Non-fungible tokens from a legal perspective

Non-fungible tokens from a legal perspective

Recently,NTFs have got highly popular to become the latest digital cοllectibles in nowadays entertainment, sport, arts, and gambling sectors. NFTs are best explained as a type of virtual asset kept on a blοckchain presenting οwnership of a digitalized product. The main characteristic that differentiates NFTs from other tokens is that it denotes a unique, non-replaceable, and non-replicable item existing in the digitalized world. In other words, NFTs are connected to a unique counter value and contrary to other tokens on a blοckchain (such as BTC), they cannot be split. Examples of NTFs include programmable pieces of art: paintings, photos, videos, GIFS, music, or in-game items. However, despite all the hype around these assets, non-fungible tokens from a legal perspective are still in the stage of development, and there are more questions than answers.

What is the value of NFT?

The emergence of NFTs has framed a marketplace in which digital football trading cards or music albums in the form of NFTs are bought on specialized marketplaces, without the mandatory presence of an agent. Moreover, NFTs serve as an optional non-traditional channel for artists and content makers to monetize their works as they are granted royalties each time a purchaser sells the NFT rendering their work to somebody else. To buy it, the buyer will need to get use to cryptocurrency deposited to the particular marketplace as a means of payment.

One of the most defining characteristics of NFTs is that they are unique, meaning that the purchaser of an NFT obtains exclusive rights for it and that NFTs have all different values and thereafter cannot be swapped with each other as other types of FinTech solutions.

But, regardless of the buzz around the rising popularity of NFTs, one of the core issues around them is the issue of their legacy and their functions in the market.

Are NFTs legal and what issues occur around them?

The lack of NFT regulating laws means there are some risks associated with sanctions and funds laundering. This situation leaves a plethora of other essential legal issues to be cleared up in the respect of NFTs.

Some of the most essential are:

  • Data storage and protection;
  • Royalties;
  • Copyright;
  • Taxation.

Data storage and protection.

The NFT is based on the blockchains and maintains details about where the digital asset is placed. While the token is linked to the digital file asset through a link, it could be trashed or the server storing it could be harmed by hacker attacks. This would make the NFT worth very little – and current law provisions have not yet explained what rights the NFT owner would have under such circumstances. Also, there is the likelihood that NFTs containing private data may breach data safeguarding obligations.

Royalties.

One of the distinctive features of NFTs is that royalties can be paid to the developer each time their token changes owners. However, whilst smart contracts can ensure the developer of a token can obtain payments each time it is sold, such payment operations may not be automatically conducted if the sales are not always conducted via the same marketplace. Many countries (along with the United States) do not recognize resale rights, which means that the creator of the NFT may have no legal tool for claiming their royalties.

Intellectual Property(IP).

The purchaser of an NFT may erroneously think they own the actual art related to the NFT. However, the only person who has IP ownership is one with the right to duplicate, share, change or publicly display the art.

NFT Taxation.

Tax purposes are one of the most notable segments of law that applies to the development of NFTs. The United Kingdom and many other countries have little or no legislation in this respect, nor any official recommendations for NFTs and taxation. Although in the UK, HMRC has proposed guidance in terms of crypto assets, it has detailed that NFTs are regarded as separate entities.

Whilst it can be expected that NFT gains and losses would be under capital gains tax and other taxes – the approach of authorities has yet to be confirmed.

The bottom line

We remain in the Wild West of overseeing the digital asset innovations, and the current difficulties with determining how the NFT marketplace will get through the route of legit protection defines what is going on now. Non-fungible tokens from a legal perspective are still at their stage of growth, and the ways to resolve the above-mentioned issues and judicial disputes that will emerge have yet to be taken into consideration.

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