The Dream of Tokenized Property – Is That Legally Possible?

(For German version click here)

 

Currently, Non-Fungible Tokens (NFT) are in the state of a real hype. Unlike other blockchain tokens NFTs are not fungible in the sense that they are not interchangeable with other, identically designed tokens of the same kind. They are rather individual tokens which each represent a specific right or object. In this context, the idea of tokenized ownership right with regard to a specific object is very popular. The ownership of an NFT insofar is intended to represent the ownership of a specific object such as a car, a piece of art or a precious gem. That is the idea from a technical point of view. But is the tokenization of property rights feasible in a legally watertight way?   

Legally Watertight Connection Between Token and Property Right is the Key Requirement

The decisive aspect when it comes to the tokenization of property rights is the difficult task of connecting the token with the property in a legally watertight way. The German law generally does not intend for such a connection, because it is aligned with the fate of the respective object itself and not with the fate of the token. A contractually invoked dependency between property rights of a specific object and ownership of a specific token is also not possible, according to the current legal situation in Germany. This is because of the applicable “principle of abstraction” which differentiates between the contractual relations, which are subjected to the law of obligations and the property law, which defines property rights. Contracts can merely obligate a party to transfer property rights to someone else. The ownership of an object is never automatically transferred to the other party by entering into a contract with them. The actual transfer of the property rights to a specific object takes place disassociated from any contractual obligations by means of an agreement concerning the transfer of the property and the actual delivery of the object itself to the acquirer. The ownership of a virtual token is irrelevant according to the current legal situation. 

Additional Obstacles with International Deals

Parties hailing from different countries face additional problems when they try to transfer property rights. Property law is designed differently in different countries. Since property law cannot be modified by contractual arrangements, the attempt to connect a token with property rights may lead to critical complications. According to the German international private law rules, the law of the so-called res sitae, meaning the law of the jurisdiction in which the respective object is situated, is applicable. Should therefore e.g. the ownership of a piece of art being situated in Germany be transferred to a Japanese acquirer, German property law would be applicable for the fate of the property rights with the consequence that the ownership of a token would be irrelevant. 

Could Connection between Token Ownership and Right of Disposition regarding the Object be a Solution?

A possible way to tokenize property in accordance with German law could be to connect token ownership in the form of knowledge of private keys of a token with the power of disposition in a way so that exclusively the bearer of the private key could actually dispose of the respective object. In order to do so, the token would have to become a de-facto key to the object. Should the ownership of the token e.g. be necessary to open a safe, which holds the object being intended to be transferred, the transfer of the token ownership, comparable to the transfer of a safe key, could represent a delivery in the aforementioned sense. However, the ownership of the token would lose all relevance for the determination of the ownership of the object, as soon as the object would be taken out of the safe. Truly tokenized property is therefore only realizable in a very limited way under German law, even with the help of the aforementioned design.

 

Attorney Lutz Auffenberg, LL.M. (London)

 

I.  https://fin-law.de

E. info@fin-law.de

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