Is it possible to use a Facebook account as collateral for a credit? This question seemed frivolous just a few years ago, but today it raises many doubts. Digital goods have become an essential part of the global economy. The market value of some digital goods even exceeds that of some real-world goods (including real estates). However, modern legal systems do not allow digital goods to be used fully as collateral. They are not protected like tangible things, and even if they are, it is not possible to "transfer" them (hand them over) under a classic instrument of pledge right (charge). This legal uncertainty deters lenders. No financial institution would decide to secure a loan with digital goods if it is not certain that it will be able to satisfy its claims in case of default. This can lead to many dangers. Digital goods will be used as collateral in an informal way, with the risk that holders of these digital goods will be disadvantaged or that various speculations will take place in the market (such as the one related to real estate mortgages that led to the global economic crisis in 2008).
The basic justification for tackling this issue stems from two remarks. First, an important benefit from having an asset is a possibility to use it to secure credit. Assets increase a credibility of an owner and help to receive a loan. This can be used for investments, buying, or building a home, or to serve other important needs. Second, value of digital goods seems to increase more and more nowadays. Virtual goods tend being at least so important to the economy as traditional goods. Assets of many people can consist of digital goods even to larger extent than of traditional goods.
However, the current situation regarding the examination field raises several questions, which in turn leads to uncertainty about the applicable rules. It is therefore unlikely that financial institutions would accept digital goods as collateral without being confident that they could enforce them. This lack of certainty limits the ability of investors to invest in those ventures which assets mainly consist of digital goods.
The subject of the project is to determine whether digital goods can serve as collateral for credit. This problem concerns the foundations of European property law. The existing rules and values specific to security rights will be referred to those specific to the virtual environment of the Internet. In other words, the task of the project is to reconcile these two – as it seems – quite different worlds.
The research will be conducted from a comparative legal and historical perspective. The regulations of European countries on pledge rights are sometimes diverse. A comparison of the various solutions accepted in the national legal systems will allow to obtain a wide range of forms of security rights (for example, fiduciary transfer; floating charge). Moreover, since the problems of the digital world require the construction of legal regulations from scratch, it is necessary to return to the roots of European private law. The current form of pledge rights is the result of a long development process. During this process, many forms of collateral have been abandoned or do not play the prominent role they did previously (for example, antichresis pledge, the Gordian’s pledge). However, it is possible that they may experience a renaissance in the context of digital goods. These two perspectives will allow for the development of an optimal model of security rights in digital goods.
By ‘security rights’ we mean all kinds of legal devices which encumber a good with a creditor’s real right (in rem) to satisfy a secured claim from this good with a priority over other (unsecured) creditors. The catalogue of rights meeting these criteria varies depending on a given jurisdiction. In most legal systems of civil law tradition this term refers at least to the rights based on a legal construction of pledge or mortgage as limited real rights (pignus and hypotheca). Many jurisdictions recognize as a real security also a fiduciary transfer of rights for security purposes, and a reservation of title (a contractual clause that suspends a transfer of title to a buyer until the buyer pays the price). In common law jurisdictions it refers to such property rights as pawn, mortgage, charges and other, non regular kinds of rights.
By ‘digital goods’ we mean goods that are intangible, exist in virtual form and are used in a virtual environment. The scope of such goods is broad, and it could be narrowed during further stages of the research project. At the point of departure, the term can cover such goods as software, e-mail addresses, domain names, music, movies and document files, virtual objects in computer online games, objects issued in blockchain (cryptocurrencies and other kinds of tokens), accounts on social media and their content. The term ‘digital goods’ does not cover: the tangible carriers of digital goods (e.g., smartphones); things cooperating with reality using digital elements (the Internet of Things); copyrights nor other types of intellectual property rights.
The project should assess if a current regulation of security rights (which usually was designed in pre-Internet times) could be reconciled with characteristics of trading in a virtual environment (with its dynamism, anonymity, and incorporeality). That is the main research question to resolve.
To settle this major issue, it is indispensable to separate it into several more specific and technical problems.
A. The first problem asks what kind of digital goods can be object to the security rights. The category of digital assets is diverse. It covers a wide variety of goods that might have little in common with each other. There are digital goods which could be encumbered with security rights, and it would be economically justified, but there are others, in case of which that would not be possible nor efficient.
B. The second problem presupposes that also the category of security rights is diverse. Some types of security rights can be appropriate for digital goods, and others cannot. The important question is if a pledge, that is a limited real right established to secure a claim (either in the form of a pawn or a mortgage), can constitute a suitable regulatory model for security rights over digital goods.
C. The third problem addresses the creation of security rights over digital assets.
D. The fourth problem refers to the way in which the security right over digital assets can be enforced.
E. The fifth problem regards applicable law and jurisdiction in matters of creating and enforcing security rights over digital goods.
The key outcome of the planned research will be the preparation of the optimal model of rules for the security right in digital goods. This will contribute vastly to private law doctrine’s development and may instigate further discussion on how the law should react to technological development. The results of the research may inspire the legislators and serve as source material in the process of introducing new laws or reinterpreting current ones dealing with security rights.