and Tomorrow 1176 2. Real Estate Law 1178 B. Impediment # 2: Overhauling the System 1181 1. The Problems of Cost and Trust 1181 2. The Delaware Corporations Example 1183 3. Back to Vermont 1185 C. The Problem of the Recording System as a Repository of a Variety of Interests in Land 1185 IV. The Intangible Case for Blockchain Property Registries 1186 A. Signals, Recording Systems, and Property Rights 1186 B. The Intangible Case(s) for Tokenizing Property Rights and Tracking Them on a Blockchain: The Case of Visual Art 1189 Conclusion 1191 INTRODUCTION

For over a decade now, (1) the promise of distributed ledger technologies (often referred to as "blockchains") have filled the minds of policymakers, politicians, investors, corporate giants, and even the general public. (2) Headlines proclaim that "blockchain will transform business" (3) and will "revolutionize the world economy." (4) Of late, the rise of non-fungible tokens (NFTs) has added fuel to the fire, further enhancing the rhetoric around what crypto can do to change the world. (5) And perhaps nowhere have these promises had more resonance than in the case of property rights. (6) Blockchain technologies have been touted as a mechanism to track and resolve disputes over property, ranging from intellectual property to personalty to even real estate. (7) It is with this final asset class--real property--that this Symposium Article concerns itself. In these pages, we question the use of blockchain networks and NFTs in real property transactions by interrogating how the existing technologies work against the backdrop of the realities of real property transfers. Moving beyond the hype, we explain that a blockchain system would provide few if any benefits to our system of real estate transactions.

The recording system in the United States is quite old and has, at least historically, been based on paper records. (8) Additionally, the system is almost exclusively one of notice, which aims to convey information to parties that may or may not be accurate. (9) Rather than being definitive, recording information serves as a basis for further investigation. (10) One may find a cloud on title to property, only to then discover that the basis for the ostensible claim is invalid. (11) In other cases, the claim revealed in the record may require additional acts to cure the title. (12) All of this, plus the very paper-based nature of the system, has given rise to numerous objections over the years--primarily that the system is antiquated and inefficient. (13) Surely blockchain systems, with their distributed networks and immutable recordkeeping all operating seamlessly through smart contracts and token-based assets rather than through paper deeds and filings, would vastly improve land transfers. (14)

But we are incredulous as to these claims. While many aspects of the existing land-recording system are old and, at least in many parts of the country, still paper-based, not all components are bad. Indeed, for all its inefficiency, land transactions abound in the United States--and have done so even during the COVID-19 pandemic. (15) In other words, for all its flaws and ripe old age, the U.S. land-recording system seems to be working quite fine.

Moreover, moving to a blockchain-based system would be a significant undertaking. (16) Not only would it involve changes to numerous laws--indeed, it would involve fundamentally moving to a land registration system (17) and leaving the notice recording system behind--but it would also require that changes be made to property law itself. (18) Specifically, current law does not allow one to tokenize rights in real property. (19) In other words, one cannot merely, through contract or some other private law mechanism, create a digital asset (an NFT) and have it embody ownership or any other rights in real estate. (20)

But putting aside the legal obstacles, there are also systemic barriers--some of which are bound up in basic political economy. First, to change the system of recording from the way it is now to one that involves blockchain as contemporarily conceived would be expensive and present issues of public trust, as it would seem to require the introduction of private firms as central nodes in the system to substitute for accountable government officials. (21) As we explain below, efforts in at least two states to use blockchain technology in corporate record keeping and in land transfers have largely come to nothing. (22)

Yet, we think there is indeed a potential case for using block-chains and crypto technology when it comes to property rights. But it is not in the world of real property--which our existing system has largely shown itself to be sufficient--but rather for intangible property. (23) American law was developed to deal with tangible assets, whether personal or real. This makes sense because these asset types represented the primary forms of wealth for most of history. (24)

But tracking and transferring rights in intangible property--particularly purely intangible personal property--have always been underdeveloped. (25) It is here, so we argue, that blockchain technology and NFTs might have the highest utility.

In order to make all of these arguments, this Symposium Article proceeds in four parts. First, we explain how the existing system of land recordation works in the United States, paying specific attention to its most salient aspects. We then describe and compare it to the recording system that is the blockchain. We aim here to give a primer on blockchains, using the Ethereum network as the centerpiece, with a focus on the aspects that offer the best points of comparison to the traditional land recording system. In Part II, we question whether the hype around blockchains and crypto has a meaningfully useful role to play in real estate transactions. We do this by describing the various uses proffered by crypto enthusiasts and the companies experimenting with various crypto offerings-ranging from NFT land transfers to crypto mortgages and more. Our main contribution comes to the fore in Part III, in which we problematize the use of blockchains and NFTs in real property transactions to show how current property and commercial law, as well as considerations of political economy and pure costs, make the crypto promise quite hollow. Part IV concludes, however, with some crypto optimism, arguing that blockchains and attendant technologies can play a useful role in how we deal with rights in certain kinds of intangible property.

1. RECORDING SYSTEMS: OLD AND NEW

   One can ascribe various definitions to blockchains, but at their core, they are digital ledgers that contain various kinds of information. (26) In turn, this information is meant to convey rights or claims, sometimes to things internal to the blockchain system itself (such as native cryptocurrencies (27)) and sometimes to things external to it (such as tokens that represent virtual or physical assets (28)). But in truth, public ledgers that contain information giving rise to or evidencing rights and claims have been around for quite a long time. (29) While not originally digital in nature, they have played an important--in fact, essential--role in moderating conflicts between parties claiming interests of one kind or another in the same thing, be it property or otherwise.

   To understand the promise of blockchains and what they can (and cannot) do to solve the issues that are often said to plague real property transactions, one must first understand the real property public ledger system that already exists. The following provides a tour of the real property recording system in the United States and then gives a nuts and bolts summary of the dominantly distributed ledger technology--that run by Ethereum--and the smart contracts and tokens that are attendant to it.

   1. The Traditional Real Estate Recording System

      To understand the extant recording system, one must understand the concept of title. As Rufford and Carroll Patton's seminal treatise on land titles defines it: '"[T]itle' means the right to or ownership of property." (30) More recently, Heather Way described title as "a legal construct that defines" the rights held by someone in a particular asset. (31) Donald Kochan has written, "title is meaningless if it is not recognized and nearly meaningless if there is not some method to prove title with certainty." (32)

      This is when the laws governing assurance of title come into play. These laws are a mix of common law doctrines and statutory regimes that impart legal recognition of title in real property and make such information readily available for public inspection. (33) In doing so, as the history below chronicles, title is made relatively certain, and certain rights are given priority vis-a-vis other interests in the same property.

      1. Historical View

         During the early common law period in England, (34) a formal system of recording land titles was not really needed. (35) Land transferred between persons seldomly...