We understand “tokens” to be digital expressions created with blockchain technology, which are capable of representing assets (whether tangible or intangible), services or rights of any kind. If we place emphasis on the assets, we may project the concept of “token” onto the realm of tangible assets, and within said realm, property.
Following this reasoning, the Token is intrinsically able to embed in itself rights in rem on a real estate property, whether they be ownership rights or rights of possession. In fact, this is a reality in some jurisdictions where technological platforms exist based on blockchain technology which permit the tokenisation of rights on property, offering the access to the property both through acquisition as well as the dynamic and open exchange thereof without the intervention of a notary or public authority[1]. The possession thereof is not only the expression of an ownership title, but of also of certain rights of use implicit in the Token, in the same way as with a conventional ownership title, therefore it could become a registrable title.
Nevertheless, we wonder whether the above adjusts to current Spanish Law. The purpose of the Land Register is to register and enter acts and contracts relative to ownership and other rights in rem on property[2]. In the same way, article 606 of the Spanish Civil Code refers to “ownership titles” as does article 2 First, Second and Sixth of the Mortgage Act and to their registration or entry on the Land Register. In order to be registered, the Mortgage Act requires that the ownership titles are consigned in a public deed, executory deed or an authentic document issued by a recognised authority[3].
Thus, it follows that Tokens are able to represent rights in rem on property, and yet they have no access to the Land Registry insofar as the cryptographic representation of the Token is not strictly considered to be a “document” as referred to in the Mortgage Act. The definition of “document”, in accordance with the Dictionary of the Royal Academy of Language, is that of a written document, in reference to a paper format. Therefore, the title would be a document authorised by a competent authority, whose validation mark is recorded therein in the form of a signature or a seal. Diversely, the Token constitutes an expression in computer language, devoid of direct written translation into conventional language and not intervened by a central authority; the authority to which article 5 of the Mortgage Act refers does not govern the authenticity of the Token, which is based on the pure technology of decentralised registries. Therefore, taking into account the differences between a conventional title and a cryptographic title, it may be concluded that the concept of “title” in the abstract sense may be applied to the latter, as evidence of rights in rem, but it is not applicable to the category “title” which is registrable pursuant to the Civil Code and the Mortgage Act.
It follows that blockchain technology allows the cryptographic representation of rights in rem in the form of Tokens, which by their very nature, are traceable and unalterable, however, they are not recognised in Law as representative titles of rights in rem on property. And for this reason, even in the case of the eventual issue of Tokens which divide the ownership of the property into a specific number of units (tokenisation), two problems would need to be addressed:
a) What would be the documental representation or what would prove the ownership or the right in rem on a property? On the technology front, the Token would be the title itself and there would be no problem in identifying it with its owner through the systems of privileged and exclusive access composed of access codes to the Token.
b) How would the publicity of the Token be achieved, so that the tokenised right in rem becomes effective against third parties, pursuant to Article 1 of the Mortgage Act?
With regard to the second question, and the legislation currently in force, we must reject the possibility of registering a Token at the Land Registry unless the technological transformation operated in the creation of the Tokens is transferred in the same way to the organ which accommodates the registry of rights in rem (the Land Registry), in order to allow access to the registration of the Tokens (a solution which a priori is contradictory to the nature of blockchains characterised by the element of distribution, in opposition to centralisation). And so that this may take place, a means of direct or indirect authentication by the competent Authority shall be necessary, which would mean an intervention in the blockchain. The fundamental problem is that while the Civil Code and the Mortgage Act lend validity and transcendence to the title of rights in rem validated by an authority, that is to say, an agent external to the title, the Token does not require this given that its validity and veracity lie in the very cryptographic nature of the title, without the need to obtain validation from a specific authority.
In short, we may say that Tokens lack the formal characteristics specified in the Mortgage Act in order to be a registrable right in rem. Nevertheless, this does not impede them from objectively constituting, in our opinion, a true expression of the ownership title or other right in rem on a real estate property, given that the features of veracity and authenticity required by law and which are found in documents authorised by notaries or other public agents, lie in their very technology. That said, these titles cannot be damaging to third parties and they do not enjoy the privileges of protection derived from registration because they do not have access to the Land registry.
Eduardo Vilá
Vilá Abogados
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18th of February 2022
[1] RealT, based upon Ethereum (www.realt.co)
[2] Article 605 of the Civil Code and Article 1 of the Mortgage Act
[3] Article 3 of the Mortgage Act
