With the skyrocketing popularity of NFTs in 2021 and many well-known celebrities joining in on the NFT craze, many other artists and consumers have rushed in to take part in the action. However, the relative novelty of NFTs has raised a host of legal issues, many of which have yet to be resolved. Below is a short summary of some of the more common legal issues that NFT minters, sellers and buyers should keep in mind when dealing with NFTs, as identified by Boodle Hatfield LLP.
It is believed by many that the purchaser of an NFT also automatically acquires the copyright in the actual digital work. This, however, is not the case. What the purchaser is actually acquiring is metadata, a collection of code written into the blockchain which contains information about where the original work is located and who owns it. The only rights of the NFT holder are to sell, lend or transfer the NFT. How this is done also depends on the specific terms of the NFT Marketplace where the purchase is made.
2. Smart contracts
Smart contracts are digital contracts, the terms of which are written into the code of the token. While the obligations embedded in smart contracts are self-executing, there is no consensus on whether smart contracts are legally binding, given the overall lack of case law, legislation and regulations. Moreover, because smart contracts usually operate alongside a Marketplace’s text-based T&Cs, consumers may become confused if the terms of the smart contracts and T&Cs don’t match up.
3. Money laundering
The huge sums of money being spent on NFTs has given rise to concerns that these transactions are being used as loopholes to anti-money laundering regulations. The fact that NFTs are easy to trade (given the lack of physical artwork) coupled with the decentralised nature of cryptocurrency (which allows for a high level of anonymity) further fuels these suspicions.
4. Estate and succession planning
Something that digital asset owners should consider is how their NFTs will be dealt with upon their deaths. The key issue here is related to how the NFT will be accessed upon death, since NFTs can only be accessed by a unique personal key and password. Owners should take steps in accordance with their local estate planning laws to mitigate the risk of their assets being lost forever.
There is a lack of NFT-specific tax guidance globally, but one key issue is determining where the NFTs are situated. Depending on the tax regime, cryptocurrencies may be taxed in the place where the beneficial owner is resident, although in general, the law is pretty unclear on this point.
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