Vasilis Charalambous, Head of GZGTech explains everything around the exciting world of Non- Fungible Tokens-NFTs, how do they work and what are some of the key legal considerations
It seems that the effects of the Covid pandemic have fuelled use cases and discussions around Blockchain. Big Tech and the banking industry appear to be highly interested in Blockchain and numerous institutional investors have acquired a great amount in cryptocurrencies.
Blockchain, the technology underlying Bitcoin and cryptocurrencies in general, is an emerging financial technology that uses a decentralized database managed by computers in a peer-to-peer network, rather than a central computer as in traditional databases to facilitate the process of recording transactions and tracking assets. An asset can be tangible (a house, land) or intangible (intellectual property, patents). Virtually anything of value can be tracked and sold on a blockchain network, reducing risk and cutting costs for all parties involved.
From clearing and settlement systems to cross-border payments, digital collectibles (NFTs), and more, blockchain technology is being actively studied and experimented with for application in almost every financial activity and institution.
An NFT (Non-Fungible-Token) is a unique, non-divisible token, often associated with an object (e.g. a collectable or digital art) and uses blockchain technology to track ownership and verify authenticity. Fungible tokens, such as Bitcoin, are not unique and therefore do not qualify as an NFT (trade one for another bitcoin, and you’ll have exactly the same thing). An NFT, has a unique identification code and information that distinguishes it from other NFTs. It represents items on the blockchain that cannot be copied and practically, may be any file you can upload, from text to audio, video, and gifs. The majority of NFT markets now use Ethereum smart contracts. Ethereum’s ERC -721 and upcoming standards like ERC 888, ERC 998, and ERC 1155 are examples of NFT tokens.
People are using digital art as profile photographs on social media, and even offering them for sale at Christie’s and Sotheby’s in the high arts sector. Mike Winkelmann’s NFT (the digital artist known as Beeple) was sold for $69 million at Christies auction house in March 2021.
This technology sets the foundation for creators to have more control over the value and terms of the sale of their digital works and create new distribution channels of art, performance access, or other valuable property.
The history of non-fungibles goes back to 2012–2013 with the Colored Coin era, and then again in 2016 with the Rare Pepes memes (NFT-like assets on Bitcoin Blockchain) on the Counterparty platform, to the famous Cryptopunks NFT project in 2017.
In the previous nine months, NFTs have developed fast, with more than 100 projects and 50 NFT marketplaces now available.
Further to the creation of digital art items with unique and exclusive properties, NFTs use cases are currently expanding to others in the supply chain, including gaming and real-estate.
The uniqueness and traceability of the assets are being used by supply chain operators in the luxury goods (Prada, LVMH) and F&B sector, to assist, demonstrate origin and prevent counterfeit items from entering the market.
In the real estate industry, physical land or property can be represented on a blockchain as an NFT. This means that the digital token representing a piece of land can have a variety of properties such as location, price, and dimensions. Malicious actors would be unable to meddle with land ownership and other tangible assets linked with the land thanks to blockchain. When it comes to real estate trading, fractionalized ownership is also one of the most fascinating NFT use cases.
One of the greatest NFT use cases is in-game assets as non-fungible tokens, where players may build or acquire non-duplicable game items that can be stored in their own private wallets and transferred across games.
NFTs enable creators to endow digital assets with physical properties such as scarcity, uniqueness, and evidence of ownership. They’ve inspired new ways to monetize items that had previously been unused.
However, because the NFT market is still in its early phases, the legal and regulatory framework around the issue is continuously evolving.
Although most governments do not yet have laws or regulations expressly addressing NFTs, a variety of current rules may nevertheless apply. This will be determined by the token’s qualities and characteristics, as well as the actions carried out in relation to the token and the token’s geographical scope.
Amongst others, intellectual property, privacy and AML are the main legal considerations regarding NFTs.
While the purchaser owns the unique digital version of the underlying work, an NFT does not represent copyright ownership of the underlying asset. Copyright to the underlying work, or property rights to a tangible underlying object, would be transferred if both parties agreed.
What is more, NFTs may sometimes contain personal data, thus triggering the application of the GDPR which means that questions like, who is the data controller, how can the right of the data subjects be safeguarded, will need to be addressed at some point.
In fact, as more individuals and businesses recognize the impact that NFTs may have and begin to use them, the NFT ecosystem will continue to develop. Developers will continue to come up with new applications, and interoperable products will be a game-changer.
The effect of Blockchain is becoming more evident every day, and it has allowed the development of new sorts of economies that are based on different principles from traditional financial markets. Decentralized finance is becoming more diverse and powerful as new solutions are introduced.