The invention of NFTs or non-fungible tokens took the markets by surprise, but now that the concept of the tokenization of digital and physical assets has matured a bit, First American Financial Corporation takes a look in a new blog post at the often misunderstood technology.
While NFTs of digital assets, such as art, receive the most attention, the technology behind it, tokenization, could be used a mechanism to convey ownership of real estate to enhance the real estate transaction process.
In fact, some startups are already focused on the application of tokenization and NFTs in real estate and are courting investors to gauge early-stage investor interest among real estate companies.
According to Justin Lischak Earley, First American Title’s Chief Innovation Underwriter, while the application might be easy on the technology side, but on the real estate title law side, things are quite different.
“First, real estate title law in the U.S. does not work the way that many people believe it does,” Earley said. “An American real estate title typically isn’t a single piece of paper that can simply be pulled from government files and digitized. Instead, in most of the U.S., deriving title to a piece of real estate (let’s call it “Greenacre”) is a research and reasoning process: someone has to read through a bunch of documents in county government offices, and reach a judgment-call conclusion about title to Greenacre. There generally is no “golden record” you can just pull out that will tell you all you need to know about Greenacre.”
“Now, the tech piece. You can think of a NFT as being like a digital piece of paper that’s really hard to replicate. Imagine an old-fashioned piece of parchment with a wax-seal, signet-ring impression on it. Can you copy the text on that piece of parchment? Sure. But can you replicate the wax seal on it? Almost certainly not, unless you have the same signet ring and wax used to make the original. NFTs are kind of like that, but in a digital context rather than a physical one. In this sense, a NFT can be “digitally unique.”
“But just because a NFT is unique, that doesn’t mean that it “represents” Greenacre in a legal sense. Owning a NFT about Greenacre is not the same as owning Greenacre, just like owning a photograph of Greenacre is not the same as owning Greenacre. Figuring out who owns Greenacre involves paging through records in a county land records office—a NFT has nothing to do with that. Some legal scholars call this the “tethering” problem: there is nothing in current U.S. law that “tethers” Greenacre to the NFT."
Click here to view the rest of First American’s blog post on the topic.