Deng Jianpeng of central finance: Legal Problems and Countermeasures of NFT

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author | Deng Jianpeng (Professor of the Law School of the Central University of Finance and economics, director of the Research Center for the rule of law in financial technology and doctoral supervisor)

Wu blockchain release authorization

1ใ€ Characteristics and value potential of NFT

Since 2020, non fungible token (also known as non fungible token in English, the industry referred to as "NFT") has been in full swing in the field of global digital works. The so-called NFT is a virtual asset generated by a specific program on the blockchain platform and confirmed the ownership and authenticity of the rights of digital works with the information recorded based on the non reproducible and indivisible pass issued by the technical standard protocols on the chain (such as erc-721, erc-1155, dgoods, etc.). In addition to the famous public chain Ethereum, other blockchains such as flow, Boca and wave field have also begun to provide support for NFT projects in recent years. NFT is opposite to the concept of homogenization token (such as bitcoin). Its "non fungible" feature makes each NFT different. It has a unique digital ID to record the creation time, transaction records and other personalized information of NFT. Different from homogenization token such as bitcoin, each NFT is unique, which makes NFT a unique way to define the ownership of rights of different digital works It is an excellent cutting-edge technology and new carrier to prove its authenticity and reflect its scarcity.

NFT records the ownership information and transaction process of mapped digital works, which helps to solve the problems of unclear ownership and rampant piracy of digital works for a long time. NFT can be mapped with digital assets that are easy to copy, such as digital music, digital images and online game equipment. It is equivalent to providing a unique "digital certificate" for each digital asset. NFT solves the difficulties of easy tampering, copying and unclear ownership of digital assets. NFT also records every transaction behavior, and all transaction processes can be queried on the blockchain. It can even be preset through the program of smart contract to ensure that the original creator can obtain continuous copyright income every time the digital works are resold afterwards. NFT can take advantage of the openness, encryption and decentralization of blockchain to protect the legitimate rights and interests of artists, collectors, content creators and buyers.

Driven by the popularity of NFT, domestic well-known Internet companies have "tested the water" to sell NFT products since 2021. Domestic well-known NFT selling platforms, such as, sell seven NFTs in one set, which respectively mark the six theme forums of JDD conference with different joy images. Tencent and Alipay play in a variety of ways. The ant chain of Alipay first tried to sell a digital torch NFT, with a limit of 20000 copies, which will be sold out in a short time; Then launch products jointly with travel frog and zhenhun street; After that, the science fiction card series was launched. There are 16 cards in the set to form a series, in which the back of each card is endorsed and signed by a well-known science fiction writer. The 72000 NFTs issued by Tencent to employees are "Penguin head" pictures, which are mixed and matched with several elements.

Stimulated by the great influence of NFT, some news and cultural and Expo institutions cooperate with some well-known distribution platforms to enter NFT. For example, Xinhua news agency released China's first set of "News Digital Collection" (i.e. NFT). This set of "News Digital Collection" records many precious historical moments in 2021, including digital memories in the meta cosmic world. The national treasure "Changxin palace lantern" in the collection of Hebei museum was also transformed into NFT digital collection, which was launched in the ant chain of Alipay, with a limit of 10000 pieces, and was quickly snapped up. Henan Provincial Museum launched its first digital collection, "women's good owl statue", which is also limited to 10000 pieces. This popular IP has huge traffic and is also quickly snapped up. In order to promote ice and snow sports and cheer for the Beijing Winter Olympics, the National Palace Museum launched a series of NFTs of "ice and play in the national tide Palace Museum" at the end of 2021, which were sold in the form of "blind box", in which the "Winter Olympics in the national Palace Museum" was displayed in front of everyone based on the painting "ice and play in the National Palace Museum". In addition, the concept of "meta universe" has been popular since 2021, and some industry experts even predict that "meta universe" will become the growth point of the next digital economy explosion. Since the second half of 2021, many local governments in China, including Shanghai, have launched the "yuanuniverse" industrial development policy. NFT is likely to provide the economic system in the "3D Internet" of "meta universe" with the definition of the property rights of various digital assets (such as virtual plots, digital paintings or digital music in the "decentraland" or "sandbox" popular projects of meta universe in recent years), so as to provide technical guarantee for the circulation, transaction and even pledge financing of various digital assets in the future. Its importance and potential value can be seen!

2ใ€ Legal issues of NFT

NFT has received unprecedented attention in recent years, but its application also has many legal problems, which deserve great attention. Some NFT transaction prices have broken through people's inherent imagination of digital works. For example, in 2021, Christie's auctioned the digital work "every day: the first 5000 days" by painting artist beeple for a sky high price of $69.35 million. This huge wealth benefit has caused incredible repercussions, stimulating some well-known artists to enter the NFT market one after another, and the NFT prices of some popular digital art works are considerable. However, for example, Jos รฉ DELBO was warned by the lawyer of DC company who owned the works due to the unauthorized distribution of NFT digital works with the image of "Wonder Woman". In July 2021,, a famous Chinese media, announced that the pictures in its report "developing China bid farewell to bitcoin" mining "were original photographic works, and some people uploaded the works and adapted versions of the works to opensea and other international mainstream NFT trading platforms for sale without authorization.

(Caixin pictures of NFT being cast and sold without authorization)

In this regard, this paper attempts to analyze the legal attributes of NFT and the legal issues related to the mint, sale and purchase of NFT digital works, so as to provide some preliminary suggestions for the steady development of the industry.

As for NFT itself, we believe that NFT is a digital asset with objective value and should be treated as a property right to be protected. NFT is a virtual object generated under the blockchain network environment and belongs to the legal civil right object of "network virtual property". Article 127 of China's civil code clearly stipulates that online virtual property is a type of property protected by law, but this article is only a declarative provision, and there is still uncertainty about the judicial protection of virtual property. According to the existing legal principles and the characteristics of NFT, we believe that NFT should be protected by law as a real right. The reason is that the NFT holder can control the NFT to the world, absolutely and exclusively by mastering the private key, which is in line with the legal principle of "one thing, one right" and the dominant requirements of real right. Secondly, the non homogeneity and uniqueness of NFT make it meet the specific requirements of the object of real right.

NFT has secondary market trading and liquidity. NFT and the mapped digital works are two different assets. Therefore, the rights of the holder to the digital works linked by NFT depend on the contract agreement of the seller. Unlike NFT, its mapped digital works are generally not stored on the blockchain because the storage cost of the blockchain is quite high. When buyers buy NFT digital works, they actually get a link in NFT, which points to the storage location of the digital works, such as a website of a third-party Web page or the storage device of a company. It is understood that NFT and its corresponding digital works are independent of each other, so that both parties to the transaction should accurately understand what the transaction object is.

The distributor of NFT refers to the institution or individual that casts NFT and distributes NFT digital works to the market. The compliant NFT casting and sale shall first obtain the complete rights of the digital works mapped by the NFT or the legal authorization of the original obligee. Therefore, when purchasing NFT, the buyer should carefully read whether the seller has obtained such authorization. For example, whether the seller publicizes the copyright registration certificate of digital works on its platform, or whether it publicizes the written authorization certificate of the creator of digital works or the certification document of a notary public, and so on. Without these legally authorized information, the buyer should be highly cautious about the NFT of its digital works. For the creators of digital works, even if they sell their own works, they still need to find out whether they have the right to sell them. If it is a job-related work, it is likely that the ownership of the work it sells belongs to the organization it employs. At this time, the sale of NFT by the originator may constitute infringement.

Secondly, buyers should also know what rights they will get after purchasing NFT. The types of digital works mapped by NFT mainly include music, animation images, portraits of well-known figures or some text content with historical significance (such as the first page of the Journal of democracy and Science). Most of the above digital works are subject to the norms of copyright law (some involving portrait rights and other relevant civil laws), and copyright is essentially a "bundle of rights" involving more than ten rights. Therefore, the buyer should know which one or more of the copyright rights it will obtain. Ant chain vermicelli has been limited to four NFT payment code skins, such as "Dunhuang Flying sky" and "nine color deer". The seller stipulates that these NFT payment code skins can be used in the specific business scenario interface to display, learn, appreciate, research and download compressed pictures of corresponding digital works. For example, it can be used as the payment code skin launched by Alipay, but it is stipulated that these NFT works cannot be used in other commercial channels, let alone to bid up and hype prices. Tencent released the NFT trading app magic core in 2021 and launched the NFT product "limited edition thirteen invited vinyl record NFT". Its NFT uses Tencent's own Zhixin chain and has a unique logo. In order to prevent users from hyping, NFT sold by magic core cannot be traded in the open market. At present, users only have the right to display and share for the time being.

In contrast, some foreign distributors grant Buyers rights with a wide range of connotations, such as the world-famous popular digital work boredape Yacht Club NFT (the industry is referred to as "bayc", commonly known as "boring ape" in China). The original obligee allows NFT holders to use, copy and display the specific artistic works they have purchased to create derivative works based on artistic works, such as producing and selling t-shirts displaying artistic works, etc, The authorized rights are very broad by comparison. In addition to the content of digital works, the size and amount of rights granted may directly affect the market price and future appreciation potential of the NFT.

NFT may purchase more than ten rights of copyright, adaptation or digital translation, or may obtain more than one of these rights. At the time of sale, ant chain made it clear that its NFT series payment code skin only allows buyers to appreciate, collect and display within a limited range, and can not be traded in other secondary markets like commodities and cryptocurrencies, which greatly reduces the possibility of market speculation, but at the same time means that the potential for price appreciation of digital collections has been compressed. If the buyer enters the market with too much speculative mentality, it may conflict with the rules of issuing and selling the seller, and finally return disappointed. Compared with overseas NFT artworks that have been sold at sky high prices, the domestic digital collection NFT deliberately wants to avoid price speculation from the time of sale. Some NFTs are also attached with strict use restrictions. The proportion can not be circulated within half a year, can be donated, but can not be traded, etc. The user agreement of Jingdong's "Lingxi" platform stipulates that users who buy its products can only use digital works for research, display, appreciation and collection, but can not use digital collections for speculation, trading or use in any illegal form. "Lingxi" said that it will adjust its available functions at any time in accordance with laws, regulations and business changes.

For the buyer, it is necessary to review all kinds of prior agreements and "offering qualification" of the seller. NFT technology ensures the authenticity of the original digital assets on the chain, ensures that the digital works are not tampered with in the circulation link, and the transaction records can be traced, but it cannot guarantee that there is no risk in the casting and sale link. At present, the digital works mapped by NFT sold on some platforms at home and abroad lack necessary links such as copyright registration and publicity or authorization of the original right owner. The legitimacy of this kind of NFT is in doubt. Therefore, buyers should be highly cautious when purchasing to avoid unnecessary loss of personal property due to the purchase of NFT that is not protected by law.

3ใ€ Ways to deal with legal issues

Although NFT has been popular with some investors in recent years, there are huge foam and many risks. Both regulators, offering platforms and buyers should pay attention. First of all, market regulators should be vigilant against the phenomenon of hyping NFT, timely release some risk tips, and punish illegal hype, especially NFT sellers suspected of illegal sales and fraud according to law.

Secondly, the selling platform should strictly abide by the copyright law, the consumer rights and interests protection law and other laws and regulations, verify and ensure that the sold NFT is legally authorized by the original obligee, and have a clear prior publicity on various restrictions on NFT selling rights, so as to protect the rights of buyers (consumers). In recent years, some selling platforms at home and abroad have not verified the true identity of registered users, or failed to review the legitimacy of NFT content sold, resulting in the platform being jointly and severally liable by the court. This risk may increase in the future.

Thirdly, NFT on domestic sales and purchase platforms mostly uses cryptocurrency (such as Ethernet) as a payment tool, which provides convenience for money laundering through NFT transactions. China's offering platform should strictly follow the anti money laundering rules to avoid such legal risks.

Finally, in recent years, China has strengthened its strict regulatory policy in the field of blockchain finance. Under this policy, China actually encourages the promotion of alliance chain (or private chain) technology. Unlike Ethereum and other public chains, the alliance chain and private chain are relatively closed blockchain systems, which are self-contained and have not established close contact with the international mainstream blockchain technology. NFT of phantom core and whale fall (also known as "digital collection") are issued in their respective alliance chain (or private chain). The metadata of digital works mapped by NFT of these distribution platforms is likely to be hosted in a centralized server. This means that if the specific company to which the server belongs stops operation or fails, the content of digital works pointed by NFT may no longer exist, resulting in the specific NFT may be worthless and the cornerstone of rights will be lost. We suggest that the above institutions should consider storing the issued NFT metadata in a decentralized storage network to protect the rights of buyers.

According to the "notice on further preventing and dealing with the speculation risk of virtual currency trading" issued by the central bank and other departments, the content of this article is only used for information sharing and does not promote and endorse any business and investment behavior. Readers are requested to strictly abide by the laws and regulations of their region and do not participate in any illegal financial behavior. Wu said that the content is prohibited from reprinting and copying without permission, and violators will be investigated for legal responsibility.

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