NFTs (Non-Fungible Tokens) have taken the world of digital arts by storm. These digital tokens make use of the same Blockchain technology which powers all the cryptocurrencies. However, instead of acting as a virtual currency, NFTs enable art creators to tokenize their works. This allows a highly traceable ownership record, along with predetermined cuts offered to creators for every secondary change of ownership. With booming NFT prices, several financial regulators are getting concerned with their possible money-laundering implications. Already, the USA and EU have been introducing stricter regulations for traditional artworks and virtual assets markets through the AMLA 2020 and AMLD5. Therefore, NFTs, which are often the digital transformations of conventional arts, are sure to see a lot of regulatory interest. New regulations for NFTs may come up in some of the following ways.
Possible treatment of NFTs as Securities
The foremost question associated with NFTs is if they will be treated like a traditional collector’s item or financially regulated securities. Similar questions were raised when ICOs (Initial Coin Offerings) were attracting lots of ‘hot money’ which eventually led to the United States SEC’s intervention. The famous Howey Test, as mentioned by the US Supreme Court’s ruling in 1946, is applied to an asset to check if it belongs to the securities category.
Legal practitioners dealing with crypto assets believe that as long as NFTs are bought & sold like the traditional artwork or other collector items like baseball cards, they won’t experience any governmental hurdles. However, if some NFT marketplace crosses the line and indulges in NFT marketing schemes by hiring third parties and offering quick returns then regulators will definitely make an intervention. Moreover, fractionalizing NFTs can also create troubles.
Getting classified as securities will create a whole new regulatory ballgame for the NFT market. If an asset is deemed as security, then there are several sets of requirements that need to be fulfilled globally. Registering such securities with the national securities exchange regulator will become mandatory while exchanges will be registered as brokers. This will surely be a challenging situation for the nascent NFT ecosystem.
New regulations for NFTs related to Intellectual Property
NFTs present new challenges when it comes to the intellectual property domain. Although, there are several laws available that are designed to protect the rights of artists. Interestingly, with the involvement of blockchain technology, things become a little more complicated. Illegally copied NFTs, just like the legal ones, also sit on a change-resistant technology. If there is illegal tokenization, it must be ascertained if the owner of the involved asset has the legal authority to transfer the NFT instead of claiming for its total extinction.
In the USA, longstanding legislation like the Digital Millennium Copyright Act (DMCA) will be used to take down acts of copyright infringement on NFT platforms. Notices under the DMCA will continue to be served to exchanges selling pirated and copyrighted materials. However, serving notices won’t be enough. In the future, government regulators will have to devise intelligent checks and regulations for NFT exchanges. This may include fine-tuning their underlying smart contracts. Clearly embedding the terms of transfer including which rights are actually being transferred is essential. Do the buyers get full rights to the tangible art behind the NFTs or simply their digital manifestations?
Stricter requirements for NFT exchanges to deal with Cyber Theft
Apart from copying, outright theft of NFTs will become a pressing issue in the eyes of law enforcement agencies. Even with blockchain’s ultimate transparency and traceability of ownership, NFT cyber theft isn’t impossible. Nifty Gateway, a popular NFT exchange recently suffered such criminal acts and they remained totally clueless about how to handle the situation. Later, they were able to get hold of many of the stolen digital artworks. Some of them traversed down into the secondary black market. Blockchain technology did allow real owners to track their assets but they couldn’t do much about it. New regulations for NFTs may mandate exchanges to deploy better cyber-theft safeguards.
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