Τhe thrill of NFTs: The trendy hybrid assets and their legal implications

Article by Panayiotis Antoniades*

Introduction: The thrill of NFTs

NFTs (Non-fungible tokens) have recently burst into an astonishing online hype. The marketplace of these assets encompasses eager capital holders that are willing to spend great amounts for the purchase of assets, yet in a profoundly unorthodox way. NFTs have revolutionized the way assets are perceived, transformed the media and collectible art industries, and justifiably caused a lot of doubtful conversations regarding their future. From the notorious JPG file of Beeple’s collage, Everydays: The First 5000 Days, sold for $69 million, to Twitter’s co-founder and CEO Jack Dorsey’s first-ever tweet "just setting up my twttr" that auctioned for a charitable cause for $2.9 million.

NFT and Blockchain Technology

NFTs are digital certifications of ownership of a unique digital asset. The code of the NFT is encrypted on a blockchain, a shared database, which records transactions on a digital decentralized ledger. The concept of blockchain is considerably a kin to a list of data that are interconnected into “blocks”and thus any alterations on that digital catalogue are evident, making the technology transparent. [1]

The assets that are transferred between parties on a blockchain are called “tokens”, with the most prevalent version of all being cryptocurrency. Cryptocurrencies are essentially tokens of equal value stored on the blockchain ledger, whose ownership can be exchanged. The conceptual difference between crypto and NFTs is that the latter are exclusive software codes that signify ownership of digital “property”. They are unique and unprecedented digital assets, not identical to others, hence their non-exchangeability for equal value (non-fungible).[2]

Smart Contract and E-signature

The purchase of an NFT, essentially a contract between a buyer and a seller, is broadly a part of a sequence of innovatory progress in the field of contract-making. The proprietary transfer of the digital certificate of ownership is obtained using smart contract technology, which is a self-executing transfer of a digital asset using a blockchain protocol, predominantly on Ethereum. Smart contracts, in general, are programmed computer codes that execute certain actions when predetermined circumstances are materialized. Their similarity to traditional contracts is that the terms of the contract are still the foundation of the contractual relationship between the parties. Therefore, the terms of the smart contract will inter alia define the IP rights of each party.

The e-signature regime for the digital execution of legally binding contracts is covered by the “Regulation No 910/2014 on the electronic identification and trust services for electronic transactions in the internal market”. This legal framework provides for three types of e-signature, with the most advanced of them requiring a qualified signature creation device. Bearing in mind the Cypriot Law 55(I)/2018 "Providing for a legal framework for electronic identification and related issues", the third qualified type of signature has the equivalent judicial value of a handwritten signature.[3]

Ownership of Asset

The owner of an NFT acquires ownership rights of the digital asset they purchase, as a token in their token wallet. What needs to be clarified is that just as in a physical marketplace, the buyers earn the ownership rights, and not copyright nor reproduction rights, which remain to the seller, unless agreed otherwise by the NFT issuer on the terms of the contract.

Equivalent to this is the IP craze that occurred with the “Comedian” by Maurizio Cattelan (a.k.a “the banana duct-taped to a wall”), which auctioned for $150000. The buyers of the controversial artwork essentially bought the artwork’s certificate of authenticity in order to righ tfully display it, a banana duct-taped to the wall, as an authenticated and official piece by Cattelan. In particular, the owners can even loan the certificate to others, temporarily transferring to them their so-called “bragging rights”. In accordance with that, the owner of an NFT, which may be a real-life object or a digital piece of any sort, buys a unique version of an asset, acquiring the property rights of a non-interchangeable “token”. The actual substance of the asset may as debated as the one of the Cattelan artwork.

Personal Data Protection

The essential nature of blockchain is contradictory to personal data protection regulations. The vast majority of blockchain platforms are permissionless, which means that the ledger is public. The public availability and disclosure of the data, the “blocks”, contribute to the transparent and intriguing character of the blockchain ecosystem. Consequently, the compliance with the General Data Protection Regulation2016/679 (hereinafter GDPR) is certainly questionable.

One of the main principles of the GDPR is that the procession of personal data requires either the consent of the data subject or a legal basis (Art. 6 GDPR).The data of the users, that are being processed, are usually under pseudonymization and thus there should still be GDPR compliance. The consent of the parties in a smart contract-based transaction such as an NFT purchase at the present form is granted within sufficient prior awareness of the procession and exposure of the data after the initial acceptance. Given abstractly in advance, the data subject cannot track the process of their data nor acknowledge before hand the handling of them, especially if they are processed to the minimum required, in line with the range of the consent.

The decentralized form of a public blockchain, with no entity as a “data controller”, elevated every user in the network of computers of the blockchain as a controller. The cryptographic and multifaceted environment, in which NFTs are encrypted and purchased, is still legally under developed and personal data protection regulations have not been updated. Proposals regarding the technical specifications of the token’s blueprint, which is basically the design of the purchasable token, have advocated for the incorporation of the relevant legal requirements into the architecture of an NFT or cryptocurrency.[4]

Conclusion

Solely the NFT marketplace itself will demonstrate if this hybridform of an asset will be transmitted into other fields of investment or if the latest signs of decrease in demand will confirm the naysayers, who have been endlessly voicing their concerns about a bubble that will sooner or later pop. Only time will tell.

* Panayiotis Antoniades is Third-Year Law Student, University of Cyprus (panandoniades@gmail.com)

[1]Adam Chernichawm, Pratin Vallabhaneni, Shobha Lizaso ‘The Rise of NFTs – Opportunities and Legal Issues’ (White Case, 20 April 2021)<https://www.whitecase.com/publications/alert/rise-nfts-opportunities-and-legal-issues>accessed 15June 2021

[2]Robyn Conti, John Schmidt ‘What You Need To Know About Non-Fungible Tokens (NFTs)’ (Forbes Advisor, May 14, 2021) <https://www.forbes.com/advisor/investing/nft-non-fungible-token/>accessed15June 2021

[3]Stylianos Trillides, ‘Cyprus: The Validity Of Electronic Signatures Under Cyprus Law – COVID19’ (Mondaq Al,04 April 2020) <https://www.mondaq.com/cyprus/new-technology/909584/the-validity-of-electronic-signatures-under-cyprus-law-covid19>accessed 15June 2021

[4]Christian Wirth and Michael Kolain, ‘Privacy by blockchain design: a blockchain-enabled GDPR-compliant approach for handling personal data.’ [2018] Proceedings of 1st ERCIM Blockchain Workshop 2018. European Society for Socially Embedded Technologies (EUSSET)

 

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