NFT’s and possible legal issues

What are NFT’s?

Let’s start with decoding the NFT. It stands for non-fungible tokens. But if you never heard of NFT’s that most probably did not make it any less clear, so let’s get into a little more detail.

Non-fungible tokens are a form of digital files verified on a blockchain. The non-fungible part means that it can’t be interchanged with other similar items, it is unique and one of a kind, that is verified and secured on a blockchain forever.

For example, money is fungible and interchangeable you can change one 10 euro banknote with another and the value will still remain at 10 euros, however, you can’t do that with NFT’s because the value of a digital item stems from the fact that it is one of a kind digital item.

Practical examples of NFT’s

The most popular form of NFT’s is digital art, gif’s, short videos and other similar expressions of art. For example, American digital artist Mike Winkelmann, professionally know as Beeple, sold his digital collage of images “Everydays: the First 5000 Days” for a staggering 69.3 million dollars.

Everydays: the First 500 Days, by Beeple

But NFT’s can expand far beyond digital art, at this point the question is only of one’s imagination. A great example of this is Jack Dorsey, a co-founder and a CEO of Twitter, selling his first tweet as an NFT on auction, highest bid as of 2021-03-15 is 2,5 million dollars.

Jack Dorsey’s first tweet

In a way, you can think of this as collecting real-life art or any other collectables, just in a digital space. People have collected items for millennia’s, whether as assets for future resales or just as something you like to own.

One question you still might ponder on is that you can see same art here in this article, so in what way is it unique and non-fungible, well just like there can be thousands of Mona Lisa fakes out there, there can be millions of copies of any digital item, but only one is original in a way that there is only one original Mona Lisa painting there is only one NFT item verified on a blockchain and that can’t be changed.

Legal aspects of NFT’s

When it comes to the legal implications of NFT’s there are some questions and nuances that should be examined by lawmakers before a new regulatory environment will be implemented.

First NFT’s should be categorized, that way it would be more clear under witch regulatory environment they fall. Most likely NFT’s are going to be categorized as security tokens because they fall under already developed and well-understood terms.

Consequently, according to the European Securities and Markets Authority (ESMA) security tokens fall into the category of crypto-assets[1]. ESMA defines that “crypto-assets are a type of private asset that depends primarily on cryptography and DLT(Distributed Ledger Technology)”[2]

Even after NFT’s are properly identified there are a lot of remaining questions, here are a few examples:

  • How can a creator protect himself from his work being copied and tokenized without their permission?

The situation isn’t difficult to imagine, most marketplaces for NFT’s don’t require any KYC procedures to register and start selling digital items on the platform, so anyone can find and copy digital works and sell them as their own. As crypto is anonymous it’s almost impossible to trace transaction to a certain individual.

  • When selling art as an NFT how can you insure and “attach” terms and conditions of a sale?

With the sale of items, buyer and seller can agree upon certain conditions of purchase as with NFT’s such agreements are not possible yet.

  • Does the creator still have rights to his creation after selling NFT and if so against whom he has rights and remedies if anything goes wrong?

When items that fall under intellectual property rights are bought in real life seller and buyer are known and IP laws protect part of creators rights, if those rights (like claiming that artwork was done by another person) are violated there is a known natural person or organization that is responsible for not complying with existing laws and when an NFT is purchased you can’t always be certain of who the buyer or sometimes even the seller is.

  • How do NFT’s comply with existing laws and regulations regarding AML, tax laws, auction laws, security laws and others.

This question is important to accordingly regulate aspects of any monetary transactions.

  • A lot of tokenization with NFT’s can be done anonymously, so what implications of criminal activities(such as using someone else’s work) can be applied?

As shortly discussed above, someone can use others work and claim them as their own, with anonymity embedded at the core of cryptographic technologies it can be almost impossible to identify those who partake in criminal activities.

As we can see there are many unanswered questions about lots of NFT’s legal aspects. Regulations for NFT’s are still not developed. If you are planning on buying more expensive NFT or even creating your own tokens it is advisable to first talk with tech-savvy lawyers, they will be able to help you make sure that tokens will be compliant with the existing regulations.

[1] ESMA. Advice on Initial Coin Offerings and Crypto-Assets. 2019. p 4. Available: https://www.esma.europa.eu/sites/default/files/library/esma50-157-1391_crypto_advice.pdf

[2] Ibid

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