Content
Introduction.
1. Copyrights and intellectual property in the world of NFTs.
2. Contract law and smart contracts for NFTs.
3. Tax obligations and consequences when trading NFTs (AIFC).
4. Legal risks when using someone else’s content in NFTs (infringement of intellectual rights).
5 Regulation and compliance when issuing and selling NFTs.
6. Legal aspects of consumer protection in the field of NFTs.
7. Legislation of Kazakhstan, AIFC, EU, USA regarding NFTs.
8. Legal aspects of licensing and royalties for NFT creators.
9. Privacy and data protection in NFTs -transactions.
10. The role and responsibility of platforms and marketplaces for NFTs.
11. Problems of law enforcement in case of NFT fraud (judicial practice in EU, USA).
1. Copyrights and intellectual property in the world of NFTs.
2. Contract law and smart contracts for NFTs.
3. Tax obligations and consequences when trading NFTs (AIFC).
4. Legal risks when using someone else’s content in NFTs (infringement of intellectual rights).
5 Regulation and compliance when issuing and selling NFTs.
6. Legal aspects of consumer protection in the field of NFTs.
7. Legislation of Kazakhstan, AIFC, EU, USA regarding NFTs.
8. Legal aspects of licensing and royalties for NFT creators.
9. Privacy and data protection in NFTs -transactions.
10. The role and responsibility of platforms and marketplaces for NFTs.
11. Problems of law enforcement in case of NFT fraud (judicial practice in EU, USA).
NFTs (non-fungible tokens) are rapidly gaining popularity, but behind the shiny digital shell there are serious legal issues. The legal framework around NFTs is still being formed, and many aspects such as copyright, smart contracts, taxation, consumer protection and regulation remain in the zone of uncertainty.
This article will examine the key legal challenges that NFT creators, buyers and platforms may face, providing insight into the specifics of legislation in Russia, Kazakhstan, the AIFC, the EU and the US.
This article will examine the key legal challenges that NFT creators, buyers and platforms may face, providing insight into the specifics of legislation in Russia, Kazakhstan, the AIFC, the EU and the US.
NFT selling associated with an object of intellectual property. The seller is required to provide the buyer with a license regulating the terms of use of the underlying asset.
The terms of such a license should be clearly defined in a smart contract or a separate written agreement, which may provide for both broad and limited rights of use, depending on the discretion of the copyright holder.
Each NFT represents a unique digital asset, identified by a unique code. The code is tied to a specific object (for example, a picture, song, video, etc.), which makes it easy to confirm the rights of the copyright holder. The owner of an NFT receives ownership rights verified on the blockchain .
NFTs can be traded in the same way as regular goods, with all transactions carried out via the blockchain.
The copyright holder of a digital copy of a painting in the form of an NFT has the right to sell it using cryptocurrency, giving the buyer the rights to own this digital copy.
The unauthorized release of an NFT associated with a digital asset entails violations of two of these rights: 1. Right of Reproduction: In case the NFT includes a copy of the digital asset, this may qualify as unauthorized reproduction. 2. Right of Publicity: If the release of an NFT results in the asset being made available to a new audience, this may violate the publicity rights of the work. This is especially true in situations where the NFT contains a copy of the asset, since the process of creating such an NFT can be seen as the act of making the asset available to a new public. To prevent legal disputes and ensure compliance with intellectual property rights, NFT market participants must carefully consider licensing and use of digital assets.
Within the framework of the legislation:
EU legislation:
Copyright to an NFT remains with its creator unless otherwise provided in the terms of sale. At the same time, NFTs are electronic evidence of ownership of certain digital objects, but they themselves are not these objects.
Typically, NFT buyers only receive the right to own the NFT in their digital wallet and the right to resell it subject to trading regulations.
The rights purchased with an NFT may be subject to a licensing agreement, which may be included in a smart contract, the terms of a specific NFT project, or be part of a separate agreement between the creator of the work and the owner of the NFT.
Each NFT represents a unique digital asset, identified by a unique code. The code is tied to a specific object (for example, a picture, song, video, etc.), which makes it easy to confirm the rights of the copyright holder. The owner of an NFT receives ownership rights verified on the blockchain .
NFTs can be traded in the same way as regular goods, with all transactions carried out via the blockchain.
The copyright holder of a digital copy of a painting in the form of an NFT has the right to sell it using cryptocurrency, giving the buyer the rights to own this digital copy.
The unauthorized release of an NFT associated with a digital asset entails violations of two of these rights: 1. Right of Reproduction: In case the NFT includes a copy of the digital asset, this may qualify as unauthorized reproduction. 2. Right of Publicity: If the release of an NFT results in the asset being made available to a new audience, this may violate the publicity rights of the work. This is especially true in situations where the NFT contains a copy of the asset, since the process of creating such an NFT can be seen as the act of making the asset available to a new public. To prevent legal disputes and ensure compliance with intellectual property rights, NFT market participants must carefully consider licensing and use of digital assets.
Within the framework of the legislation:
EU legislation:
Copyright to an NFT remains with its creator unless otherwise provided in the terms of sale. At the same time, NFTs are electronic evidence of ownership of certain digital objects, but they themselves are not these objects.
Typically, NFT buyers only receive the right to own the NFT in their digital wallet and the right to resell it subject to trading regulations.
The rights purchased with an NFT may be subject to a licensing agreement, which may be included in a smart contract, the terms of a specific NFT project, or be part of a separate agreement between the creator of the work and the owner of the NFT.
Smart contracts are automated programs stored on the blockchain that execute the terms of an agreement between parties without the need for third party intervention.
Smart contracts are subject to the rules that govern contractual relations. Smart contracts ensure automatic execution of agreements when certain conditions are met, which increases the transparency and efficiency of NFT transactions.
All terms of the smart contract and its execution are publicly available on the blockchain .
Among the acts that regulate smart contracts for NFTs , we can highlight:
For EU:
Among the acts that regulate smart contracts for NFTs , we can highlight:
For EU:
- Regulation (EU) 2016/679 on the protection of personal data (GDPR)
Contains requirements for transparency in data processing and for providing users with the opportunity to exercise their rights to access, correct and delete data.
- Directive 2014/65/EU on markets in financial instruments ( MiFID II)
Regulates the activities of NFT platforms in the case of implementation of activities with investment products.
- Directive 2002/65/EC on distance marketing of financial services.
- Uniform Commercial Code (UCC).
This law regulates commercial transactions, including the exchange of goods, transfer of money, circulation of securities and other transactions.
- California Consumer Privacy Act (CCPA).
The law provides the right to maintain user privacy and obliges companies to comply with regulations in the field of personal data protection.
- Electronic Commerce Act (E- Sign Act).
Regulates and determines the procedure for signing electronic contracts.
The AIFC does not provide a specialized tax regime, however, income from the sale of NFTs may be subject to income tax.
The AIFC has a preferential regime, based on which the personal income tax is 0% and the corporate income tax is 0%.
- NFT trading platforms do not require mandatory copyright or trademark verification when creating or selling NFTs.
Primary law governing copyright in the United States is the Copyright Act of 1976 . It protects original works, including artistic, literary, musical and other works.
Moreover, copyright infringement is contrary to the provisions of the Berne Convention and European Union directives such as Directive 2001/29 / " On the harmonization of certain aspects of copyright and related rights V informational society " which regulates the rights of reproduction and making available to the public.
- The NFT market is currently in its formation stage and is characterized by an insufficient level of legal regulation. In the United States, although general copyright protection is provided by the Copyright Act of 1976, there are currently no specific provisions regarding NFTs.
- NFT can be released by anyone without mandatory verification of rights to the content. This creates the potential for IP infringement.
For example, this may violate the provisions of EU Trademark Directive 2015/2436/EC.
Lanham Trademark Act , using someone else's trademark in the context of an NFT may mislead consumers as to the source of the product.
- The ability to create anonymous accounts on NFT trading platforms poses a threat to data security and significantly reduces the level of transparency of transactions.
The Computer Fraud and Abuse Act (CFAA) provides guidelines for protecting data and information systems.
- Risk assessment.
- Checking the availability of rights to the IP object. It is necessary to ensure the existence of rights, as well as the absence of rights of third parties to the object, in order to avoid disputes.
- Availability of license agreements
In order to streamline controversial legal relations, it is necessary to develop licensing agreements that can be reflected in smart contracts.
- Financial obligations.
If we are talking about US jurisdiction, it is necessary to analyze NFT and its relevance to financial instruments or investment contracts. The US Securities and Exchange Commission ( SEC ) is the regulatory body and administers the Howey Test. The classification of NFTs as securities is the basis for a specialized registration and licensing procedure.
- Confidentiality.
When processing personal (confidential) data, it is necessary to comply with the relevant standards. Among them is the GDPR in the EU, which includes the following requirements: obtaining consent to data processing, ensuring the rights of data subjects, such as the right to access and erase data, and complying with data security requirements.
- Technological requirements.
When using third-party platforms to issue and sell NFTs , security policies must be followed. Additionally, smart contracts used to issue and sell NFTs must meet all programming requirements. This may require additional auditing to prevent data leaks, fraud, and other system vulnerabilities.
For example, in the EU, consumer protection in the field of NFTs is regulated by general rules applicable to digital goods and services.
Right to information and transparency.
According to Directive 2011/83/EU on consumer rights, sellers are required to provide comprehensive information. Consumers have the right to receive complete and accurate information about the NFTs they purchase, including their basic characteristics and terms of the transaction.
Right to withdraw from the contract.
According to Article 9 of Directive 2011/83/EU, consumers can withdraw from the contract within 14 days. This rule is limited if digital content, such as NFTs, begins to be used with the consent of the consumer.
Right to protection of confidential data.
Under the GDPR, NFT companies are required to protect consumers' personal data and ensure that it is processed transparently. To process personal data such as name, contact information or payment card details, companies must obtain explicit consent from the consumer. This consent must be freely given, informed and expressed clearly and unambiguously. If the purposes of data processing change, companies are required to obtain new consent from consumers.
Right to judicial protection.
Consumers have the right to access dispute resolution mechanisms and redress, including judicial review and alternative methods such as mediation. - Right to erasure of confidential data The GDPR provides consumers (data subjects) with a number of rights, including the right to access their data, the right to have inaccurate data corrected, the right to have data erased (the right to be forgotten), the right to restrict data processing, and the right to data portability.
Right to information and transparency.
According to Directive 2011/83/EU on consumer rights, sellers are required to provide comprehensive information. Consumers have the right to receive complete and accurate information about the NFTs they purchase, including their basic characteristics and terms of the transaction.
Right to withdraw from the contract.
According to Article 9 of Directive 2011/83/EU, consumers can withdraw from the contract within 14 days. This rule is limited if digital content, such as NFTs, begins to be used with the consent of the consumer.
Right to protection of confidential data.
Under the GDPR, NFT companies are required to protect consumers' personal data and ensure that it is processed transparently. To process personal data such as name, contact information or payment card details, companies must obtain explicit consent from the consumer. This consent must be freely given, informed and expressed clearly and unambiguously. If the purposes of data processing change, companies are required to obtain new consent from consumers.
Right to judicial protection.
Consumers have the right to access dispute resolution mechanisms and redress, including judicial review and alternative methods such as mediation. - Right to erasure of confidential data The GDPR provides consumers (data subjects) with a number of rights, including the right to access their data, the right to have inaccurate data corrected, the right to have data erased (the right to be forgotten), the right to restrict data processing, and the right to data portability.
Kazakhstan
At the moment, the legislation of Kazakhstan does not specifically define NFTs as a separate class of digital assets. NFTs may fall under the general categories associated with digital assets, The main rules governing digital assets, including potentially NFTs, are contained in the Law of the Republic of Kazakhstan "On Amendments and Additions to Certain Legislative Acts of the Republic of Kazakhstan on Digital Technologies" In Kazakhstan, digital assets, including NFTs, may be classified as financial assets, depending on their nature and use.
Operators issuing, exchanging or storing digital assets, including NFTs, must comply with anti-money laundering (AML) and anti-terrorist financing (CFT) requirements, as well as compliance rules established by the relevant authorities in Kazakhstan. The legislation of Kazakhstan regarding digital assets and NFTs is under development, and changes and additions are possible.
EU
The EU provides a list of acts that indirectly regulate NFTs . The regulation of NFTs (non-fungible tokens) is carried out within the framework of existing legal acts and directives that affect various aspects of digital assets, financial services, data protection and intellectual property.
The U.S. Securities and Exchange Commission (SEC) is considering whether certain NFTs qualify as securities based on their use and structure. NFTs are subject to tax at both the federal and state levels, but the details may vary by jurisdiction. In most cases, the purchase and sale of an NFT is treated as an event that creates a tax liability, such as a capital gain.
Issues of deception, fraud and consumer protection are becoming increasingly important. The Federal Trade Commission (FTC) and other authorities monitor the NFT market to prevent unfair practices.
Platforms and marketplaces where NFTs are traded may be required to comply with anti-money laundering (AML) and customer identification (KYC) laws. Issues of sustainability and the environmental impact of cryptocurrency mining and NFT creation are being discussed as part of broader environmental initiatives.
At the moment, the legislation of Kazakhstan does not specifically define NFTs as a separate class of digital assets. NFTs may fall under the general categories associated with digital assets, The main rules governing digital assets, including potentially NFTs, are contained in the Law of the Republic of Kazakhstan "On Amendments and Additions to Certain Legislative Acts of the Republic of Kazakhstan on Digital Technologies" In Kazakhstan, digital assets, including NFTs, may be classified as financial assets, depending on their nature and use.
Operators issuing, exchanging or storing digital assets, including NFTs, must comply with anti-money laundering (AML) and anti-terrorist financing (CFT) requirements, as well as compliance rules established by the relevant authorities in Kazakhstan. The legislation of Kazakhstan regarding digital assets and NFTs is under development, and changes and additions are possible.
EU
The EU provides a list of acts that indirectly regulate NFTs . The regulation of NFTs (non-fungible tokens) is carried out within the framework of existing legal acts and directives that affect various aspects of digital assets, financial services, data protection and intellectual property.
- MiCAR establishes a pan-European legal framework for cryptoassets , including regulation of the issuance, trading and storage of cryptoassets . Although MiCA is focused on cryptocurrencies and asset-backed tokens, its provisions may be applicable to NFTs, especially if the latter are used as financial instruments or investable assets.
- Directive 2009/110/EC on rights and obligations regarding electronic money defines the legal framework for the issuance of electronic money. NFTs may fall under this directive if they function as a medium of exchange
- The Fifth Anti-Money Laundering Directive (AMLD5) includes virtual asset service providers within its scope, which may affect platforms trading NFTs.
- GDPR regulates the processing of personal data in the EU. Platforms and services that handle NFTs must comply with GDPR requirements, especially if the data processing is related to user identification, their financial transactions, and other aspects of using the NFT.
The U.S. Securities and Exchange Commission (SEC) is considering whether certain NFTs qualify as securities based on their use and structure. NFTs are subject to tax at both the federal and state levels, but the details may vary by jurisdiction. In most cases, the purchase and sale of an NFT is treated as an event that creates a tax liability, such as a capital gain.
Issues of deception, fraud and consumer protection are becoming increasingly important. The Federal Trade Commission (FTC) and other authorities monitor the NFT market to prevent unfair practices.
Platforms and marketplaces where NFTs are traded may be required to comply with anti-money laundering (AML) and customer identification (KYC) laws. Issues of sustainability and the environmental impact of cryptocurrency mining and NFT creation are being discussed as part of broader environmental initiatives.
The creator of the original work digitized and converted into an NFT is the copyright holder unless he has transferred his rights to another person. This creator may act as a licensor, granting licenses to use the work.
Licenses may be exclusive or non-exclusive, and may be temporary or perpetual. In the context of an NFT, it must be determined what rights are being transferred: the right of reproduction, the right of public performance, the right of distribution, etc. The license agreement should also include terms regarding royalties, if any, and terms for terminating the license.
EU legislation, including Directive 2001/29/EC and Directive 2019/790, regulates the use of works in the digital environment. These directives provide a legal framework for licensing digital works, including NFTs, and protecting intellectual property rights. Licensors in the EU must take these regulations into account when entering into licenses and using smart contracts.
This Directive establishes the right to fair compensation (royalties) on the resale of works of art, which may also apply to digital works in the form of NFTs. In the context of NFTs, it is also important to take into account Directive 2019/790 (“Digital Copyright Directive”), which adapts copyright rules to the digital age. While there is no direct mention of NFTs in these regulations, general intellectual property protection provisions may apply to NFTs .
In turn, in the United States, the right to receive royalties upon resale of works of art is determined by the Copyright Act . In particular, the Visual Artists Rights Act gives artists the right to compensation for the use of their works, which can also apply to digital works.
Given the novelty of the technology and the lack of direct references to NFTs, the most relevant solution at the moment is to apply regulations by analogy.
Licenses may be exclusive or non-exclusive, and may be temporary or perpetual. In the context of an NFT, it must be determined what rights are being transferred: the right of reproduction, the right of public performance, the right of distribution, etc. The license agreement should also include terms regarding royalties, if any, and terms for terminating the license.
EU legislation, including Directive 2001/29/EC and Directive 2019/790, regulates the use of works in the digital environment. These directives provide a legal framework for licensing digital works, including NFTs, and protecting intellectual property rights. Licensors in the EU must take these regulations into account when entering into licenses and using smart contracts.
This Directive establishes the right to fair compensation (royalties) on the resale of works of art, which may also apply to digital works in the form of NFTs. In the context of NFTs, it is also important to take into account Directive 2019/790 (“Digital Copyright Directive”), which adapts copyright rules to the digital age. While there is no direct mention of NFTs in these regulations, general intellectual property protection provisions may apply to NFTs .
In turn, in the United States, the right to receive royalties upon resale of works of art is determined by the Copyright Act . In particular, the Visual Artists Rights Act gives artists the right to compensation for the use of their works, which can also apply to digital works.
Given the novelty of the technology and the lack of direct references to NFTs, the most relevant solution at the moment is to apply regulations by analogy.
In the context of NFT transactions, it is necessary to strictly comply with the requirements of the Regulation (EU) 2016/679 on the protection of personal data (GDPR) in relation to users residing in the European Union, as well as the California Consumer Privacy Act (CCPA) in relation to users residing in the United States of America.
Platforms that process data for NFT transactions are required to ensure that they have mechanisms in place to anonymize users and their transactions, while maintaining strict transparency and compliance with European Union and United States laws.
Implementing monitoring and audit systems to track data access and promptly identify security breaches is a mandatory requirement set by the GDPR and CCPA.
Platforms must provide users with the ability to exercise their rights under the GDPR (EU) and CCPA (US), including the rights to access data, correct data, and delete data.
All data processing carried out as part of NFT transactions must comply with applicable regulations governing the protection of personal data, including the GDPR for EU users and the CCPA for US users.
Platforms that process data for NFT transactions are required to ensure that they have mechanisms in place to anonymize users and their transactions, while maintaining strict transparency and compliance with European Union and United States laws.
Implementing monitoring and audit systems to track data access and promptly identify security breaches is a mandatory requirement set by the GDPR and CCPA.
Platforms must provide users with the ability to exercise their rights under the GDPR (EU) and CCPA (US), including the rights to access data, correct data, and delete data.
All data processing carried out as part of NFT transactions must comply with applicable regulations governing the protection of personal data, including the GDPR for EU users and the CCPA for US users.
Marketplaces operating in the EU must comply with legal requirements relating to consumer protection, personal data and financial regulation.
- Violation of the terms of the agreement with users ( Directive 2011/83/EU on consumer rights):
- Marketplaces are required to provide accurate and complete information about goods and services, including NFTs.
- The platforms are responsible for the quality of the services provided and compliance with the stated characteristics.
- Misrepresentation of information ( Directive 2005/29/EC on unfair commercial practices):
- Marketplaces have a responsibility to avoid misleading consumers about the characteristics, value, and legal aspects of NFTs.
- Failure to comply with the requirements of the legislation on the protection of personal data (General Data Protection Regulation , GDPR):
- Marketplaces are required to ensure the protection of users’ personal data and comply with the principles of data processing.
- Non-compliance requirements financial regulation And counteraction laundering money (Directive (EU) 2018/843 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, AMLD5):
- Marketplaces are required to implement measures to identify users and monitor suspicious transactions.
EU
- HMRC case against persons unknown.
Circumstances of the case: In the UK, HM Revenue and Customs , HMRC) has seized non-fungible tokens (NFTs) as part of an investigation into a €1.6 million fraud.
The suspects used NFTs to hide transactions from HMRC. The suspects created fictitious companies, inflating value added tax (VAT) refund amounts.
Claimant's submissions (HMRC): The suspects deliberately used complex schemes using crypto assets, including NFTs, to evade taxes and launder money. Requirements were violated:- Fraud Act 2006 Section 2: Fraud by false representation – false representation of data in order to inflate the amount of VAT refund.
- Money Laundering Act 2017 Regulations 2017).
Court decision: The trial found that intangible assets known as “non-fungible tokens” (NFTs) can be used as a tool for fraudulent activities.
In accordance with the results of the investigation and within the framework of the consideration of the case, the competent tax authority, represented by Her Majesty's Revenue and Customs (HMRC), has received the right to confiscate NFTs that are the subject of an investigation, as well as to block the bank accounts of persons suspected of committing fraudulent activities using NFTs.
- Lavinia Osborne against Persons Unknown and Ozone Networks Inc.
Circumstances of the case: Lavinia Osborne, founder of the Women project in Blockchain Talks ", filed a claim in the English High Court in connection with the theft of two non-fungible tokens (NFT) from the 'Boss Beauties ' collection from her digital wallet on the OpenSea platform , owned by Ozone Networks Inc. The theft occurred through unauthorized access to Osborne's digital wallet, after which the stolen NFTs were transferred to two other anonymous accounts on the OpenSea platform.
Claimant's submissions (HMRC): Osborne argued that the theft of her NFT violated her property rights. The theft of digital assets falls under the violation of common property law and is considered misappropriation of property. The plaintiff also relied on case law recognizing cryptoassets as property (AA v Persons Unknown [2019] EWHC 3556 ( Comm )), which confirms its right to protect property in digital form.
Requirements were violated:- Property Law 1925 (Law of Property Act 1925).
- Rules of precedent (see above).
Court decision: an injunction preventing further sale or transfer of the stolen NFTs and a disclosure order order ), obliging Ozone Networks Inc. provide information about the anonymous owners of the accounts to which the stolen NFTs were transferred. The court's decision was based on the recognition of cryptoassets as property within the framework of case law (AA v Persons Unknown ) and on the provisions of the Property Act 1925, which confirmed the plaintiff's rights to protect her digital assets.
USA
United States v. Aurelien Michel.
Circumstances of the case: Aurelien Michel, a French citizen living in the United Arab Emirates, was arrested on charges of fraud related to the sale of an NFT called " Mutant" " Ape Planet" According to the indictment, Michel and his accomplices recruited buyers by promising them various rewards and benefits from owning NFTs. After successfully selling all NFTs, which were worth approximately $2.9 million, Michel stopped all communications and embezzled investor funds.
The plaintiff's arguments: The prosecution argued that Michel's actions violated Title 18, United States Code:- § 1343 (wire fraud): Fraud using electronic communications media, such as the Internet and email, to defraud investors. According to the indictment, Michel also violated Title 18, U.S. Code:
- § 1956 (money laundering): Michel and his co-conspirators allegedly used complex crypto-asset schemes to conceal the origin of the proceeds of the fraud.
Court decision: Michel pleaded guilty to conspiracy to commit wire fraud. The court accepted his confession and sentenced Michel to five years in prison. In addition, Michel agreed to pay $1.4 million in forfeiture.
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