TerraZero takes NFTs as loan collateral

Second Life, which was brought to virtual life by Linden Lab in 2003, is widely acknowledged as the first "metaverse" in which individuals could acquire, build on and, if they wished, sell virtual land. Coming to life long before the advent of cryptocurrency, the coin of the realm was the U.S. dollar, and land could be acquired through auctions held by Second Life. In 2006, Second Life concluded that an avatar named Marc Woebegone had found a way to hack into an auction and acquire a property below market value. Second Life took back the land, and all other virtual land owned by Woebegone, with the flip of a switch, effectively accomplishing the first ever non-judicial virtual foreclosure. Bragg v. Linden Lab, 487 F. Supp. 2d 593 (E.D. Pa. 2007). The matter eventually settled.
Almost 20 years later since Second Life welcomed its first avatar residents, it seems inevitable that if the metaverses succeed to the degree that J.P. Morgan and many others hope, virtual land disputes will only become more common.

For example, TerraZero Technologies, founded in 2021, promotes that it "owns, acquires, leases and develops real estate within multiple Metaverses" (including Decentraland, where there currently are roughly 200 properties), while also providing "a full service real estate experience, including buying, leasing, construction, tenant representation and white-glove brokerage services." TerraZero rents and sells its land to individual consumers and businesses alike.
Interestingly, TerraZero deliberately attributes its properties with many of the characteristics of traditional real estate, i.e., "LAND is a non-fungible digital asset maintained in an Ethereum smart contract … divided into parties are referenced using unique x,y Cartesian coordinates," and "each LAND token includes a record of its coordinates, its owner and a reference to a content description file or parcel manifest that describes and encodes the content the owner wishes to serve on his or her land."

In other words, just as in real life, the land purports to be unique and has a title resembling that found in a traditional deed. Unlike Second Life's owner, which claimed, "You have to remember this stuff isn't real. It's a game on a computer," TerraZero and others consider their land as more than just a game. Evans v. Linden Research, 2012 WL 5877579, at *2 (N.D. Cal. Nov. 20, 2012).

Indeed, TerraZero will loan U.S. dollars to individuals and businesses to allow them to buy property. To secure these loans, NFTs are given by the borrower as collateral. Once the debt is paid, TerraZero returns the NFTs to the borrower. It is unclear clear from the website whether an owner can sell the land subject to a mortgage or whether the owner can borrow against the property further and grant a security interest to a third party, which potentially would have its own remedies rights in event of default. 

Presumably, there will come a time when a TerraZero borrower defaults and disputes the forfeiture of its collateral and the loss of its rights to the property. Despite "land" being given the attributes of traditional real estate, it is difficult to believe that a court will deem the land so similar to virtual real estate as to require TerraZero to initiate the notice and other procedures associated with either judicial or non-judicial foreclosures, given that there the property does not exist in particular state and that the rules behind traditional foreclosure would be hard to bend to sensible application in the virtual world.

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