Legal and Regulatory Challenges Related to Non-fungible Assets – Technology
One of the hottest trends of 2021, non-fungible tokens (NFTs) have empowered a new generation of digital artists and turned many speculators and creators into millionaires and celebrities overnight. NFTs are also gaining traction in the video game industry due to their ability to solve problems such as creating, managing, and selling rare products. NFTs are frequently used to grant players – rather than the game developer – ownership of their in-game assets. Assets created, found, mined, cultivated, bought, traded, and even looted in-game can be transported across. platforms and sold in real life. Beyond the art and gaming world, NFTs are also used to verify identity, ticketing, creation of physical property tokens, and other practical functions. NFTs are unique, rare, durable and expandable. While there is no shortage of information about the benefits that NFTs bring to digital transactions and activities, several legal, regulatory, environmental and operational challenges must be overcome for businesses and organizations to take full advantage of this potentially revolutionary technology. .
As NFT applications expand beyond cryptocurrencies and into new industries, not everyone involved in buying and selling assets attached to them fully understand what they are dealing with. Ownership of an NFT does not automatically grant ownership of the underlying artwork or other asset. An NFT simply grants the buyer the right to use the creative production or the object they represent for their personal use. For example, if someone purchases an NFT linked to a painting, he or she has simply earned the right to display the digital art in their token wallet. They will not have the right to reproduce, create derivative works or sell prints or copies of the painting. From a copyright perspective, an NFT is simply a digital receipt showing the ownership of an individual
Given the immature market and uneven regulation of NFTs, criminals have already found ways to use them to steal intellectual property. Several prominent digital artists have seen their work sold as NFTs without their permission and have expressed concern that once their digital art is hijacked and inscribed in a blockchain-activated token, they will lose ownership of their work. Although tokens can be sold, art can only be legally symbolized with permission from the artist. The concern of artists loss of copyright to creative production is unfounded, but the inherent difficulty of proving the place of origin of a digital artwork puts TFNs in a legal gray area for non -experts.
A main idea behind the blockchain technology behind NFTs is that the general ledger is not centralized or managed. While this makes reverse-engineering or fabricating transactions nearly impossible, it also poses a complex jurisdictional challenge, as the lack of a specific governance locale subjects it to different and often conflicting legal frameworks. The problem of conflicting laws is particularly important from a copyright and moral rights perspective. For example, moral rights differ considerably between common law and civil law jurisdictions (especially those with Germanic and Napoleonic legal traditions). In France, moral rights are perpetual, inalienable and imprescriptible while in the United States, moral rights come with limitation periods. As a result, artists’ rights to their underlying artwork may differ from jurisdiction to jurisdiction, and in some cases it may not be possible to clearly determine the applicable laws and select a legitimate forum to review. disputes concerning NFTs.
One of the most striking features of blockchain technology and NFTs is the self-executing “smart contract”. Smart contracts are sets of promises typically specified in a digital format that form the basis on which parties fulfill their specific contractual obligations. Due to their inherent uniqueness and complexity, it is difficult to say whether smart contracts fit within the legal framework governing traditional contract law. This is especially true in the United States, where there is no federal contract law. Additionally, at the time of this article’s publication (April 2021), there is no federal law or guidance that explicitly defines the legality of smart contracts in the first place. The only exception to this rule is the Electronic Signatures in Global and Domestic Commerce Act 2000, which grants limited legal validity to smart contracts. However, the legal validity of smart contracts vis-à-vis NFTs remains unclear, paving the way for potentially lengthy litigation in the future.
The security that NFTs offer by ensuring anonymity between contracting parties is often hailed as one of the greatest advantages of the technology. However, this benefit is not guaranteed to continue. Some believe it is only a matter of time before the marked improvement in blockchain analytics tools can reveal identities and terms. Analysis tools like Chainalysis, Reactor, Elliptic and others can already trace blockchain transactions. While most are used for purposes such as fraud tracking and money laundering via blockchain, they have the potential to track confidential and sensitive information.
NFTs raise important questions related to consumer rights. Issues such as the allocation of authorization and responsibility for recording transactions, the legality of digital receipts, anti-fraud and money laundering procedures are critical, as many consumers have a poor idea of what they are buying and their rights and responsibilities in relation to NFTs. As the legal status of NFTs as consumer goods continues to evolve, many customers can be left behind with transaction or ownership complications. This is all the more relevant as, unlike traditional banking and credit card transactions, there is no financial institution to step in if the end user suffers a loss due to hacks, fraud or breach. of security.
Financial and business challenges
Other logistical, legal and financial challenges will need to be addressed before NFTs are universally accepted. First, most NFT transactions involve cryptocurrencies that are not legal tender in the United States and are not backed by any central issuing authority or an inherently valuable asset. Cryptocurrencies are regulated by individual states and there is currently no protection available to consumers in the event of fraud. Second, there are tax implications of buying NFT with cryptocurrencies. Many buyers and sellers are unaware that they may be forced to pay high taxes if they profit from cryptocurrency transactions. Third, NFTs could violate US sanctions law that prevents US residents or citizens from doing business with individuals or entities operating in countries on which the United States has imposed economic sanctions. or commercial. While there are some exceptions for the use of NFTs for works of art from sanctioned countries, buyers and sellers should consult a lawyer if they have any questions or doubts about the legality of an NFT transaction.
Despite the hype surrounding NFTs, operational issues also affect NFTs:
- They are based on decentralized networks which are not 100% user friendly. This means that verifying, promoting, buying, selling, and storing an NFT requires a basic understanding of blockchain technology. In fact, only users of sophisticated blockchain technology can effectively use NFTs.
- For NFTs to be truly successful, they need to be as ubiquitous as smartphones.
- The speculative nature of NFTs can pose a challenge to the gaming industry, as players may be inclined to buy and hold NFTs with the aim of selling them in the future for a profit instead of using them in the game. game ecosystem.
As with cryptocurrencies, the legal challenges related to NFTs are likely to become more pronounced in the coming months as the media increasingly focuses on the technology. It is important to consult a lawyer before creating, launching or purchasing an NFT as the regulatory framework is always evolving. An experienced lawyer can guide you on anti-money laundering regulations, tax implications, financial regulations, intellectual property issues, etc. They can also prepare all the preliminary legal documents before you dive into the world of NFTs.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought on your particular situation.