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Virtual real estate: New-age fad or feature of the future?

Authors: Nicholas De Decker– Candidate Attorney

Supervised by: Penny Chenery – Director & Head of Real Estate


If you were born before 4 September 1998, you are officially older than Google. If you were born after that, then the concepts discussed in this article might not seem so farfetched. So, if you’re part of the first category, then buckle up for a mental rollercoaster.



Land has long been held as one of the most financially prudent investments, as its limited availability and high demand have always seen property prices continue to rise. In the words of Mark Twain: “Buy land, they’re not making it anymore.”

Or are they?


The concept of virtual real estate is a difficult one to get your head around. Paying actual money for a digital plot of land that you cannot physically occupy, seems counter-intuitive. Accordingly, you would be forgiven for thinking that no-one was buying into this notion. But they are. By the end of 2021, virtual real estate sales surpassed the 500-million-dollar mark, with a single plot of virtual land selling for 4.3 million dollars! It’s clear that there is plenty of hype around digital real estate, with companies all over the world pledging money towards its development, as well as purchasing digital space themselves. But what exactly is virtual real estate and how does it operate within the confines of the law?


Defining virtual real estate

The 21st century tech boom has brought about a multitude of innovative new concepts, none of which are as exciting, and as controversial, as cryptocurrency. The emergence of Bitcoin in 2008, paved the way for digital money to grow into the widely known movement that it is today. While cryptocurrency’s initial popularity stemmed from it being a decentralised monetary system – not subject to any governmental control, what has arguably bolstered its appeal in recent years are the ludicrous financial returns associated with it. The same goes for virtual real estate.


When you buy a plot of virtual property, you alone are afforded access to that property, on whichever virtual world within the metaverse you decided to purchase it. This allows you to utilise the “land” however you choose, be that improving it and selling it for a profit, renting it out, or, most commonly, using it as an advertising platform to promote real world products.


Cryptocurrency and virtual real estate both rely on a type of virtual ledger system called the blockchain. In essence, blockchain is a kind of digital archive that makes use of asymmetric-key algorithms and hash functions to encrypt and store data. This data is not held in a centralised place like conventional data storage, but rather copied and spread across a variety of systems all over the world. These factors make it incredibly secure, as a single strand of data cannot be manipulated to change the outcome.


As such, once you perform a virtual property transaction, you are you are assigned a non-fungible token (NFT), which is essentially a digital certificate linked through the blockchain, to a certain virtual item, serving as proof of ownership. This works in a similar way when you buy actual land. The transaction is recorded with the Deeds Office and a change of ownership is effected on the property’s title deed. The purchaser will then be able to prove that they own the immovable property by presenting the requisite title deed with their name reflected as the owner.


However, Bitcoin’s recent plunge has sent the crypto market into freefall, with most virtual currencies down nearly 60% this year to date. This has cast major doubt on cryptocurrency as a sustainable form of legal tender. Virtual real estate is inextricably linked to cryptocurrency and has not remained unscathed by the severe market fluctuations. It is therefore important to ascertain where cryptocurrency and virtual real estate find themselves in the eyes of the law. How secure are your virtual rights and how easily can you exercise them?


Position in law

Conceptually, virtual and actual property transactions operate on the same premise: the purchaser pays a sum of money for a plot of land that they then have unhindered access to and use of. However, while property law is designated as its own field of law with unique rules regarding change of ownership and how transactions take place, virtual real estate doesn’t exactly fall within the ambit of property law. Instead, the rights of virtual property owners stem from contract law.


The first and most obvious difference between the two is that when you buy an erf of land, you purchase the physical “real” land as well as the associated rights and physical improvements that come with it. When someone buys virtual property, the property only exists within a certain virtual universe. As such, they are in fact buying a line of code within a particular virtual world, that allows them to utilise the land as their asset. This classifies virtual real estate as personal property as opposed to real property.


Legal complications

The biggest question that arises around virtual property is whether an individual actually owns the virtual item. As mentioned above, when you purchase virtual property, you are given an NFT that is linked to a certain virtual item showing that you are the owner of that item. However, it is important to note that while NFTs exist on the blockchain, the virtual property to which the NFTs are connected only exist on whichever virtual platform they are hosted, inter alia Sandbox, Decentraland and Somnium Space.


This is legally problematic. Although virtual property owners possess an NFT linked to their virtual asset in order for them to actually access and utilise said asset, they will have to comply with the terms and conditions of the associated platform on which the property exists. Now, not to point any fingers, but big tech has a notoriously bad track record when it comes to user agreements that are so superfluously long-winded that they are essentially unreadable. Thus, when a user signs up for a virtual platform and purchases a virtual property with the hopes of monetising it, if any of the conduct that the user engages in goes against the terms and conditions of the virtual world, the owners of that site, as per their Ts and Cs, reserve the right to bar the virtual property owner from entering the virtual world.


This is of particular concern, given that most of these digital platforms do not require express user consent to amend their terms and conditions, meaning that at any given time, you could be contravening them without even knowing it. This would effectively stop the user from being able to interact with their asset as they desire, which in turn raises the question: do you actually own something if another party can unilaterally control your use and enjoyment of it?


Similarly, in the real world, when you purchase immovable property, even if the improvements on it are destroyed, you still have ownership of the actual land. In the virtual space, your asset only exists on whichever digital platform you purchased it. If for some reason, the owners of that platform decide to shut their platform down or there is a malfunction by way of a hack or other type of disruption, the virtual world, along with all your assets for which you have paid real money, cease to exist. In these scenarios, the user still technically owns the NFT on the blockchain, but without access to the linked asset, their investment is unreachable and unprofitable.


The benefits

Make no mistake, the recent crypto market performance is certainly cause for concern. However, it has dipped before and this wouldn’t be the first time that people wrote it off. Top companies like Meta, Adidas, HSBC and Samsung have pledged millions towards growing their virtual footprint by purchasing real estate in the metaverse. Exorbitant land prices have forced enterprises and individuals to look for alternative ways of conducting business and the potential that virtual property provides is truly exciting.


Of course, I am not advocating that buying an absurdly priced virtual mansion for your game avatar is a shrewd investment. But buying plots of land to erect digital billboards within the metaverse – advertising real world products that cost real money – is a really innovative way of reaching a broad audience base at a fraction of the cost. Similarly, the metaverse offers up a unique opportunity for virtual meetings for businesses. Staff can log into a virtual meeting room, one that could even resemble a company’s actual office, and proceed to co-ordinate the meeting from that virtual space. This would offer up considerable advantages over conventional online meetings, as it would allow people to see their colleague’s reactions and body language in real time, without the distractions of the surrounding environment.


The way forward

While scepticism will always persist, there’s no denying the potential of the virtual realm, as this new frontier of human interaction offers up a world of possibilities. There will always be get-rich-quick schemes looking to defraud and defame, no matter the medium. That isn’t to say that the whole movement is to be frowned upon. Accordingly, the legal industry needs to adapt to the fast-paced and ever-changing tech world. Only through proper regulation and understanding, can the metaverse mature into the burgeoning concept that it promises to become.



 

Lawtons Africa is a South African law firm. With roots that grew out of seeds sown in down-town Johannesburg in 1892, our history features various changes and different names. Our team of lawyers, including directors, consultants, associates and candidate attorneys is highly qualified, market-recognised and skilled. For further information, visit www.lawtonsafrica.com

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