Global experience in legal regulation of NFT-tokens

Experiments with tokenisation of various assets began in 2013-2014 amid growing interest in cryptocurrency. Among the first protocols used for this purpose were Colored Coins and Counterparty on the Bitcoin blockchain; in 2015, Etherium, an NFT project based on Ethereum, was launched.

Today, NFT tokens are an important part of the digital sphere, with no legislation in the world separately regulating the circulation of such assets.

1. The concept of NFT, intellectual property rights issues

NFT (non-fungible token) is a type of token whose elements are unique and cannot be replaced or substituted by other similar tokens. In essence, it is a digital record that carries a certain set of information:

  • about the external parameters of the token, i.e. information about the underlying asset - any object of the digital environment or the material world (usually a picture or other object of fine art, but the underlying asset may also be real estate, pieces of music, cinema tickets, etc.);
  • internal parameters of the token, in particular, the time of creation of this digital record, information about its owners, history of transfer of rights to it (change of NFT owners takes place through conclusion and execution of smart contracts).

It is important to understand that NFT itself, as a digital record, is not an object of intellectual property, and international legal treaties and conventions regulating this sphere do not apply to it. The existence of an NFT cannot certainly indicate that its owner is an author of the underlying asset. Conversely, the existence of an NFT by a third party does not deprive the author of his copyright to the intellectual property object created by him. 

Despite the lack of global legal regulation, it is presumed that the person creating an NFT must be the right holder of the underlying asset (the real work to be "digitised", or the digital work if the original was initially created in digital form), or be authorised by the right holder. 

Infringement of intellectual property rights occurs if the issuer of an NFT:

  • Is not the right holder of the underlying asset, and
  • does not have a licence granting the issuer the rights to create NFTs.

The relevant provisions are set out in the local rules of most marketplaces (section 6 Terms of Service of the MakersPlace platform, section 6 Terms of Service of OpenSea, para. (b) clause 7.5 of Section 7 of the Rarible Terms of Service). When creating NFT-tokens, users of the platform guarantee that their actions do not infringe any third-party right. In case an NFT-token was nevertheless placed with a violation, the right holder has the right to demand that the platform remove the corresponding NFT from the website.

Another legal issue closely related to the nature of NFT tokens is the scope of the rights that are transferred to the purchaser when transacting with NFTs. As noted above, by purchasing an NFT, users do not acquire the underlying asset in reality, but only a "digitised" image - the metadata that constitutes the NFT. Such a purchase does not give the right to use the image in copyright ways, without any specifical authorisation of the author or copyright holder. Otherwise may be established in a specific agreement between the creator of NFT and the purchaser - the seller may offer to turn the NFT token into an actual transfer of rights to the underlying intellectual property object (if this does not contradict the copyright laws of the jurisdiction in which the transaction is made). 

Given that the key characteristic of NFT is its non-interchangeability, it is assumed that the circulation of such tokens should, firstly, be carried out in compliance with the blockchain legal regulation of digital assets and, secondly, comply with the requirements of intellectual property legislation. Thus, the participants of the NFT market (issuers, potential purchasers, marketplaces) face two key issues to which special attention should be paid: 

  • Does the issuer of the NFT have the relevant rights in respect of the underlying asset to issue the NFT?
  • What rights are transferred to the purchaser of the NFT?

2. NFT in the United States

Speaking of the regulation of NFT-tokens in the USA, it is necessary to note the heterogeneity of the practice of legal regulation of digital assets. It is assumed that NFT-assets can be considered as:

  • security;
  • convertible virtual currency;
  • commodity.

Position of the United States Securities and Exchange Commission (SEC): NFT, like any other token, is recognised as a security if it represents an asset that has the potential to generate income from the efforts of others (income derived from inflation or other purely market-based factors is not taken into account in this context). Accordingly, the platform where this NFT will be placed must be registered by the SEC as a securities broker-dealer, stock exchange or alternative trading system.

Based on the  nature of NFT, this type of token cannot be a security if it:

  • Relates to an existing asset;
  • presented as a collectible item with a public guarantee of authenticity in a decentralised registry.

In order to exempt an NFT from the risk of being recognised as a security, the token must pass the Howey test, which determines whether an asset is a so-called "investment contract" - a type of security other than the usual stocks and bonds. 

The Howey test consists of four key elements (prongs):

  • Investment of funds;
  • a common enterprise (in other words, the investor's return depends not on his individual investments, but on the success of the entire enterprise);
  • a reasonable expectation of profit;
  • the profit is derived from the efforts of others.

Consequently, fractional NFTs (F-NFTs), in which the value of each fraction depends on the value of the other parts and the whole asset, and collectible NFTs, which are promoted by large teams of producers, marketing specialists and agents, will be under the greatest "threat".

Position of the Financial Crimes Enforcement Network (FinCEN): If NFT transactions are recognised as a money transfer activity, they are required to comply with the Bank Secrecy Act, which is essentially the key AML legislation in the US. A digital asset is expected to be treated as a convertible virtual currency (CVC) if it has an equivalent value in real currency or acts as a substitute for real currency.
Of course, since most NFTs are a digital copy of some underlying asset, they are more likely to be collectibles than CVCs. On the other hand, NFTs can be exchanged for fiat currency - hence the characteristics of a currency substitute. Based on this fact, different US states regulate money transfer service providers in a different ways.

Position of the US Commodity Futures Trading Commission (CFTC): Cryptocurrency - at least Bitcoin, Litecoin and Ethereum - refers to commodities, so unfair and manipulative trading laws may apply to NFTs. If such transactions were leveraged or on a margin basis (i.e., using credit funds from a broker), the CFTC as supervisory authority may additionally examine whether the transactions took place on a registered derivatives exchange, as well as monitor compliance with the rules on the actual delivery for digital assets.

Based on the above, there is no single approach in the U.S. to classifying NFT tokens as a specific civil rights object; each of the three agencies (SEC, FinCEN, CFTC) makes the qualification independently of each other. Depending on the final decision, the NFT, its issuer and the platform where the NFT is created and placed may be subject to completely different regulatory requirements.

3. NFT in Cyprus

The European Union's Markets in Crypto-Assets Regulation (MiCA), which is adopted in 2023 and coming into force in 2024 in all EU Member States (Cyprus has been a full member of the EU since 2004), excludes most NFT tokens from its scope of regulation. At the same time, NFTs issued in a large series or collection are considered by the European legislator as interchangeable tokens, even though each of such tokens has a unique code.

It is important to realise that the MiCA regulatory exemption provided for most NFTs does not affect the application of other EU financial rules to them. In particular, if, in accordance with EU Directive 2014/65/EU on Markets in Financial Instruments (MiFID II), an NFT token qualifies as a financial instrument (transferable security or derivative), the provisions of the Cyprus Investments Services Law, EU and Cypriot securities legislation will apply to that token. This fact will impose a number of additional obligations on the token issuer - registration as an investment company, publication of a prospectus before issuing an NFT, obtaining authorisation from the Cyprus Securities and Exchange Commission (CySEC), etc.

If any NFT tokens fulfil all the criteria to be recognised as electronic money or payment instruments under EU Electronic Money Directive 2009/110/EC or EU Payment Services Directive 2015/2366/EC, they will be subject to the rules in these areas.

In addition, it is recommended to pay attention to the following legislation when planning to issue or transact NFTs:

  • EU Directive 2018/843 (the so-called 5th AML Directive) and the Cyprus AML Law 188(I)/2007 corresponding to the Directive - in relation to AML compliance;
  • EU Regulation No. 910/2014 on electronic identification and trust services for electronic transactions in the internal market - in relation to electronic signatures and electronic contract enforcement, which is particularly relevant for transactions with NFTs based on blockchain technology and smart contract algorithms;
  • EU General Data Protection Regulation 2016/679 (GDPR) - in relation to compliance with personal data protection legislation for transactions on the blockchain network, as well as NFTs containing personal data of any persons.

Thus, due to the lack of specialised regulation of NFTs in Cyprus and in EU legislation, the key issue is the qualification of these digital assets. An NFT token can be considered as a security, a form of electronic money or a payment instrument, which allows for different legal regulation depending on the purpose of its creation and circulation.

4. NFT in Belarus

The Republic of Belarus is considered a favourable jurisdiction for launching a crypto-business. The Regulation on the High Technology Park, which lists possible forms of crypto-activities (functioning of crypto exchanges, crypto brokers, crypto currency exchange operators, ICO organisers, and mining companies are legalised), additionally provides a paragraph for "non-standard" types of crypto-activities - "other activities using digital signs (tokens), including those containing features of professional and exchange-traded securities activities, investment fund activities, securitisation, as well as operations for the creation and placement of their own digital signs (tokens)". It is supposed that NFT-marketplace activities may also fall under this type of activity.

As noted above, an NFT is a specific type of token due to the fact that, in addition to its cryptocurrency component, it may be linked to a specific intellectual property object to be created by the NFT issuer or to which the NFT issuer is obliged to acquire the relevant rights under a licence agreement or as a result of an exclusive right assignment agreement.

At the same time, Belarusian legislation limits its scope of regulation exclusively to the general concepts of token and cryptocurrency as a specific type of token. It is believed that the issue of NFT has remained unresolved due to the fact that the legislation was largely formed in 2017 before the widespread popularity of NFT.

Accordingly, since NFT can be conditionally divided into a token and the intellectual property object it contains, the authors believe that the general procedure of token turnover is applied to NFTs – but at the same time the creation of this token requires either obtaining a licence to "digitise" the underlying asset and "bind" it to the NFT, or acquiring the rights to the intellectual property object by means of an assignment agreement (taking into account the requirements of the Civil Code of the Republic of Belarus and the Law on Copyright and Related Rights).