Digital Wealth and Doctrinal Gaps - Envisioning Inheritance of NFTs under Hindu Succession Law (Part 2)

*by Shivansh Singh

Having recognised the concurrence of NFTs with the existing property framework under HSA in the previous part of the article, the second part of the article shall continue by inquiring into the legal roadblocks that hinder the incorporation of NFTs and blockchain-based digital assets at large within the Inheritance landscape in India. 

I.     CHALLENGES IN APPLYING HINDU LAW TO NFT INHERITANCE?

Unlike physical property, which is well-regulated under the HSA, digital assets exist in decentralised networks and beyond Indian jurisdiction, which delegitimises them under inheritance law.

A.    The Decentralised Operational Framework of Blockchain

The blockchain transaction log is kept in real-time synchronised on a decentralised network of autonomous computers or servers, otherwise known as nodes, which are like a database spread in thousands of identical copies on several systems. A block is only added to the blockchain when these nodes (computationally compelling blockchain network members) agree to its legitimacy. The blockchain acts as a dynamic and exhaustive ledger, whereby every transaction is irrevocably logged and gathered into blocks. However, before its inclusion in a prospective new block, the transaction must initially be validated as genuine by every node in the network. To verify the integrity of the proposed block, there are dedicated participants known as miners who compete to solve complex cryptographic procedures.

Thus, blockchain functions as an operating system with smart contracts created for its practical use. It is also a self-maintaining database with an app development platform. Therefore, this eliminates the need for a traditional middleman, such as a bank, central authority, or other reliable third party, to track and store assets and transaction information. 

B.    The Jurisdictional Dilemma in Blockchain and NFTs

This aspect of blockchain technology gives rise to its lack of specific jurisdiction, owing to the highly dispersed nature of the nodes on a blockchain, which can be positioned anywhere around the globe, with no means to pinpoint its specific location due to its algorithmic randomisation.  However, regarding legal considerations, the non-demarcated jurisdiction of blockchain-based assets like NFTs poses complex jurisdictional issues that require careful deliberation regarding the relevant legal relationships. The principles of title and ownership of assets differ across jurisdictions; therefore, identifying the appropriate governing law, especially regarding inheritance becomes paramount.

Under ordinary circumstances, for instance, if a dispute arises in the inheritance of property situated in India, then irrespective of the mechanism of devolution of the property or the physical location of the heir, the courts having appropriate jurisdiction with respect to the area of the disputed property can be approached. The applicable laws of that jurisdiction within India would govern the dispute. However, identifying the applicable rules according to the appropriate jurisdiction becomes extremely difficult in a decentralised environment, which forms the backbone of NFTs and blockchain. Therefore, to regulate the breakups in the system, every transaction could fall under the jurisdiction of the location of every node in the network, resulting in a multiplicity of concurrent jurisdictions, yielding a vast number of legal and regulatory regimes. This means it may be challenging to identify the location of a disputed transaction inside the blockchain.

Because blockchain deinstitutionalises the ledger administrator and disperses the verification nodes globally, it becomes very challenging to determine whether a transaction was conducted on the blockchain.

II.   THE PROBABLE ROAD AHEAD: FRACTIONALISATION SOLUTION

The provisions for succession and inheritance are based on the divisible nature of property. Upon death, people devolve their properties, including their interests, to their legal heirs. This is known as the fractionalisation of property concerning the property’s succession.  

However, fractionalisation becomes particularly challenging for digital assets like NFTs due to their virtual and intangible nature. While Hindus can devolve their properties under HSA and ISA, there are no specific guidelines for digital assets. Therefore, if a Hindu dies intestate (without a will), the question surrounding the inheritance of their digital assets, like NFTS and how they should be distributed among Class I heirs remains unresolved and largely unexplored.

For the transmission of intangible digital assets, traditional inheritance frameworks that are based on centuries-old property rights concepts are insufficient. When an owner passes away, these virtual properties risk of being lost, stolen, or falling into legal limbo without specific restrictions. The death of American billionaire Matthew Mellon highlights the vulnerability of the existing laws in addressing the same. At the time of his death, Mellon held an estimated $1 Billion in Ripple (cryptocurrency), all of which remains inaccessible to his heirs as he did not leave the property with any instructions about its inheritance and the modalities for the same.

A fractionalised NFT, or F-NFT, refers to dividing an NFT into smaller units for divided or fractional ownership of the original token. The fractionalisation is achieved by interlocking the larger, main-body NFT in a smart contract (self-executing arrangements based on blockchain, contingent on fulfilling pre-decided conditions), which divides the original NFT into a predetermined number of consecutive shares. NFTs are usually created based on the ERC-721 template, which is locked in a smart contract, thereby splitting a single ERC-721 token into multiple ERC-20 tokens as per the instructions of the NFT owner. Each fraction or ERC-20 token created, therefore, represents divided ownership of the NFT.  

This is analogous to the physical division of property as we understand it under classical HSA, wherein, for instance, a single unit of property owned by a Hindu male when divided among his three offspring (Class I heir) would be divided into one-third equal units in accordance with Section 8 of HSA. Likewise, under fractionalisation of NFTs, a single unit of NFT can be divided into similar subunits as per the discretion of the owner of the property.

III. WHERE DOES THE WORLD STAND: A GLOBAL OUTLOOK

The United States, in this regard, has adopted the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA), 2015, which attributes legal recognition to digital assets, categorising them on the same footing as tangible property. Section 2(10). However, RUFADAA doesn’t provide any statutory guidelines with respect to the inheritance of such assets, and keeps itself confined to the privacy of the information contained within such assets. However, it does create a caretaker relationship by nominating two classes of individuals eligible to handle the digital assets, viz, the custodian and the fiduciary.

Furthermore, the judicial position in the US is heterogeneous in this regard. Whilst the case of Shin v. ICON Foundation has somewhat established preliminary guidelines attributing the legal recognition of cryptoassets to property considerations, the case of United States v. Chastain restricts the wider interpretation of digital assets as property. The court in Shin has recognised assets hosted on blockchain as capable of being possessed using three metrics: a) precise definition, b) exclusive possession, and c) control and exclusivity claims. Whereas, in Chastain, the court has restricted the property rights to traditional forms of property, explicitly excluding digital assets from the same.

The European Union has set up the Markets in Crypto-Assets (MiCA) Regulation, its very first major regulatory regime for crypto-assets, their issuers, and their service providers. With the aim of introducing coherence and consistency into the regulation of cryptoassets throughout all EU member states, under the proposed regulation, any provider of services relating to crypto-assets within the EU will be obligated to obtain authorisation from national authorities. This authorisation will allow them to lawfully issue and sell digital tokens across the EU.  This creates the interpretation of cryptoassets, very close to that of legal property.

The United Kingdom, through the case of AA v Persons Unknown & Ors, Re Bitcoin, has officially recognised Bitcoin, a type of cryptoasset, as property for the purpose of granting proprietary injunctions following a cyberattack. Moreover, the Money Laundering and Terrorist Financing (Amendment) Regulations 2019 have brought cryptoasset firms, i.e., those engaged in the exchange or holding of cryptoassets, into the regulatory framework (Section 52B). Furthermore, specifically w.r.t. NFTs, the London High Court, through the case of Lavinia Deborah Osbourne v Persons Unknown Category A & Ors, established that NFTs are equivalent to properties in English Law, through which the UK has recognised NFTs as legal property.

IV. CONCLUSION

India has largely remained dormant in legislating NFTs in both commercial and personal domains of law, leaving several prominent gaps unaddressed. The question over the inheritance of NFTs and other crypto/digital assets might not pose any significant legal discrepancy at the status quo; however, the application of legal enterprise towards bridging the gaps above, even when interpreted to be theoretical, for finding sound solutions is a vital step towards the future development of the law in this aspect, which would have a corollary impact on other avenues of law, as any inquisition over the inheritance of such properties would naturally require redefining and expanding the entire concept of property. Additional legislative recommendations towards the integration, in addition to the aforementioned fractionalisation model, include recognising digital assets under Indian succession laws, legalising blockchain-based wills, and formulating digital asset custodianship laws.

*Shivansh Singh is a 2nd-Year law student pursuing B.A. LL.B. (Hons.) from Integrated Law Course (ILC), Faculty of Law, University of Delhi.

The views expressed above are the author's alone and do not represent the beliefs of Family Law Chronicle: The CFL Blog.