A law professor explains why NFTs don’t protect digital ownership

by James · November 24, 2022

In 2021, an investment company purchased 2,000 acres of property for approximately $4 million. Normally this wouldn’t make headlines, but in this case the land was virtual. It only existed in a metaverse platform called The Sandbox. By purchasing 792 non-fungible tokens on the Ethereum blockchain, the firm owned the equivalent of 1,200 city blocks.

But did it? It turns out that legal ownership in the metaverse is not that simple.

The prevailing but legally problematic narrative among crypto enthusiasts is that NFTs allow true ownership of digital items in the metaverse for two reasons: decentralization and interoperability. These two technological features have led some to argue that tokens provide indisputable proof of ownership, which can be used across various metaverse apps, environments and games. Because of this decentralization, some also claim that the buying and selling of virtual items can be done on the blockchain itself at whatever price you want, without any person or company’s permission.

Despite these claims, the legal status of virtual “owners” is considerably more complicated. In fact, the current ownership of metaverse assets is not governed by property law at all, but rather by contract law. As a legal scholar who studies property law, technology policy, and legal ownership, I believe that what many companies call “ownership” in the metaverse is not the same as ownership in the physical world, and consumers are at risk of being defrauded.

When you buy an item in the metaverse, your purchase is recorded in a transaction on a blockchain, which is a digital ledger under no one’s control and where transaction records cannot be deleted or changed. Your purchase grants you ownership of an NFT, which is simply a unique array of bits. You store NFT in a crypto wallet that only you can open, and which you “carry” with you wherever you go in the metaverse. Each NFT is associated with a specific virtual item.

It’s easy to think that because your NFT is in your crypto wallet, no one can take your NFT-backed virtual apartment, outfit, or wand from you without access to your wallet’s private key. Because of this, many believe that NFT and the digital good are one and the same. Even experts confuse NFTs with their respective digital goods, noting that because NFTs are personal property, they allow you to own digital goods in a virtual world.

However, when you join a metaverse platform, you must first agree to the platform’s terms of use, terms of use, or end user license agreement. These are legally binding documents that define the rights and obligations of the users and the metaverse platform. Unfortunately and not surprisingly, almost no one actually reads the terms of use. In one study, only 1.7 percent of users found and questioned a “child assignment clause” embedded in a terms of service document. Everyone else unwittingly gave away their first-born child to the fictitious online service provider.

It is in these lengthy and sometimes incomprehensible documents that metaverse platforms explain the legal nuances of virtual ownership. Unlike the blockchain itself, the terms of service for each metaverse platform are centralized and under the full control of a single company. This is extremely problematic for legal ownership.

Interoperability and portability are defining features of the metaverse, meaning you should be able to transport your non-property virtual property—your avatar, your digital art, your wand—from one virtual world to another. But today’s virtual worlds are not connected to each other, and there is nothing in an NFT in itself that designates it as, say, a wand. As it stands, each platform must connect NFTs to its own proprietary digital assets.

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Virtual small print

According to the Terms of Service, the NFTs purchased and the digital goods received are almost never one and the same. NFTs exist on the blockchain. The land, goods, and characters of the metaverse, on the other hand, reside on private servers running proprietary code with secure, inaccessible databases.

This means that all visual and functional aspects of digital assets – the very functions that give them any value – are not on the blockchain at all. These functions are fully controlled by the private metaverse platforms and are subject to their unilateral control.

Due to their terms of service, platforms can even legally delete or give away your items by stripping the digital assets of their original NFT identifiers. Ultimately, while you may own the NFT that came with your digital purchase, you do not own or possess the digital assets themselves. Instead, the platforms only give you access to the digital assets and only for as long as they want.

For example, one day you may own a $200,000 digital painting for your apartment in the metaverse, and the next day you may find yourself banned from the metaverse platform, and your painting, originally stored in its proprietary databases, deleted. Strictly speaking, you would still own the NFT on the blockchain with its original identifier, but it is now functionally useless and economically worthless.

Repeat your NFTs

While admittedly jarring, this is not a far-fetched scenario. It may not be a wise business move for the platform company, but there is nothing in the law to prevent it. Pursuant to the Terms of Use and the Premium NFT Terms of Use governing $4 million worth of virtual property purchased on The Sandbox, the metaverse company – like many other NFT and metaverse platforms – reserves the right, at its sole discretion, to terminate your ability to use or even access your purchased digital assets.

If The Sandbox “reasonably believes” that you have engaged in any of the Platform’s prohibited activities, which require subjective judgments as to whether you interfered with others’ “enjoyment” of the Platform, it may immediately suspend or terminate your user account and delete NFT’s images and descriptions from the platform. It may do this without notice or liability to you.

In fact, The Sandbox even claims the right in these cases to immediately confiscate any NFTs it deems you have purchased as a result of the prohibited activities. How it would succeed in confiscating blockchain-based NFTs is a technological mystery, but this raises further questions about the validity of what it calls virtual ownership.

Legally binding

As if these clauses weren’t alarming enough, many metaverse platforms reserve the right to change their terms of service at any time with little or no actual notice. This means that users must constantly update and re-read the terms to ensure that they do not engage in any newly prohibited conduct that could result in the deletion of their “purchased” assets or even their entire accounts.

Technology alone will not pave the way for true ownership of digital assets in the metaverse. NFTs cannot bypass the centralized control that metaverse platforms currently have and will continue to have under their contractual terms of use. Ultimately, legal reform is needed alongside technological innovation before the metaverse can mature into what it promises to be.

This article has been republished from The conversation under a Creative Commons license. Read the original article by João Marinotti, an associate professor of law at Indiana University.