Contracts Are Still Crucial for NFT Sales of Real-World Objects
When blockchain technology went mainstream in 2016 and Bitcoin hit its then-record high of $20,000 the following year, entrepreneurs and visionaries were eager to leverage the crypto-mastermind Satoshi Nakamoto’s vision for decentralization for as many real-world applications as possible.
And the list of innovations is seemingly endless. IBM went all-in on the blockchain, launching its program to speed up the development of blockchain-based applications for businesses. The Sacramento Kings became the first NBA team to mine Ethereum. Even Walmart expressed interest in employing blockchain centers to help bring transparency to the supply chain and reduce instances of foodborne illness. Clearly, people worldwide were excited to not only understand, but also expand blockchain applications.
Fast forward to 2022, and it’s clear that non-fungible tokens (NFTs) have become the most significant development in fintech to date, opening up new forms of transacting, connecting, and supporting one another globally.
While NFTs have allowed innovation to take a shot at digital immortality, it’s worth remembering that an NFT is still just computer code, or data. This means using it in any given transaction doesn’t remove the need to clearly set forth the terms and conditions that provide that transaction with life and legitimacy.
For this reason, traditional contract law still applies when working with NFTs. In fact, it’s crucial for us to understand what roles every party — including companies, artists, and prospective buyers — plays in the underlying transaction.
How real-world objects can sell as NFTs
To be considered a valid agreement, four crucial elements must be present in any transaction between and among parties — (1) offer, (2) consideration, (3) acceptance, and (4) mutual assent, or the meeting of minds.
“Consideration” is arguably the most important of the four elements above, since it requires all parties to have some “stake” in the transaction, where there is a mutual exchange of value by and between parties.
But to better grasp how our industry has conducted the purchase and sale of real-world items through NFTs, let’s consider some examples that illustrate the way real-world contracts still govern them.
Speeding up the real estate procedures
While physical real estate has been sold as NFTs, it’s worth noting that the properties themselves are not NFTs. Rather, the ownership rights and data are physically tied to the property, which is transferred through a legal entity.
Leveraging NFTs in real estate certainly speeds up the property buying process, since smart contracts replace intermediaries and transactions recorded on-chain. But traditional contracts are still necessary to set forth the terms and conditions underlying the property’s sale by and through an NFT.
Ultimately, the need for a traditional real estate agreement is justified by complying with existing U.S. regulatory frameworks, including registering that transaction with your individual state recorder’s office.
Propy’s emphasis on ensuring NFT transaction integrity
The real estate transaction platform Propy has carved out a significant market presence throughout the real estate industry for its technological and legal mechanisms that enable real estate property ownership to be represented as an NFT. Specifically, the platform developed a way to transfer ownership rights digitally, while also implementing a KYC process to verify the person’s name and identity. The firm can switch a property’s ownership from individual ownership to a U.S.-based legal entity via an LLC, enabling the direct transfer of ownership rights of an LLC via an NFT.
Through its proprietary KYC process, Propy developed a protocol that would transfer an asset from one digital wallet to another, while collecting personal names to conduct a background check — ensuring the transaction’s integrity and confirming the identity of all parties involved.
Propy executes the first NFT sale of a U.S. property
Once the sale is completed (through fiat, crypto, or NFTs), ownership of that property is automatically transferred to the LLC and its owner. The record of the purchase is then placed on the blockchain, providing access to the legal documents, reducing costs for buyers, and streamlining the purchasing process.
In 2017, Propy tested its proprietary framework for the first time on a studio condominium located in Kiev, Ukraine, then owned by TechCrunch and Arrington Capital founder Michael Arrington, and subsequently made a purchase for roughly $93,000 (36 ETH).
In March, Propy completed the first NFT sale for a U.S. property after a Florida home in Gulfport was auctioned and sold for $654,310 (210 ETH). Details following the successful sale revealed that bidders on the property were required to provide identification and their full names before participating in the auction to authenticate house ownership — but couldn’t share any additional information beyond that without the buyer’s consent.
Propy currently conducts its auctions through its NFT Marketplace, as it needs to specifically cater to the restrictions in a real estate transaction while using the $USDC stablecoin.
We’re on a boat!
In March, award-winning naval architect Gregory Marshall pioneered the world’s first NFT customized superyacht in partnership with digital yacht dealer startup Cloud Yachts, which was minted on OpenSea and sold for approximately $12 million USD, paid in crypto.
Unique to the yachting world, the minted NFT goes beyond the mere art and includes all the technical data on the systems and structures, recorded to the blockchain — allowing owners to virtually tour a yacht design, in real scale, from anywhere through holographic, augmented reality (AR) technology.
With the NFT minted, Tactical Custom Boats in Canada is working to build the physical pairing to the NFT — an IRL customized 33.5-m (110-ft) yacht that will be built over the next three years.
According to Marshall, Cloud Yachts handles the financial transactions, delivering crypto payments to the appropriate parties. Once the yacht is complete, both Tactical Custom Boats and Cloud Yachts say they’ll mint another NFT featuring all metadata from the building process of this superyacht, which will simplify everything moving forward for future designs.
Tactical CEO Tim Charles said he chose to apply the NFT business model to “simplify” what he says is often a complex build process.
Chevy’s Corvette NFT
In June, Chevrolet became the latest automaker to take on NFTs, taking a different approach from Lamborghini, McLaren Automotive, and Hyundai — auctioning off a Corvette-themed NFT, which also comes with the actual sports car inspired by the artwork.
The NFT, created by artist Nick Sullo (who goes by the online alias “xsullo”), depicts a lime green Chevy Corvette Z06 blasting through a cyberpunk landscape, which is paired to an IRL custom-painted 2023 Corvette Z06 color-matched to the art.
The process was not very different than a traditional contract seen in a real-world auction. For example, Chevrolet’s contract that governed last month’s auction set forth the Terms and Conditions that named the parties to the transaction, beginning with General Motors LLC. Then it continued by defining the way in which the auction would take place, the description of the items (the NFT, the artwork, and the Chevy vehicle itself), and general warranty disclaimers.
According to the company, the winner from last month’s auction will also receive the “Minted Green” Corvette, the only car in the Z06 to be painted that color. The Corvette’s VIN will be binary, coinciding with the NFTs coding, and forever associating the IRL vehicle with the NFT auction.
The new Z06 Chevy is expected to go into production this summer and will go on sale to the general public as a 2023 model.
The bottom line on NFTs of real-world objects
Those participating in the NFT space should understand that an NFT is nothing more than code.
This is why transactions surrounding the creation, inclusion, and association of an NFT should all be governed by a traditional legal contract that sets forth the terms and conditions to the nature of how the transaction will employ that NFT, in addition to the real-world item to which it’s paired.
Andrew Rossow is an attorney and journalist who focuses on fintech and intellectual property law.
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