Navigating the uncharted legal territory of NFT: What to avoid?

Navigating the uncharted legal territory of NFT: What to avoid?

According to the NFT aggregator platform- CryptoSlam, the market for Non-Fungible Tokens (NFTs) plummeted from its peak of $17 billion in early 2022 to $460 million in October 2022, a staggering decline of 97.3%. While the decrease in NFT transaction volume may be partially attributed to dropping cryptocurrency prices, NFT developers continue to create NFT. In fact, creators are confident that the NFT industry will recover. We see new projects popping up every day on Twitter. We see different projects challenging the Number 1 spot on sales volume. At the point of publishing, Art Globblers are topping the charts. I see centralized marketplaces like Bybit are still selling out their Mystery Boxes. Everyone is building harder than before.

Taking the sentiments from the ground and as per the requests from various communities asking about NFT regulations, I have decided to share some insights on legal implications and the regulatory side of things so that you will be aware and up to speed on the state of the NFT sector.

Around 105 nations have legalized NFTs either expressly or as part of a larger recognition of cryptocurrencies and virtual currencies. However, as the aforementioned list illustrates, legislation regarding NFTs is frequently general and not designed mainly for NFTs.

The U.S., Canada, Australia, and most of the European Union are notable examples of markets that are integrated and moderately regulated. In each of these jurisdictions, the predominant legal strategy is to view NFTs as either a type of capital gains taxable asset or a component of an individual’s income tax portfolio. However, there are still a lot of nations where NFTs and cryptocurrencies are either implicitly or expressly banned. This is largely because those governments view NFTs and other digital assets as threats to the current financial system and sources of illicit and/or terrorist financing. China, Vietnam, Algeria, Egypt, Qatar and Nepal are notable instances.

I will go through a few markets.

U.S.A

Although there are no particular NFT legislation in the US, similar to the UK, some NFT crypto-asset kinds may be covered by already-existing federal statutes. For instance, the Securities and Exchange Commission (SEC) may treat specific types of NFT as securities under US securities law.

India

Since there is no official legal framework for NFTs and no classification of NFTs under the SCRA, it is unclear if dealing in NFTs is forbidden under the Securities Contract Regulation Act, 1956 (“SCRA”). If NFTs are deemed to constitute derivatives, trading in them would be prohibited in India.

Singapore

Singapore’s central bank has recently announced that it will not regulate the NFT market. Recently, under Singapore law, it will be subject to MAS’ regulatory requirements if an NFT has the characteristics of a capital markets product under the Securities and Futures Act (SFA). Similarly, should an NFT have the features of a digital payment token under the Payment Services Act (PSA).

U.K.

NFTs are not subject to any special NFT rules in the U.K., but they are recognized as a kind of crypto asset. To be more precise, it can be classified as a security token, an e-money token, or an unregulated token. However, most NFTs are not regulated since they do not meet the first two prerequisites. Even if it does, it can still result in broad regulations, such as an anti-laundering rule for art sales over €10,000 and capital gains tax if purchased or sold at a profit. Strict laws require consumers to be adequately informed and warned about the risk of loss or price volatility if public advertisements promote NFTs.

China

NFTs can currently be purchased or sold by individuals in Mainland China. NFTs are not presently subject to any specific laws or regulations. The National Internet Finance Association of China, the Securities Association of China, and the China Banking Association jointly released an initiative regarding the prevention of financial risks associated with NFTs. Because the three associations are under the supervision of the central bank, the banking regulatory authority, and the security regulatory authority, respectively, and because the Initiative is not a regulation under PRC law, it reflects the attitudes and policy orientation of regulators in Mainland China. For some time, the word “NFT” was also deemed a sensitive word and temporarily blocked by some official media sites.

Japan

While there are presently no particular regulations in Japan that govern NFTs, the government said in January 2022 that it was creating an NFT task force, which suggests that regulation is soon to come. Currently, an NFT may meet the definition of a security under the Financial Instruments and Exchange Act if its holder receives cash or other assets that represent a sharing of profits. It should be carefully considered whether NFTs violate gambling laws, which are especially important for NFTs employed in games.

Now that you have read briefly how the regulators around the world look at NFTs in general. If you are an entrepreneur, your DNA could be telling you to be a creator or start an NFT Marketplace. So what are some legal considerations if you want to create a business like an NFT marketplace? What do you need to do?

  • Creation of a legal entity: A corporate body must first be established before a marketplace can be introduced. Your company will benefit from the most robust liability protection, increased capability, and credibility while looking for outside financing.
  • Formation of smart contracts: The digital work must be individually recognizable and have transferrable ownership within the smart contract. The economics of trading should be included in the creation process, including how much to charge for a primary sale, how much to charge for a secondary sale, royalties, transaction costs, and other characteristics of the aftermarket to facilitate trade with money naturally flowing to the right parties.
  • Terms of service: It regulates the interactions between users and the NFT marketplace operator, as well as between buyers and sellers of the NFTs displayed on the platform, which is a necessary component of NFT marketplaces. A carefully drafted term of service agreement will typically include clauses that limit the company’s overall responsibility and can aid in defending your firm from several legal problems.
  • Terms of sale: If the platform’s terms of service do not adequately address risks to the seller or creator, sellers or creators listing their NFTs on an NFT marketplace may choose to impose additional terms of sale on buyers of their NFT.
  • Securities law compliance: It’s critical to develop features that show the difference between your newly minted token and what governments seek to regulate to ensure it doesn’t have the characteristics of a security.
  • Intellectual property: It is crucial to confirm the validity of each participant’s intellectual property rights at every stage of every NFT transaction. Copyright ownership, which belongs to the original work’s creator, governs the original work. Make careful to divide up intellectual property ownership among the authors, artists, buyers, collectors, and other parties.
  • Consumer protection: Most jurisdictions have consumer protection laws. Consider a scenario where an NFT marketplace fails to appropriately notify its clients about the products they are buying and the hazards involved. Cybercriminals will probably attack NFTs in order to profit financially. To protect against these attacks, your platforms will need reliable controls. Other regulatory standards, including KYC and anti-money laundering, might also need to be implemented.

The fast-changing NFT space, where digital assets prevail, was not considered when developing the current regulatory and legal framework. However, some crucial challenges have surfaced as investors, financial institutions, and fintech firms investigate this market. Is there a gateway to your platform that guards against money launderers and other undesirable parties subject to government sanctions?

NFTs are indeed not treated as cryptocurrencies right now. Regulators are trying to clamp down on grey NFT projects and have warned the general public about buying NFT. So far, I have been talking about how governments look at us and what entrepreneurs need to understand when they start their NFT business as a marketplace. I have come out with a few quick reminders for consumers when buying NFT.

3 Quick Reminders on NFT Buying

  • Do not buy NFTs that include securities, insurance or other financial assets as the underlying value of NFTs. An NFT may become a regulated financial product if it grants its owner the right to income streams or a stake in an underlying portfolio of investment assets. There are many grey examples to be named.
  • Do check on the copyright behind the NFTs. Some of the creators are plagiarizing artists’ original work. Playboy Enterprises filed a lawsuit against the owners of a website that was constructed to seem like the one Playboy used to market their “Rabbitar” NFTs. Playboy claims that the scam was successful because more than a thousand customers fell for it and collectively paid more than a million dollars for Rabbitars they never received.
  • Do remember that trading NFTs for profit is subjected to capital gain tax. It is good to consider all tax implications before making the trade. Take India, for example. All virtual digital assets, including NFTs, are subject to the government’s 30% tax levied.

NFT is a beautiful term and has excellent potential. As crypto community members, we should try our best to keep it clean and proper. Hiding financial products or securities behind an NFT is not an excellent way to support innovation. It will give the regulators a chance to kill the innovation. You need to understand regulations to grow in the right manner. #anndylian

 

Source: https://www.securities.io/navigating-the-legal-territory-of-nft-what-to-look-out-for/

 

Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.

j j j

‘All eyes are on it:’ CryptoPunks at center of copyright legal dispute

‘All eyes are on it:’ CryptoPunks at center of copyright legal dispute
Additional comments from me.
From an investor standpoint myself, the key issues to this lawsuit will result in financial repercussions. CryptoPunks V2 is the most talked-about NFT collection globally, they are one of the key figures in the NFT market. Imagine another 10,000 images from CryptoPunks V1 is proven to be legit, this move could possibly affect the brand and show a significant decrease in their NFT price. Simple maths, V2 has 10,000, V1 added another 10,000. The price could be halved technically. This potential decrease in price is not only affecting CryptoPunks, it could also let the non-crypto natives or non-believers create new FUDs.
Firstly, NFTs are intellectual property (IP) in my opinion. They are changing how we see ownership and usage rights. Secondly, NFTs is likely to supplement and disrupt the IP markets. Web 3.0 is that enabler and the bridge.

Web 1.0: Ownership is a legal contract; Usage rights are non and unauthorised; Enforcement is by lawyers.

Web 2.0: Ownership is a legal contract; Usage rights is is based on the platform;  Enforcement is by the platform and lawyers.

While Web 3.0 is a combination. Ownership is NFT; Usage rights are creator-driven and platform to facilitate; Enforcement is by lawyers, smart contract. platform and community.

In this structure, the creator will be able to gain their IP rights in a global manner, compensated accordingly when they authorised usage and all these are trackable, administrated by the smart contract and platform.

With all these in mind, I believe NFTs need a global standard and enforceable contracts and licenses agreement to protect all parties.

– Anndy Lian

 

‘All eyes are on it:’ CryptoPunks at center of copyright legal dispute

The biggest-selling NFT collection of all time has two competing versions, threatening to undermine the value of the tokens and faith in the industry itself.

Holders of the original non-fungible token (NFT) collection CryptoPunks V1 have filed a counter-DMCA notice to overturn a request by creator Larva Labs to delist the collection from OpenSea.

Larva Labs issued the DMCA notice — a takedown notice by copyright holders — earlier in the month, arguing it maintains the license for the V1  tokens and no longer wants them to be traded, as they undermine the value of the current V2 series. The V1 community is arguing that as close to US$50 million has been spent on the V1s, the community holds at least some ownership over the assets.

As the legal proceedings continue, the case will be closely watched for what it may reveal about the future of copyright laws and the potential need for oversight within the industry.

“I’m really excited to see how it does play out,” said Yehuda Petscher, strategist at NFT data aggregator CryptoSlam, telling Forkast it’s one of the more significant stories we’ve seen on the NFT scene to date. “All eyes are on it: we’re talking about the biggest brand in NFTs with Larva Labs and CryptoPunks, so it’s going to be a wild one.”

The V1 series was the original minting of the CryptoPunks collection but were replaced by the current V2 models upon the discovery of a bug that allowed buyers to instantly withdraw the Ether used to purchase them, leaving sellers with no profits. Existing holders of the series were airdropped updated V2 versions which became the standard, authorized versions of the collection.

Petscher himself is a V1 holder, which he bought as he recognized the historic significance of the initially discarded collection.

CryptoPunks are the most traded NFT collection in the world, with over US$2 billion in sales volume across their 10,000 units. If the V1s are considered legitimate, that would double the supply of CryptoPunks and potentially deflate their unit price.

Larva Labs had actually sold 210 ETH or over US$600,000 worth of CryptoPunks V1 prior to issuing the takedown order, as the company thought selling the tokens would give the impression they were not of any value — a fact the firm now recognizes was a poor decision.

The V1s have already been delisted from OpenSea only weeks after launch once the V2s were issued, as they were perceived to be inauthentic. Once the V1s were wrapped and listed on competing marketplace LooksRare, however, OpenSea reversed course once they began growing in popularity.

But the impacts of the case go beyond simply the price, as some have suggested it could see an NFT standard introduced in the industry in order to protect copyright — and investors.

“Until there is the NFT standard, it is very tough to police each and every single transaction and collection in the market,” Anndy Lian, founding member of NFT creative studio Influxo, told Forkast, explaining that blockchain is useful for determining ownership but does not guarantee copyright. “The industry is still very much driven by speculation and price and if this continues you will see a lot more of these cowboys running around in the crypto market and in the NFT space,” he added.

CryptoSlam’s Petscher disagrees, saying all the information required to verify an asset is already stored on the blockchain along with the token itself, it’s just a matter of educating people to read and interpret the data that is stored there.

“The beauty of the blockchain is you don’t need that kind of oversight,” he said. “You don’t need certain regulations because some of these things are now indisputable. That is the power of the blockchain.”

The V1 CryptoPunks are still available through LooksRare, the upstart marketplace that has transacted greater sales volumes than OpenSea since launching in early January, though they have a significantly lower floor price of 9.3 ETH (US$26,500) compared to 72.69 ETH for the V2s. 

 

 

 

Original Source: https://forkast.news/all-eyes-cryptopunks-center-copyright-legal-dispute/

Anndy Lian is an early blockchain adopter and experienced serial entrepreneur who is known for his work in the government sector. He is a best selling book author “Blockchain Revolution 2030”.

Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.

An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.

j j j