NFTs and Intellectual Property Law

NFT NFTs have been in development in blockchain technology as early as 2014. However, they have only recently shot up in popularity in the field of digitally held assets. The massive surge in popularity is attributable to many factors. Among others, celebrities, creators, and athletes alike have invested in NFTs and exploring how the technology can be utilized to further commercialize their brand or work.

Non-Fungible Tokens

Unlike other forms of blockchain technology such as Bitcoin which are fungible, or interchangeable and indistinguishable from each other, NFTs are “non-fungible” tokens. This means they are unique and are used to identify a digital good as the original, or as part of a limited series of originals. These pieces of computer code reside on blockchains and contain metadata that includes, among other things, an NFT’s unique ID and a short description of the work associated with the NFT. The recording on the blockchain proves both the ownership and authenticity of each unique digital asset. A person who “mints” an NFT creates a unique digital version of the underlying digital asset. This can be anything from an image, a video, or other digital content, and can even include physical assets such as paintings and sculptures. Once minted, the digital asset is listed or offered for sale to buyers.

Digital Scarcity with NFTs

Uniqueness drives the common perception of digital scarcity in NFTs. Following the rules of supply and demand, NFTs are sold for enormous prices for their uniqueness. For example, the Andy Warhol Foundation for the Visual Arts minted five digital works restored from some of Andy Warhol’s floppy disks. These were created specifically for an auction, without intent to create additional NFTs. The sales for those five NFTs alone reached a total of over $3.3 million in 2021. In effect, when someone purchases an NFT, they are not buying the actual underlying asset, but rather a link to that asset. The copyright in the underlying asset does not necessarily transfer with the sale of an NFT, the same as when a physical copy of a type of creative work is sold. The copyright of the original remains with the creator or copyright owner.

NFT Regulations Today

The present regulatory and legal system in many jurisdictions was not originally designed in consideration of digital assets. Today’s NFT popularity boom raises questions on legal and commercial aspects of NFTs, in particular on copyright ownership as well as ownership enforcement issues. Here are some of the ways that NFT regulations are being developed globally, and in the two major jurisdictions of the EU and the US. As of now, there is very little global regulatory guidance on whether NFTs fall within the purview of existing regulations on crypto assets. Most jurisdictions are still in the process of developing regulatory frameworks specifically for NFTs. However, many countries have already implemented or published their initial plans and frameworks on the regulations of NFTs and their trading platforms. NFTs, as digital assets, are inherently cross-border in trade. Because the platforms used to trade NFTs are available to a global audience; this also raises issues on which laws and regulations would apply in lawsuits on NFTs. The “free” nature of NFT marketplaces is also prone to fraud. The Financial Action Task Force, an international body, has included specific mentions of NFTs for the first time in its updated guidance. These global, binding standards aim to prevent the misuse of virtual assets for money laundering and terrorist financing.

Recently Enacted Legislation in the US

NFTs are not currently specifically regulated in the U.S. At the moment, the legal status and regulatory classification of NFTs under the U.S. law is still up for determination. However, the government is taking active steps to address the issue. In October 2021, the U.S. Department of Justice unveiled the National Cryptocurrency Enforcement Team. This team was established to tackle the growth of crime related to the criminal misuse of cryptocurrency and digital assets. In November 2021, President Biden signed into law the Infrastructure Investment and Jobs Act (IIJA). This legislation gives the US Internal Revenue and Treasury Department the power to establish tax reporting rules for cryptocurrency transactions beginning in 2023. The Financial Crimes Enforcement Department confirmed that the Treasury Department would also begin directing existing anti-money-laundering controls toward virtual currency in particular. Under the IIJA, NFTs are deemed included in the definition of digital assets and are presumably subject to the regulations on cost basis reporting. However, there are still areas that need to be clarified. For instance, NFT marketplaces are organized in different ways, such as when intermediaries process payments versus peer-to-peer payment strategies. This structure may matter when it comes to information reporting rules under the law and regulations.

Regulatory Drafts in the European Union

NFTs are also not currently specifically regulated in the EU. However, a European legislator is preparing a regulation that stands to affect NFTs–the Markets in Crypto-Assets Regulation (MiCA). This is expected to enter into force in 2024. It will apply to any person issuing or providing crypto asset services across all EU Member States. Non-EU firms seeking to trade in EU Member States will also fall under the coverage of the MiCA. The MiCA proposal provides for a consistent international approach when it comes to assets that are a digital representation of value or rights which may be transferred and stored electronically, using a distributed ledger or similar technology. Under the current draft of the MiCA, NFT issuers will fall out of scope of the licensing obligation and will most likely be exempt from the requirement to draft, notify and publish a crypto asset white paper in an Initial Coin Offering, as this will not apply to non-fungible tokens. However, other requirements under the MiCA are likely to apply to NFT issuers. For instance, they will be required to be a legal entity, whether established within or outside the EU. They will also need to comply with standard business conduct and governance requirements.