The evolution of ownership: NFTs, blockchain and property

Answer

A tale of two auctions

On 15 November 2017 Leonardo da Vinci's Salvator Mundi was put up for auction at Christie's in New York. The painting depicts Christ with his right hand raised and his left hand holding a golden orb. Only a handful of original da Vinci paintings are still in existence and it was a painfully protracted process of over six years of identification to verify that the painting did indeed come from the brush of the master.

While it was not one of Leonardo's better-known pieces, there was a palpable excitement around the auction house that night. The bidding started at $100 million. Within 20 minutes, it had reached $400 million as the crowd watched on in giddy delight. Two bidders remained. The price edged higher and higher in increasingly small increments as the tension in the room grew. Finally, after some five hours, Prince Badr Abdullah al Saud of Saudi Arabia emerged triumphant with a new world record for a painting sold at auction of $450.3 million. 

Less than four years later, in March 2021, another piece of art was sold at a Christie's auction. This one was different. In contrast to the delirium that greeted the sale of Salvator Mundi, many in the art world and more widely regarded this auction with a combination of curiosity and bemusement. The interest could not be attributed to the celebrity of its artist or the beauty of the piece itself. Indeed, the artist, Beeple, was little-known outside the more obscure corners of Twitter. The piece up for auction, Everydays – The First 5000 days is a somewhat overwhelming image to look at, consisting of a collage of 5,000 images taken on successive days.

However, those interested were not really bidding for the piece itself. There is no physical copy of Everydays save for any individual photographs an individual could print off. It is a purely digital work of art. Those bidding for the piece were hoping for nothing more than to be made an entry on a register. The winning bidder would then have the unique non-fungible token (NFT) associated with Everydays assigned to them as proof and verification of their ownership of the piece. Over several weeks, there were more than one hundred bids for the file. The winning bid was $69 million. Not quite on the Salvator Mundi scale perhaps, but a hugely significant sum for more reasons than one.

This tale of two auctions could be instructive on future questions of ownership both in the art world and more widely. Exorbitant price notwithstanding, Salvator Mundi is a rather conventional example of a sale and purchase. Everydays meanwhile is the first significant sale of its kind and may well be the first page in the next chapter of humans' relationship with property. NFTs act as digital stamps of authenticity of ownership. These cannot be duplicated and therefore they are reduced to the ultimate scarcity – a total of one. In this way, an NFT can be compared to a historic and priceless piece of art by a deceased genius. There can only ever be one true version. However, barring future discoveries, the species will be denied any new da Vincis. NFTs, meanwhile, are just getting started.

NFTs and blockchain: a quick history

NFTs exist on the blockchain. A quick overview of blockchain is necessary here. Bitcoin (BTC) is the key example as it was the world’s first blockchain. The technological genius it represents is still understood by few. The simplest definition of blockchain is that it is a publicly available database. Saifedean Ammous has stated that it can best be understood as “the conversion of electric power to verifiable undisputed records of ownership and transactions”.

To initiate a transaction, a user will indicate that they wish to transfer some of their funds using their private key. This transaction is then transmitted out across the network. The network users will then solve a series of equations in order to verify the transaction. Once the transaction has been verified, it is added to a ‘block’, which is a list of the most recently verified transactions across the network. A computational race then occurs between different nodes on the network to have their version of the block added to the chain. The winner of the race is the first to add the latest block to the chain, and they are rewarded with a certain amount of BTC. This is how Bitcoin is mined.

The blockchain is what results from this process – a ledger, distributed across a network of thousands of computers, of every transaction that has taken place. Each transaction is marked with its time, date, and the amount transferred. It is anonymous but it is completely transparent. One can view a list of unconfirmed transactions in real time online. Vitalik Buterin (the creator of Ethererum, the blockchain on which most NFTs run) summarises as follows: “Whereas most technologies tend to automate workers on the periphery doing menial tasks, blockchain automates away the centre. Instead of putting the taxi driver out of a job, blockchain puts Uber out of a job and lets taxi drivers work with the customer directly.”

NFTs represent the next stage in the evolution of blockchain. NFTs are units of information stored on blockchains that keep a record. The winner of the auction for Everydays bought themselves one such unit of information that acts as a stamp of legitimate ownership. The key distinction between cryptocurrencies and NFTs is denomination – all Bitcoin are equal but not all NFTs are. Bitcoin will be confined to being used as currency whereas the possibilities for NFTs are potentially limitless.

Further uses and the law

The use of NFTs has so far mainly been confined to creative fields. Digital art has been at the forefront of NFTs. Along with Beeple, other social media savvy artists have been quick to the NFT market – Seattle teenager Fewocious has already made $17 million from a series of NFT drops. Gaming companies have begun to experiment with the use of in-game NFTs as virtual currencies. A number of musical artists including Kings of Leon and Grimes have made some of their work available as NFTs. However, it seems that the possibilities for NFTs could go far beyond the arts.

Forbes writer Natalia Karayaneva has argued that real estate could be a key domain in which NFTs will thrive. She argues that NFTs could be “minted to include descriptive and legal data about the property, including paperwork, disclosures, reports, image files, and even videos". Indeed, in June of this year, the founder of TechCrunch, Michael Arrington, sold his apartment by selling the NFT that evidenced his ownership. In this way, NFTs could well supplant traditional deeds and contracts. This logic could then hypothetically extend to almost all forms of property. Blockchains could come to operate as public and decentralised ledgers for transactions in everything.

Of course, there must be caution. NFTs and blockchain are incredibly new in a historical context. As such, the market and the legal landscape around them is rapidly shifting. It is unclear how easily NFTs can be linked to real-world assets. As with the wider crypto market, the value comes from the networks. This dynamic is subject to speculative frenzies resulting in wildly fluctuating prices. At present for tax purposes, NFTs are regarded by HMRC as intangible assets. This means disposals of NFTs by individuals are subject to capital gains tax. Companies that trade in NFTs will be subject to corporation tax. So far, so conventional. But these are a new kind of asset.

Government and lawyers will need to be quick to respond to both the challenges and the opportunities that arise in future. The surge in interest in NFTs could be a bubble or it could be the advent of a new mode of ownership. Indeed, perhaps one day there will be an NFT underlying the ownership of Salvator Mundi. If Prince Badr Abdullah al Saud ever comes to sell the painting in the distant future, maybe he will do so by selling some future NFT that acts as an official stamp of his ownership, setting a new record in the process.

Adam Williamson is a first-seat trainee sitting in the commercial and banking litigation team at RPC.