MAKING VIRTUAL THINGS.

• Author: Fairfield, Joshua A.T.

Table of Contents Introduction 1059 I. Making Virtual Things 1062 A. History 1063 1. Community 1066 2. Technology 1067 B. The Social Construction of Technology 1068 1. The Byzantine Generals Problem 1069 2. Rivalrousness, Excludability, and Uniqueness 1071 3. Other Technological Features of Sociality 1073 a. Graphics 1074 b. Technologically Generated Context 1075 4. The Value of Things 1078 C. Essentialism, Circularity, and Hypocrisy 1081 1. Essentialism 1081 2. Circularity 1083 3. Hypocrisy 1084 II. The State of the (Virtual) Art of Making Virtual Things 1088 A. Information Theory and Transaction Costs 1089 B. A Social Approach to Virtual Things 1091 Conclusion 1096 INTRODUCTION

The recent non-fungible token (NFT) craze (and regularly scheduled high-profile meltdown) is the latest turn in an old discussion. (1) Since the inception of virtualization technologies, people have wanted to own, sell, collect, invest, trade, consume, and sometimes destroy virtual objects (2)--as academics who study online games, multi-user dungeons (MUDs), multi-user shared hallucinations (MUSHes), virtual worlds, and augmented or virtual reality have long known and written about. The question is not whether people wish to own, buy, sell, trade, or invest in these assets; it is why people cannot own virtual things with confidence that the law acknowledges and protects their ownership interests. (3)

This Article makes a simple argument: virtual items are made by social narratives of value, and so the legal regulation of virtual things should center on the human social conception and human social use of those things. When humans package and use a virtual thing as if it were a real object, the law should deem it a thing, an object, the same as any other. This approach comports with present and developing law, satisfies human expectations and intentions, and provides a stable basis for understanding virtual assets going forward.

Contrary to this approach, the discussion around the legal regulation of digital assets has long been mired in a discussion of the technological characteristics of virtual things. (4) Courts and academics tend to consider virtual things in light of their technological essence rather than the use to which humans put them. Take an NFT: it is a loosely grouped set of features, including a token recorded in a distributed database (which sometimes rests on other distributed databases) and some kind of asset, which is either recorded with the database entry, linked to it, hashed to it, or somehow otherwise bundled with it by association. (5) When one looks under the hood to search for the technological essence of a virtual item, there is a temptation to think that we should adopt sui generis regulation for digital assets. (6) Indeed, that process is well underway, with efforts such as the Proposed Article 12 to the Uniform Commercial Code, (7) which treats digital assets as controllable documents by analogy to security interests in brokerage accounts and equities. (8) This Article aims to provide a practical take on the characteristics of virtual assets from a social rather than technological perspective. Such assets, when characterized by humans as objects to be traded, sold, bought, used, excluded, and so on, should be treated as such. Here we can notice that the process of reification (9)--of making informational objects into legal objects--began long ago. (10) Consider the deed to a home. It is simply an NFT stored in a centralized and not very accessible database: the county courthouse records. (11) The process of projecting a social consensus ("this is my land, that is your land, and we know because of our behavior and an entry into a database") onto an asset, land for example, is highly developed, so highly developed that we do not see how odd it is to impose property interests over land. (12) Consider property interests in air or in water, or explaining this conception of metes and bounds to a culture that has a different conception of (or lack of) individual land ownership.

The point is, we can find what we need for a successful process of making virtual things from the long history of reifying assets elsewhere in the law. (13) Doing so requires attention, somewhat ironically, to their informational characteristics. (14) This is because property is the law of who owns what, and the scope of what they own. (15) This information must be written down or otherwise conveyed by the characteristics of the asset itself. (16) These informational characteristics, not information in the sense of information technologies--code--but information in the sense of what information people who wish to buy a digital object know about what they are getting, who owns it, the scope of what they are buying and the rights in it, and so on, are the ones that matter in the formation of stable social narratives of value creating virtual things.

This Article will begin with a brief history of the crying market demand for virtual things, the history of using databases to record property interests in virtual things, and the history of law's successes and failures in satisfying the human desire to own, invest in, and trade virtual things. The Article will then proceed to a description of what is most important in the process of reification: a clear understanding of the conceptualization of the asset. Or, more simply, the idea that the legal characterization of a virtual thing ought to turn not on what it is in some essentialist sense but on how humans use it. This approach has the signal virtue of being the actual present guiding principle of the law: use a token as currency, and the Bank Secrecy Act applies. (17) Use a token as an equity, and the Securities and Exchange Commission (SEC) has jurisdiction, and so on. (18) Picking out this principle and applying it to emerging areas of digital asset creation will do wonders to simplify a needlessly complex field and support and build the kinds of markets needed to satisfy human preferences.

1. MAKING VIRTUAL THINGS

   The signal virtue of property law is that it lets parties know who owns what. (19) This reduces conflict and transaction costs. (20) The antithesis of this virtue is purchaser confusion. (21) When someone considering a transaction does not know what they will receive or whether they truly own it at all, they are less likely to buy or invest. (22) If this uncertainty rises far enough, the transaction will not go through, creating deadweight loss. (23) If the uncertainty is epidemic, no robust market will emerge. (24) That, in a nutshell, is the present state of the digital asset market, marked by enormous potential but hamstrung by the itch in the back of every buyer's mind that they do not know whether they truly own anything at all, and if they do, they do not know the scope or extent of what they have bought. (25)

   1. History

      The history of making virtual things is not one of technological advancement but of narrative economics (26) and community building. (27) That is because the value of all things is social and informational (28)--a social human consensus that the thing has value--and such value is usually generated in a community in which the item or thing is directly valued, (29) before value propagates by virtue of the fact that what has stable value in one community has value in general. (30) I may not personally value a World of Warcraft sword, or a share of Apple, or a ten-pound note from Great Britain, but someone does, and that makes the thing valuable in the general sense. (31)

      One error the academic literature often makes in determining the legal treatment of virtual things is to focus on the technology that undergirds a novel application of a thing. (32) This Article will touch on these features, with a loose focus on NFTs and similar tokenized digital assets. But this serves merely as an example and not as definitional. For purposes of this Article, a thing is a thing, legally, when a community values it and when it has been legally, technologically, electronically, or even physically packaged in such a way that the community that values it conceives of it as a thing. Social and, particularly, community conception drives legal categorization. (33)

      This approach is driven by science and technology studies (STS) theory, (34) particularly that of Bruno Latour, developer and promoter of actor-network theory, (35) who introduces the idea of the "quasi-object." (36) An object is never simply a physical thing; its very thingness, the very concept of it as a unit is socially derived. (37) Think of a brick: clearly comfortingly concrete and physical. Yet there can be no explanation of a brick (much less a book) that does not go into the social processes that formed it and the social conceptions for which it is used. It is modular, to be stacked with other bricks. It has characteristics of stability and aesthetics that explain why it is a commonly used building material--its "brick-ness," its reason for being and its uses. As Latour writes, nothing in the human sphere is purely an object. (38) Everything is a quasi-object, imbued with social and informational characteristics by the social processes, functions, and needs that give them birth. (39)

      This is important for our inquiry into the making of virtual things: we cannot purely look to what these things are, technologically. Rather, we are discussing the creation of quasi-objects, nodes of information formed by social consensus within communities that value them. There can be no explanation of virtual things or the processes that form them, much less of the legal (that is, social) structures that do or ought to regulate them, without attending to their social and informational nature. The trick is to realize that this is true of all objects, not merely virtual or informational ones, to realize that an NFT is as real as a brick, and that a brick is comprised as much of information and social process as it is...