Blockchain or distributed ledger technology is the primary technology upon which cryptocurrencies, utility tokens, security tokens, and similar products are built. These types of products are all fungible tokens. One cryptocurrency token is of the same nature and value as any other token of the same cryptocurrency. Likewise, the owner of a token representing a digital security has the same rights as any other person owning a similar token.
Recently, another application of distributed ledger technology has been gaining in popularity. Unlike its fungible brethren, a non-fungible token (or NFT) represents a token which vests its owner with a unique set of rights and/or privileges. An NFT is a unit of unique data stored on a shared, digitally distributed ledger which acts as a digital certificate of ownership of a specific tangible or digital asset. A wide range of assets can be sold as NFTs, from digital art to a pair of sneakers. To illustrate their popularity, in the first quarter of 2021 alone NFT sales generated US$2 billion in revenue. In this article, we will focus on NFTs representing interests in creative works, such as music and paintings, and will discuss certain legal issues prompted by the issuance of such NFTs.
Without going into great detail as to the various technologies used, tokens may be created that represent unique digital or physical assets. A cryptographic hash can be created for instance for a digital painting which contains the artist’s signature or other identifying mark. The digital painting would, therefore, be unique and the owner of the corresponding token would be the singular owner of that unique painting. Similar cryptographic identifiers can be created for other digital and physical assets and combinations of the two. For example, to provide fans with unique, exclusive experiences, a singer or other musician could create an NFT of a music video which contained exclusive behind-the-scenes footage of production, or even concert tickets ahead of any official sale.
Given the novelty of creative-work NFTs and the lack of specific legislation protecting the integrity of transactions, questions and disputes have begun to arise. Such disputes almost invariably relate to ownership of the asset underlying a particular NFT. In some circumstances there is a legitimate dispute as to asset ownership. In other instances, the NFT issuer clearly has no rights to the tokenized asset and is committing blatant fraud. We introduce below the essential elements of a lawfully minted creative-work NFT and how conflicts regarding the legitimacy of NFT transactions may arise and, hopefully, may be avoided.
On the issuer side of the NFT transaction, our advice is simple. An NFT is merely a digital certificate of ownership with no inherent rights attached. As such, the transfer of a creative-work NFT must also involve the transfer of the underlying ownership rights. To make a valid transfer of the underlying rights to a creative work, i.e., issue and sell an NFT for it, the NFT issuer must secure the underlying rights to the work.
Under Taiwan’s Civil Code, the buyer of a creative-work NFT from an issuer that was not the rightful owner of the underlying work has two potential remedies. First, the innocent buyer may rescind the purchase contract. Second, the innocent buyer may request compensation for damages.
The artist as the original rightsholder of the creative work would have a claim for tort damages against the issuer for issuing an NFT for the artist’s work without authorization. An artist may also have protection under Taiwan’s Copyright Act. However, protection under the Copyright Act could depend on how a work was tokenized. An NFT is often merely a certificate of ownership and simply points to the location of the underlying asset; however, in some instances a digital asset may be embedded in the NFT itself. If the NFT includes the work itself, the creator is more likely protected under the Copyright Act, as the work would have been published, replicated, or publicly transmitted through the NFT. However, if the NFT merely contains a digital certificate of ownership that points to the location of a digital or physical asset, the artist would likely not have a claim under the Copyright Act (unless the underlying work was previously unpublished).
Some more egregious cases of defective NFTs involve intentional forgery of creative works, i.e., an issuer issuing and selling NFTs for artwork as if it were the original creator. In such cases, the purchaser of a fraudulently issued NFT may file a criminal complaint pursuant to Taiwan’s Criminal Code and initiate criminal prosecution of the issuer. Civil damages would also be available.
Additionally, the Fair Trade Act makes it illegal for any person to affect trading by means of any deceptive or obviously unfair conduct, including:
1. Impersonating a well-known entity or person in respect of a transaction;
2. Concealing important information related to a transaction; and
3. Exploiting the work of others.
In the creative-work NFT context, selling a creative-work NFT as if one were the actual creator would likely constitute a Fair Trade Act violation. Both the purchaser of the fraudulently issued NFT and the original artist may file complaints with the Fair Trade Commission. Administrative penalties of up to NT$ 25 million (approx. US$890,000) could be levied against the offender. Civil damages may also be available.
In addition to money damages, victims of a fraudulently minted NFT may also request that the wrongdoing be “undone” via injunctive relief.
Where the NFT is traded under the owner’s real name, a harmed artist may ask that a court compel the current possessor of the NFT, be it the infringer/forger or the innocent buyer, to dispose of the NFT. Given the immutable nature of blockchain technology, disposal may require a transfer of the illegally issued NFT into a “dead account”, thereby prohibiting any further transfer and effectively “removing” it from circulation. Where the NFT is traded anonymously, the trading platform on which the transaction took place may be required to publicly announce the illegal transaction or ban the wrongdoer.
Taiwan already has several platforms promoting NFT transactions. However, the market for the issuance and sale of NFTs is still in its nascent stages, and we expect to see significant further development. Our team is involved with both issuers and artists in connection with the issuance and sale of NFTs. We strongly recommend that both issuers and artists seek competent counsel to advise them on any issuance or sale of NFTs. There are numerous and varied issues to consider. In addition to the intellectual property rights issues described in this article, there are a host of novel considerations due to the nature of the emerging technologies being employed.
For more information on NFT legal issues or blockchain matters, please contact Greg Buxton at firstname.lastname@example.org.Written November 23, 2021 By Gregory A. Buxton, Chi-Hsien Nieh, Bryan Tan, Ming Teng.