There are a number of commercial as well as legal issues that companies must take into account when it comes to non-fungible tokens. This guide outlines the issues and what you should be aware of.
Non-fungible tokens and legal issues
In spite of rumors that non-fungible tokens (NFTs) will be caught explicitly by the Markets in Crypto-Assets Regulation (MiCAR), there aren’t specifically regulated at the moment. Still, existing laws, as well as regulations, apply to NFTs. So, companies must consider several commercial and legal issues regarding NFTs. If you are interested in NFTs, you can read about Moody Krows NFT.
Critically, issuers must be clear about what rights are being “sold” with the non-fungible token. For instance, these could include certifying ownership of an asset, a license to use intellectual property rights (IPR), or even contractual rights, for instance, a right to receive or use a peculiar asset (whether digital or virtual) or to access benefits.
Besides, the purchaser of an NFT needs to understand what they are purchasing. For instance, if the NFT incorporates smart contract functionality, this will be encoded into it and may not be noticeable on the surface of it. What non-fungible tokens represent, how much is expected to be generated from selling that NFT, as well as even whether it is capable of fractional ownership will mainly be driven by the commercial rationale for issuing an NFT.
Non-fungible tokens and intellectual property rights
Unsurprisingly, issuers will want to control purchasers’ use of any IPR associated with an NFT. Importantly, selling a claim to a unique piece of content might seem at first glance to be equivalent to an assignment of copyright. But usually, copyright, as well as other IPR, will be retained by the issuer, and when it comes to the buyer, they will be granted a right to display the underlying asset.
So, what the purchaser of a non-fungible token will own depends on any coding or smart contract ingrained in the NFT (or the terms of sale in an additional contract format). Creators of an NFT may, for example, set up an NFT to create an ongoing automated payment of royalties or commission on any resale of the tokens.
Financial regulation and its importance
Companies must evaluate whether their non-fungible token is a regulated investment, security, or payment instrument and/or whether offering it for sale or providing related services such as a custody or exchange plat-form, represents a regulated activity for the purposes of financial regulation.
Even though NFTs aren’t (yet) specifically regulated, if they exhibit characteristics of other regulated investments, they may trigger national as well as supra-national legal obligations. In particular, issuers will have to demonstrate the non-fungibility of any NFT they offer in order to prevent it from being considered a security token or cryptocurrency, which could be caught by financial regulation.
Notably, these regulatory obligations range from “know your client” (KYC) identification and verification and other regulations. Issuers, as well as service providers, will typically be caught by regulation in the jurisdiction into which the non-fungible tokens or related services are sold, especially if offered to the retail market. Let’s not forget that liability for compliance will sit with the regulated entity and is quite difficult to pass on. Along with any financial penalties, the reputational risk of non-compliance will be severe.
Apart from financial regulation, companies must also ensure that any marketing activity in respect of its non-fungible tokens is compliant, keeping in mind that a number of regulators have taken enforcement action in the crypto space, including in relation to advertisements for unregulated crypto that didn’t adequately highlight financial risks.
