by Micah Kindred, Associate Member, University of Cincinnati Law Review Vol. 91
This article is the first in a series by Micah Kindred on the current NFT landscape. For further reading on how intellectual property rights relate to NFTs, see Part Two here.
As technology develops, the world grows and adapts to it. Blockchain technology is one of these technological developments that is already changing our world. As blockchain has become more and more normalized, nonfungible tokens (“NFTs”) have been created as one of the many ways to utilize blockchain. NFTs present a host of practical uses to varying fields, not just technology. One such field is real estate law. In the last few years, adopters of blockchain technology have begun experimenting with replacing deeds with NFTs in real estate transactions. This could be largely beneficial to real estate lawyers along with real estate buyers and sellers. However, the use of NFTs in real estate transactions could prove to be unrealistic because lawmakers would be required to intensely revise real estate laws across the country. Thus, utilizing NFTs at this point may not be worth the hassle. This article will explore the benefits of NFTs as deeds and in the process of title verification. Part II will provide explanations of NFTs and their uses in real estate. Part III will discuss the benefits and potential roadblocks that come with NFTs as deeds. Part IV concludes with a current outlook on NFTs as deeds and how NFTs can aid in real estate transactions.
NFTs have skyrocketed in popularity as blockchain technology has become more mainstream, with artists releasing graphics depicting anything from psychedelic cats to athletes.1Anthony Clarke, How NFTs Can Boost Fan Engagement in the Sports Industry, Cointelegraph (July 30, 2022), https://cointelegraph.com/news/how-nfts-can-boost-fan-engagement-in-the-sports-industry. The public adoption of NFTs as a fun gimmick has led to experimentation with NFTs for more practical uses. Today, NFTs are used for things like ticket sales, shipments, commerce, and to verify important documents.2Patrick Jones, The Practical Applications of NFTs, Tech Times (Feb. 10, 2022, 8:02 PM), https://www.techtimes.com/articles/271697/20220210/the-practical-applications-of-nfts.htm. One of the most interesting uses of NFTs is to support real estate title verification or to act as a real estate deed itself.
A. What is an NFT?
To utilize NFTs in more practical ways, it is critical to understand what an NFT is. NFTs are nonfungible tokens. Nonfungible means that NFTs cannot be easily exchanged or traded for other NFTs.3Robyn Conti & John Schmidt, What is an NFT? Non-Fungible Tokens Explained, Forbes (Apr. 8, 2022, 8:36 AM), https://www.forbes.com/advisor/investing/cryptocurrency/nft-non-fungible-token/. In this way, NFTs can be analogized to physical sports trading cards. A one-of-a-kind rookie card is likely worth significantly more than a standard, run of the mill baseball card of an average player. The same goes for NFTs. One NFT may be worth thousands or even millions of dollars, while others are worth pennies. Trading an NFT for another NFT at random would not make any sense, just as trading any one baseball card for another baseball card would not make sense since the values can be drastically different.
Because NFTs are nonfungible, identifying individual NFTs is crucial. The nonfungible nature of NFTs is a major part of what makes them so innovative. So, to capitalize on this, all NFTs are encoded with a unique identifier, making it simple to identify exactly which NFT is which.4Id. The identifier allows an NFT owner to know they own the original NFT and not a copy of it. The identifier also prevents potential replicators from passing a duplicate off as the original, because any duplicate would not have the correct identifier. This is similar to how original art is differentiated from forgeries. An original artwork likely has an artist’s signature, distinct brushstrokes, or some other key identifier that cannot be fully duplicated. The same idea applies to NFTs and the unique identifiers encoded into them.
Another crucial aspect of NFTs is that they are built on blockchain technology.5Id. Blockchain technology is a “system of recording information in a way that makes it difficult or impossible to change, hack, or cheat the system.”6What is Blockchain?, Euromoney Learning, https://www.euromoney.com/learning/blockchain-explained/what-is-blockchain (last visited Sept. 20, 2022). The importance of blockchain technology as it relates to NFTs is that blockchains are largely considered immutable.7What is Blockchain Technology? – IBM Blockchain, IBM, https://www.ibm.com/topics/what-is-blockchain (last visited Sept. 17, 2022). This means that records stored on a blockchain network, in this case as an NFT, are essentially unable to be changed once they are documented. This immutability has largely contributed to the use of NFTs in connection with real-life assets.
B. NFTs as Real Estate Deeds
In real estate, title is “a legal term that refers to ownership of something,” and a deed is “the actual legal document that would transfer the ownership (title) of a property from one person to another.”8What’s the Difference Between a Title and a Deed?, Atlantic Bay Mortg. Grp. (Aug. 2017), https://www.atlanticbay.com/knowledge-center/whats-the-difference-between-a-title-and-a-deed/. The real estate industry is beginning to use NFTs in place of or in conjunction with real estate deeds.9Megan Jones & David W. Wright, NFT Use Cases in Real Estate, JD Supra (May 5, 2022), https://www.jdsupra.com/legalnews/nft-use-cases-in-real-estate-9505741/. These transactions consist of the sale of an NFT, which acts as the deed for the real estate.10Id. In these transactions, the NFT is representative of the real estate itself. The NFT contains the exclusive history of the specific real estate it is tied to. It can be programmed to include all the information that deeds require and more.
A property in Tampa, Florida was sold as an NFT on April 12, 2022 for $215,000.11Id. This is one of a few NFT real estate transactions that have started to pop up.12Id. An real-estate backed NFT in Ukraine sold for over $93,000 in May 2021. Id. The appeal of using NFTs in place of physical deeds is the immutability of blockchain. Storing critical real estate transaction information on an NFT that is not easily changed or hacked may be a way to avoid many common title disputes and verification processes that often come with real estate transactions.
Currently, deeds are physical legal documents. Real estate deeds in Ohio, like many other states, must be signed by the “grantor, mortgagor, vendor, or lessor” and “acknowledged by the grantor, mortgagor, vendor, or lesser, or by the trustee” in front of someone who can certify the documents.13Ohio Rev. Code Ann. § 5301.01(A) (LexisNexis 2022). After a deed is properly signed and acknowledged, it is recorded in a county recorder office.14See, e.g., Franklin County Recorder, https://recorder.franklincountyohio.gov/Services/Real-Estate (last visited Sept. 20, 2022).
Physical deeds often require significant verification by attorneys in real estate transactions.15Everything You Need to Know About Proof of Ownership, Courthouse Direct (May 23, 2018), https://info.courthousedirect.com/blog/everything-you-need-to-know-about-proof-of-ownership. This can include confirming ownership of the property through county records, reviewing property tax records and any mortgages or liens on the property, verifying the identity of the seller and buyer, and more.16Rashmi Deshpande, Key Legal Checklist for Buying a Property, Housing.com (Mar. 4, 2022), https://housing.com/news/key-legal-checklist-buying-property/. This process can be time consuming and expensive for buyers and sellers.
Further, title disputes often arise in relation to real estate deeds. Fraudulent titles are a frequent cause of these disputes.17Jeffrey T. Angley, What Might Lead to a Title Dispute Affecting Your Property?, Phillips & Angley (Nov. 2, 2021), https://www.phillips-angley.com/blog/2021/11/what-might-lead-to-a-title-dispute-affecting-your-property/. These cases typically arise from one party selling a forged deed to another.18Stephan Quinn Cassady & Riley Saunders, Home Title Fraud – The Real Risk and How to Safeguard Against It, Cassaday & Company, Inc. (June 22, 2021), https://cassaday.com/home-title-fraud/. With physical deeds, tracking down everything needed to verify title can be a lot of work and is usually done by an attorney. This can be cumbersome to buyers and sellers alike, which is why some choose not to go through with verification. However, not verifying title commonly leads to lengthy and expensive title disputes.
NFTs may offer a solution to this problem. NFTs could be used as deeds or in conjunction with deeds as an aid in the verification process during a real estate transaction. Utilizing NFTs may minimize the verification process. NFTs can be programmed to include all necessary information for each sale of the real estate. While this information would need to be verified for both the buyer and seller in the first transaction on the NFT, all future transactions would only require verification of the new buyer’s information. This would be possible because of the immutable nature of NFTs and blockchain. Once the necessary information is verified and put into the NFT’s record, that information is extremely difficult to change which makes the NFT and its information highly reliable. So once the first buyer’s information is stored in the NFT, any subsequent purchaser could use the information stored on the NFT to verify the identity of previous property owners and other necessary information. Having the NFT ledger with the entire history of transactions associated with a piece of real estate would also reduce the hassle of verifying the real estate’s history because the NFT could contain all previous foreclosure, lien, mortgage information and more. Thus, utilizing NFTs to aid in the verification process can save buyers and sellers money, and lessen the burden lawyers face when tasked with verifying everything necessary in a real estate transaction.
By minimizing the hassle that comes with verifying title, NFTs could also prevent title disputes. If verification of title is cheaper and easier, buyers and sellers will be more inclined to do it. This would benefit everyone involved, not only the buyers and sellers. Real estate lawyers could complete thorough title verifications quickly and efficiently without having to track down information from various sources because the information would be provided on the NFT. Beyond that, the entire transaction history of the property would be openly available on the NFT making these transactions much less time consuming, which would allow for more transactions to be handled on a regular basis.
While using NFTs in this manner could be advantageous, to make NFTs a suitable replacement for deeds, the laws would need to be revised significantly. In Ohio, the law currently requires deeds to be physically signed and recorded in the office of the county recorder.19Ohio Rev. Code Ann. § 5301.01 (LexisNexis 2022). First, the laws would have to allow a digital signature, like those on blockchain, to be equal to a physical signature. That would be just the beginning though. To make the NFTs reliable for verification purposes, the law would have to require that all transactions be recorded on the NFT for that property. Likely the entirety of real estate laws regarding transactions would need to be revised to account for the digital nature of NFTs since real estate has historically been handled with large quantities of physical paperwork.
By allowing NFTs to be used as deeds for real property or to aid in the verification process of real estate transactions, transactions could become much smoother by removing the need for intensive verification processes as well as preventing many legal issues that often occur related to real estate title. However, getting to a point where utilizing NFTs as deeds is realistic would require significant revisions to real estate transaction laws. So, while NFTs could be beneficial to real estate long-term, normalizing their use as deeds at this time is likely too significant a task to undergo for the somewhat limited benefits they currently present. However, NFTs as an aid to title verification should be seriously considered as NFTs become normalized.
- 1Anthony Clarke, How NFTs Can Boost Fan Engagement in the Sports Industry, Cointelegraph (July 30, 2022), https://cointelegraph.com/news/how-nfts-can-boost-fan-engagement-in-the-sports-industry.
- 2Patrick Jones, The Practical Applications of NFTs, Tech Times (Feb. 10, 2022, 8:02 PM), https://www.techtimes.com/articles/271697/20220210/the-practical-applications-of-nfts.htm.
- 3Robyn Conti & John Schmidt, What is an NFT? Non-Fungible Tokens Explained, Forbes (Apr. 8, 2022, 8:36 AM), https://www.forbes.com/advisor/investing/cryptocurrency/nft-non-fungible-token/.
- 6What is Blockchain?, Euromoney Learning, https://www.euromoney.com/learning/blockchain-explained/what-is-blockchain (last visited Sept. 20, 2022).
- 7What is Blockchain Technology? – IBM Blockchain, IBM, https://www.ibm.com/topics/what-is-blockchain (last visited Sept. 17, 2022).
- 8What’s the Difference Between a Title and a Deed?, Atlantic Bay Mortg. Grp. (Aug. 2017), https://www.atlanticbay.com/knowledge-center/whats-the-difference-between-a-title-and-a-deed/.
- 9Megan Jones & David W. Wright, NFT Use Cases in Real Estate, JD Supra (May 5, 2022), https://www.jdsupra.com/legalnews/nft-use-cases-in-real-estate-9505741/.
- 12Id. An real-estate backed NFT in Ukraine sold for over $93,000 in May 2021. Id.
- 13Ohio Rev. Code Ann. § 5301.01(A) (LexisNexis 2022).
- 14See, e.g., Franklin County Recorder, https://recorder.franklincountyohio.gov/Services/Real-Estate (last visited Sept. 20, 2022).
- 15Everything You Need to Know About Proof of Ownership, Courthouse Direct (May 23, 2018), https://info.courthousedirect.com/blog/everything-you-need-to-know-about-proof-of-ownership.
- 16Rashmi Deshpande, Key Legal Checklist for Buying a Property, Housing.com (Mar. 4, 2022), https://housing.com/news/key-legal-checklist-buying-property/.
- 17Jeffrey T. Angley, What Might Lead to a Title Dispute Affecting Your Property?, Phillips & Angley (Nov. 2, 2021), https://www.phillips-angley.com/blog/2021/11/what-might-lead-to-a-title-dispute-affecting-your-property/.
- 18Stephan Quinn Cassady & Riley Saunders, Home Title Fraud – The Real Risk and How to Safeguard Against It, Cassaday & Company, Inc. (June 22, 2021), https://cassaday.com/home-title-fraud/.
- 19Ohio Rev. Code Ann. § 5301.01 (LexisNexis 2022).