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Where Bitcoin was hailed as the digital answer to currency, NFTs are now touted as the digital answer to collectibles. But there are plenty of skeptics who think it is all a bubble that is going to burst.

The structure of NFTs—modeled after artwork rather than currencies or shares—implies they are not subject to the same financial regulation as other types of crypto. However, they still risk falling afoul of intellectual property law and consumer protection laws.

Anyone entering the world of NFT art will need to seriously consider it from the perspective of taxation, corporate structure, and intellectual property.

1. Will transfers of such tokens be subject to a gift tax or viewed as purchase transactions?

2. How will the token be valued separately from the physical property it represents?

3. Which rights will the eventual owner be given for the potential display of the artwork?

Adv.P.M.Mishra of Finlaw Associates and his International Associate Firm BCH Consulting, Estonia & Finjuris Counsels LLC, UAE has done one in-depth analysis on a few legal Issues concerning NFT Internationally. As per Adv.P.M.Mishra’s team, the creation, distribution, ownership, and trading of NFTs are new phenomena that raise many legal issues, many of which are ambiguous or unresolved. Discussed below are some of the more prevalent problems legal about which anyone involved in the minting, sale, or acquisition of an NFT should be aware.

A.Copyright – A common misconception is that when you buy an NFT, you are acquiring the copyright in the digital artwork. This is not the case. The situation is essentially the same as if you were buying a painting. When you buy a picture, you are purchasing only the physical artwork itself and not the ability to make and sell copies or create new works which wholly or substantially reproduce the original. Given the many uncertainties, a buyer would be best advised to conduct rigorous due diligence. Specifically, one would want to ascertain whether the seller is the creator of the work, has good title to it, and has obtained the permission of any third party whose IP is present in the digital work.

B.Smart Contracts – Smart contracts govern NFT sales. These are digital contracts where the terms of the agreement are written in the code and are embedded within the purchase tokens. SMART contracts are usually programmed to operate automatically when a pre-defined set of conditions are fulfilled. Because the contractual obligations of intelligent contracts are performed automatically, it follows that, in theory, fewer legal disputes should arise over the terms and performance of the contract. However, there is practically no case law, legislation, or regulation addressing SMART contracts. This creates questions as to whether SMART agreements are legally binding.

Money laundering- Given the exorbitant sums spent in the NFT market and the widespread use of cryptocurrency, concerns have been raised about whether these transactions are being used to circumvent the increasingly robust anti-money laundering regulations implemented around the world. After all, it can be challenging to understand why collectors are spending so many millions on what some might say are essentially just digital autographs. The more cynical commentators may also point to the timing of the rise in popularity of NFTs, which has coincided with the mainstream art market being made subject to anti-money laundering regulations for the first time (in Europe at least). David Hockney, for example, labeled NFTs as the preserve of ‘crooks and swindlers’ when speaking on an art podcast.

The EU’s Fifth Anti-Money Laundering Directive (5AMLD), which came into effect in the UK on 10 January 2020, subjects all “Art Market Participants” (i.e., anyone who acts in the sale or purchase of works of art above €10,000) to a plethora of new duties. Most notable among these is the requirement to carry out Client Due Diligence (CDD) to verify a purchaser’s identity and their source of funds in advance of any transaction.

The legal implications of NFT ownership remain murky. Most likely, it will take a couple of room-clearing court decisions to help owners and litigants navigate their waters.

About the Author

Adv.P.M.Mishra is a lawyer working as Managing Partner of Finlaw Associate, Director at Finlaw Consultancy Pvt.Ltd.,India ,Finjuris Counsels LLC,UAE & BCH Consulting, Estonia, Europe.

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