Legal registration of NFT tokens and problems of their distribution

Content:

• What is an NFT?
• The current legal model for the distribution of NFT;
• Possible solution to the current problem.

What is an NFT?

NFT - Non-Fungible Token is a unique digital certificate located on the blockchain and confirming the ownership of an object. Such a token cannot be changed, divided, replaced in any way - it is unique. Each record on the blockchain is called a token. Accordingly, all tokens are equal and interchangeable with each other, for example Bitcoin. One bitcoin is equal to one bitcoin, they look alike like two peas. NFT is a unique token that has a number of special characteristics that distinguish it from other tokens. Accordingly, nothing can be done with such a token, except how to create and, possibly, transfer.

There are also semi-fungible tokens. They are characterized by one unique property that characterizes them. In the future, such tokens may give their owners any right, for example, such tokens may be cinema tickets.

However, it should be understood that the NFT is only a kind of certificate confirming the ownership of any digital asset. At the same time, NFT does not protect the owner from copying this object in any way. Anyone can see a sample of the original NFT, but it is the original file that is in the possession of the owner.

NFT tokens can serve as a means of accounting for objects in the real world, in other words, they can be a kind of register of objects, for example, real estate. But along with this, a number of difficulties arise associated with the transfer of a real thing into the possession of a new owner, which will be discussed below.

Therefore, at the moment, NFT is used mainly for recording rights to digital objects such as photographs, paintings, music, and so on.

NFT token exists on the blockchain. Most of the existing NFTs on the market are on the Ethereum blockchain. The blockchain acts as a guarantee of the authenticity of the object and the place of its storage. There is a fee to issue an NFT as it requires the use of computing power to upload to the blockchain. Depending on the blockchain and site, there are two models of payment for the creation of an NFT:

1. Fees are charged immediately when the NFT is created;
2. NFT creation occurs only if there is a buyer of the future token and the buyer pays for the creation of the NFT.

Current Legal Model for NFT Distribution 

Today there are a number of NFT marketplaces used to create and sell NFT art objects, such as:

• Opensea;
• Makersplace;
• BinanceNFT;
• Rarible.

Having considered the rules for using the above services, you can find a number of similarities that allow you to identify the current legal model for the distribution of NFT tokens:

1. The first and most important point is the absence of any rights to the acquired object. Based on the provisions of the user agreements, the sites do not guarantee any transfer of exclusive and copyright to the object from the author;
2. It is also important that the sites do not bear any responsibility and do not guarantee the existence of copyright and other rights to the object from the one who uploaded the NFT to the blockchain;
3. Hence, the sites do not bear any responsibility for violation of the law by the parties involved in the trade, including the lack of guarantees of the authenticity of the objects;
4. Based on clause 3, the buyer does not have any guarantees of the authenticity of the object placed on the site. Therefore, anyone can take any public object on the Internet and create an NFT token without the knowledge of the author or copyright holder. Hence, such a transaction may be invalidated, as a result of which you will lose the object, and also spend a lot of resources on litigation;
5. At the moment, it is not possible to link material objects to NFT tokens and regulate the transfer of rights and property itself to a new owner without deep integration of state institutions into the blockchain.

Thus, to maintain the legal purity of the transaction, it is not enough just to purchase an NFT token on any platform. The marketplace, like the blockchain, at the moment cannot guarantee the full transfer of rights to the object, not only in the digital, but also in the legal field.

Possible solution to the current problem 

Given the current legal model of NFT marketplaces, there are several options for solving the current problem of NFT distribution:

1. Marketplaces need to finalize the current rules of use, where the moment of transfer of exclusive rights and other rights to the acquirer of the NFT token will be regulated;
2. In addition to regulation on the part of marketplaces, deep integration of contractual structures into the blockchain is also required to control and record all transactions carried out on the sites;
3. On the blockchain side, there are also a number of actions that allow for more detailed regulation of the moment of transfer of rights, namely, fixation through detailed control from the smart contract. A smart contract is a kind of record that records the accounting of tokens. With a smart contract, you can not only keep track of tokens, but also regulate the moment of transfer of a token from one person to another, but also other requirements, depending on the wishes of the parties;

There are now new platforms such as FoilNetwork that offer theoretical solutions to the above problems. First, it is proposed to directly load an object into the blockchain, and not just create such a record. That is, the buyer receives a full-fledged original file of the art object, and not just a link to download it. Secondly, a smart contract makes a corresponding record in the blockchain.

Thus, in addition to the technical implementation of the transfer of rights and the object, compliance with the legal purity of the transaction is also required. If you have any questions or need help working with NFT, you can contact the lawyers of A4 Law Firm.