NFT Law and the Future of the Crypto Market – The Rise and Rise of NFTs
Are there any written regulations for NFT Law? Is there any observation over the transactions?
First, we should know what NFTs are;
NFS stands for Non-Fungible Tokens.
The word “Fungible” means that which can be traded or exchanged for one another, for example, a dollar bill or a Bitcoin or an Ada coin. Therefore, by definition, something that is “Non Fungible” is unique and cannot be exchanged with another token.
A token is a data unit kept on a digital ledger called a “blockchain.”
Ethereum currently supports most NFTs. Other blockchains such as “Flow,” “Tezos,” Polygon, and increasingly Solana have their standards to support NFTs.
While NFTs have been around for over a year or two, they have become especially popular in the last few months. It appears that the lack of physical art events during the lockdown meant that a great deal more attention was paid to digital ones, and in fact, an auction curated by Christie’s took place in February 2021, where the artist, Beeple sold a staggering $69m worth of NFT. This led to an explosion in digital art NFT, and many other artists coming from backgrounds of graphic design and digital design became involved.
Further, digital galleries such as “Nifty Gateway” and “Super Rare.”
When you buy an NFT, you are not purchasing the digital work itself. Copyright relating to the artwork does not automatically transfer with the sale of the NFT. The artwork creator or the third-party seller can retain the right to copy, distribute, modify, and publicly display or perform the art.
If you are interested to know more about the legal aspects of NFTs, you can read the article below:
Smart Contracts Scope in NFTs
Smart contracts use blockchain technology in order to automate commercial contracts. They are commonly described as “self-executing transactions,” meaning that they use computer programs to automatically perform contract obligations without any manual work required.
Examples of use cases include running transactions on cryptocurrency exchanges, managing supply chains, monitoring service level agreements, real estate, insurance, and decentralized finance.
One particular development that the Law Commission considers necessary but feasible to apply existing laws to smart contracts involves contractual interpretation. The principles of contractual interpretation have become second nature to most commercial litigators—how a reasonable person, with all the necessary background knowledge of the parties at the time of the contract, would understand the language of the contract. However, smart contracts may require courts to interpret not only the meaning of natural language but also the meaning of code.
The Law Commission suggests adopting a test of a “reasonable coder,” namely “what a person with knowledge and understanding of code would understand the coded term to mean.” Its suggestion is to use an “expert” coder to translate the coded language to the court and give their opinion on what the code appeared to instruct the computer to do.
Such suggestions show the Law Commission adapting traditional contractual principles to keep up with blockchain technology, recognizing their increasing use but also the need to cater to potential uncertainties.
The paper ends with an appendix summarising a list of issues that the Law Commission encourages contracting parties to consider before entering into a smart contract. This includes agreeing on a jurisdiction clause to mitigate the uncertainties caused by the multi-jurisdictional nature of blockchain.
The new wave of technology that blockchain has bought has revolutionized the consumer, financial and digital worlds, but lawmakers and regulators are catching up. The unique challenges posed by cryptocurrency, NFTs, and smart contracts are being recognized and accounted for by UK judges as well as regulators, but further legal and regulatory development in this area is likely to be seen in the coming months and years.
Intellectual Property Rights (IPR)
NFTs have become a topic of interest in IP regulations, as the process of tokenization allows any work, such as artwork, literary results, marks, inventions, images, GIFs, or music, to be transformed into a series of digital assets and put up for sale on host marketplaces.
Where Does One Buy NFTs?
NFTs are now available through various sources. This now even includes eBay. However, there are at least two very well-known digital art galleries called SuperRare and Nifty Gateway in relation to digital art. However, some of the significant sales have been carried out through recognized auction houses, for example, the Beeple sale above. The most popular exchange, though, is OpenSea.
A great deal of transactions happens on that site daily. The data from Dune Analytics shows that $105 Million was the amount of Ether traded on OpenSea on 14 November 2021. Some of the most famous works are Crypto punks and the Bored Ape Yacht Club. These are limited series, and each image will have specific distinguishing features not always visible to the naked eye. They are highly sought after and have achieved. In September this year, a Bored Ape Yacht Club was sold for $24 million at Sotheby’s.
Another new entrant in this market is Reddit which now has an NFT marketplace, but its leading site is used as one of the main hubs for NFT artists and collectors to interact.
In What Other Areas Have NFT’s Been Used?
Now one can find NFTs in the domain of games, music, film, sport, fashion, and collectibles. Other uses have been rather sensationalist. For example, Jack Dorsey, the CEO of Twitter, minted an NFT of his first tweet, which was sold for $2.9m!
This happened a few months ago, and since then, NFTs have been embraced by many commercial organizations making different uses of them: This includes the NBA, Dolce Gabbana (who set a staggering $ 6 Million record with their NFT many other commercial businesses.
NFTS and Gaming
Increasingly NFTs are being used in gaming. Play to earn games such as Axi Infinity allow gamers to earn NFTs as they play. Axi Infinity also has its own coin, “Axi Infinity shards. “ There are other gaming NFTs such as the Matic Verse Superhero game. This area is likely to grow a great deal bigger.
As with all innovations, there are legal implications for NFTs. Of particular importance is laws that refer to any rights which are (or are not) transferred from the owner of the artwork (or any underlying asset) to the holders of the NFT.
It is important to note that a mere transfer of an NFT by the owner does not necessarily give any intellectual property right to the buyer. Effectively, in most cases, all the buyers of the NFT will own is a digital receipt showing that the holder owns a version of the work.
What Does the Owner of the NFT in the World of Digital Art Receive?
- The owner of the NFT will be given a token of authenticity to their digital art.
- Secondly, for the buyer, the NFT creates a potentially helpful online canvas.
- In the case of digital artists, they are given the opportunity to share a new genre of performative artwork.
What about Royalties?
A smart contract is written in the code of the NFT to allow for the distribution of funds for the payment of royalties created each time the work is resold. However, these automated resale royalty payments might not occur unless the NFT is resold through the same platform.
Further, in the EU and the US, the laws do not recognize resale rights relating to created work, so the law provides no recourse for unpaid resale royalties.
This use of NFTs is gaining popularity amongst musicians who can monetize their work on a peer-to-peer and trustless basis. Audius is the leading streaming platform providing this service to musicians.
This is the main data protection law in the European Union, and it gives an individual the right to the erasure of their data. Therefore, appears to be a direct conflict between that and the immutable nature of the blockchain. This, therefore, means that any NFT which contains any personal information may violate data protection rights.
At present, there is nothing stopping a person from purchasing NFTs off the blockchain which can lead to some form of conflict between what the NFT holder has and what they believe they have.
There are also issues; for example, if there is an original piece of work minted onto the blockchain that has never belonged to the person who pretended to be the owner, this could raise issues for the purchaser of the token.
How about Money Laundering Issues?
As with many areas where there are interactions between the physical world and the virtual one, there are many potential pitfalls, particularly the case with money laundering: here is the crux: the payment for NFT is often made by using digital currencies.
The better platforms that provide the users with such currencies would ask for some KYC, but that is not always the case with all of them. Even with the better platforms, what they tend to ask for is for a copy passport to be downloaded onto the website, but no one checks whether the user is, in fact, the owner of the passport. Many people set up wallets in countries that they do not even live in.
Given the lack of intrinsic value of the NFT and the limited rights currently conferred on the buyer, there has been criticism leveled on NFTs as a potential means to facilitate criminal behavior such as money laundering.
This could also apply to sanctions and embargoes. Theoretically, a person living in a sanctioned country can use a wallet unlawfully to purchase coins, which are used to buy NFTs. OFC has recently issued many guidelines in this area which are to be found under:
The Biden Administration’s Plans for Crypto Regulation
Whilst currently, this might not be considered to be a major issue as the size of transactions is so far comparatively low compared, for example, to the traditional art market, it is now increasingly likely that new legislation will be introduced.
In fact, the Biden admin has already started to move towards that direction with cryptos generally, and there is a huge amount of lobbying going on by the more prominent players in the crypto space to try and influence the shape of the legislation to come. How these regulations will affect NFTs will remain to be seen.
Whatever steps are taken in the US in terms of regulation will no doubt influence other jurisdictions in this regard. The Infrastructure Bill that was recently passed by congress now creates a reporting obligation for buyers of NFTs regarding any work that has a valuation of over $ 10000.00.
The Importance of Local Copyright Laws
Copyright law and NFTs are likely to interact a great deal. For example, a photographer who decides to exploit photographs he has taken of a person by minting it as NFT must be conscious of the image rights granted to that individual (the subject of the picture) under the law of the country/state where the photograph was taken.
Minting an NFT regarding such pictures may lead to the photographer in question being sued in relation to any profit he makes, and the whole exercise would be rendered pointless.
Further, it’s important to point out that the purchase of an NFT will only confer personal non-commercial use and resale rights in the NFT to the owner, who has no right to license, commercially exploit, reproduce, distribute, prepare derivative works, publicly perform, or publicly display the NFT or the music or the artwork. The creator of the art will retain all copyright to work.
Do Not Mint What You Do Not Own!
There have already been cases involving people who had minted photographs owned by a third party without that person’s authority. This could give rise to all sorts of claims such as misrepresentation, breach of contract, etc.
Is There Anything Written in Stone? Will the Rights Conferred by NFTS Remain Insignificant? What Is the Role of Contractual Drafting in This?
A significant body of jurisprudence is likely to result from issues such as the ones outlined above, and these would, to a great extent, depend on which laws govern the various relationships at play.
There is, in fact, nothing written in stone. It is possible, for example, for a person to contract with the artist to get ownership of the piece of art and not just the NFTs. The terms of the NFTS to come can, in the future, be expanded. There are already some NFTs that allow commercial exploration of an image by the buyer.
There is here plenty of room for innovation. Currently, there are a lot of players in the market who are selling works of art or music but with no contractual terms at all. This can lead to a great deal of confusion. Whilst the NFTs are governed by the smart contracts embedded in the tokens bought, it is essential that appropriate terms are drafted specifying what rights are received by the buyer of the token.
How about the future?
As we advance, NFTs could be used increasingly in much more mundane and everyday areas: sale of property, purchase of a train ticket, buying or selling collectibles, jewelry, etc. As with many other places of law, how the law interacts and regulates this area now will undoubtedly influence the use of NFTs in relation to its future applications.