Applications of Non-Fungible Tokens In Law

If Bitcoin and other crypto currencies were the 2019 speculative mania, Non-Fungible Tokens (“NFTs”) are the 2021 speculative mania. By way of example, Jack Dorsey (CEO of Twitter) recently sold a NFT of his first ever tweet for $2.9M! While currently NFTs are predominantly used for trading art works in digitalised forms or for collectible gamification (such as CryptoKitties) it seems to me that NFTs have obvious application for use in legal documents.

Intro to NFTs

NFTS are a digital asset stored on the Blockchain that are, as the name suggests, not fungible. Whereas if I give you one bitcoin my bitcoin ledger is reduced by one and yours increased by one, and you give me one bitcoin back so your ledger is then reduced by one and mine increased by one I will not necessarily have the same bitcoin. This is the same as for electronic transfers of money, a fungible. This means it does not matter whether I got the same bitcoin. All that matters is that my ledger correctly shows the number of bitcoins that I have.

With a NFT I have a specific token which will have an identifier to it and so if I transfer you NFT number 001 you now have the specific NFT 001 and unless you transfer that specific one back to me I cannot ever get it again. While I might attempt to make a copy of NFT 001 the ledger will record you as the sole owner of the original. So, for a NFT that is an artwork I might take a screen shot of it but you would retain the original. Just like I might take a photo of your painting, you will still own the original painting and I will merely have a copy. In a world where digital artists can have their images copied infinitely for nil marginal cost there is obvious appeal. An artist can create an artwork and attach it to an NFT and it instantly has collectability and non-reproducibility. In a world obsessed by speculation on digital assets there is a further obvious appeal.

The problem of the original-copy

Over the past 20 years we have seen a greater uptake of the creation of digital documents. It is common for us to make payments with online payment facilities, share documents online and execute documents through mediums such as DocuSign. One area where the law and practice has not quite kept up has been in the understanding of what constitutes an original. Where “wet” signatures are used on paper it is clear that this is the original and a scanned electronic version is the copy. It is common for such a copy to then be proved in some manner, for example by a statement to the effect of “This document is a true copy of the original”.

But where the document is created electronically there may be multiple originals or, in an alternate view, there are no originals. Let’s say that I create an agreement that I PDF and then electronically sign. I send that document to you. Do I have the original? Do you have the original? They are both clones of the same document. You might say that they are digital reproductions of the same document and so therefore both the originals. I can therefore have an unlimited number of originals.

On the other hand if you argue that only I have the original and I have sent you a copy then it follows that I am unable to transmit the original beyond the storage on my computer. It also means that if my filing system moves the “original” then I have destroyed it and there is no longer any original. The simplest example would be if I cut and pasted it onto a USB drive. The computer action undertaken is to copy the document and delete the original. But we say that we have moved it. But if we have accepted that we cannot move it without creating a copy then we must accept that we can never move the document. This also means that if my hard drive rearranges its filing system (say moving from one folder to another) then I may have deleted the original and replaced it with a copy. You could also create and destroy a document depending on whether it is saved to RAM or ROM. That is the temporary RAM memory that the computer uses while you are creating it and the ROM whereby it is saved in a more permanent state. This means that from the time that you create the document when it is saved in RAM to when you save it in ROM you have already destroyed it once. And potentially every time you open it you are destroying it afresh.

This conundrum is not new to either law or philosophy. We’ve seen it considered in science fiction in the Star Trek transporter problem, whereby “beaming up” someone all of their person is destroyed and then replicated in another location. While it might seem on Star Trek that someone is transported, on another view they are instead killed and replaced by another. A classical analogy is that of Theseus’s ship, where over time each of the rotting planks of Theseus’s ship is replaced with fresh planks such that eventually all of the planks are replaced. Is it still Theseus’s ship? Indeed the same thing applies to humans, where our cells are constantly being destroyed and regrowing such that over the space of a year or two we are almost entirely freshly constituted with new cells.

So depending on which philosophical outlook you take an electronic document can either have infinite originals or (potentially) no originals.

This problem has been tackled in law in relation to goodwill of a business. For example, if a blue collar pub slowly becomes gentrified and over time attracts a pink collar clientele the goodwill of the pub will continue and not be destroyed even though at the end of the process there has been a total change. On the other hand, if a blue collar pub immediately changed its attractiveness to blue collar patrons and suddenly only attracted pink collar patrons then there could be an ending of the old goodwill and creation of new good will. Where goodwill is terminated there might be taxation consequences.

How NFTs solve the original — copy problem in Law

NFTs solve the original — copy problem by avoiding the issue altogether. Whether the token is deleted and created afresh does not matter, because ownership and originality is identified by the token ledger. Using a legal example, when a bank requests a certification that the electronic trust deed that they have been sent is a true and accurate copy of the original instead of trying to explain to them that either this is the original so that they have the original or that there is no original, if the trust deed was tokenised as an NFT it would show that in your ledger you hold the original NFT and that you have provided them a copy. Where the Probate Registry requests certification that the document submitted is a true copy of the Will they can use existing processes and procedures and understanding of the difference between a physical original and an electronic copy, and having a NFT original and an electronic copy. If the Court requested that original documents be made accessible to another party for inspection you could with certainty state that you are the holder of the original and that you are presenting a view access of that said original.

I think that the use of NFTs are much more interesting to the practice of law than so called “smart contracts”, which were widely expected to be adopted in law. A smart contract is one that automatically completes upon happening of some predetermined steps. While the contract does have programmatic mechanisms, much of the interpretation is not the subject of IF — THEN statements that are required for the execution of a program. Further the central problem solved by smart contracts is one of trust, that is where we are transacting with someone that we do not trust. The applications are limited by the widespread and reliable availability of alternatives. That is the reliability of the rule of law. I do not need my house title saved to the blockchain because I have trust in the Torrens system used by our Land Titles Office and the real property law enacted by our Parliament and administered by our Courts. I have trust that if I pay by Visa or Paypal that my account will be properly debited. There are some situations where that doesn’t apply, but on the whole those are edge cases, which causes a problem for mainstream adoption of blockchain. Put simply most blockchain applications would be done better as a database of a trusted authority.

However, for NFTs and the original — copy problem that they solve, while this might seem less interesting than creating Distributed Autonomous Organisations they can solve the practical problem of moving institutional frameworks from the paper age to the digital age. While it might seem simpler for institutions like courts, government departments and banks to understand the creation of electronic contracts (which have been around since the telegraph) it might be simpler to create a certainty of original system that confirms with existing practices.

Who knows, NFT legal documents might also be the next collectible artworks? I have a couple of old system land titles that I hang on my wall. Maybe someone will resell an NFT sale agreement for a large amount of money? Given the speculation that has occurred in collectible images of cats it’s not that farfetched.

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Adrian Cartland

Adrian Cartland

Creator of Ailira, the Artificial Intelligence that automates legal information and research, and Principal of Cartland Law. www.Ailira.com www.CartlandLaw.com