New applications of cryptocurrency and blockchain technology called non-fungible tokens (NFTs) are a hot topic in Taiwan. But currently, there are no regulations specifically addressing their rise and development, and the regulator does not seem to have revealed any official view on the trend.
From a local perspective, the classification of any NFT and related activities or transactions should be determined on a case-by-case basis, referring only to existing laws and regulations.
SECURITIES AND FINANCIAL LAW
NFTs are commonly structured to represent digital artworks, musical works, collectables, sports cards and photo albums, and their classification would depend on the structure and linked assets or interests, among other factors.
In November 2021 and March 2022, Huang Tien-Mu, chair of the Financial Supervisory Commission (FSC), remarked that NFTs are considered art creation, so their sale offering should not be deemed virtual currency. He also indicated that whether NFTs should be regulated in the future would depend on factors such as their implications for financial stability, among other things.
So, it seems to be that if NFTs represent “art creation” they should not be regulated by existing financial laws and regulations.
The authors consider it less likely that NFTs would be deemed to be securities or any other financial instrument falling under existing financial instruments regulation, as long as the NFT is linked to (or represents) a unique underlying asset; and there are not multiple NFTs linked to or representing the same asset.
However, due to the possible investment character of NFTs, the applicability of financial law and securities regulations still cannot be completely ruled out.
Interestingly, in July, the FSC expressly prohibited local acquiring banks from allowing local credit cards as a means of payment for virtual assets and, accordingly, local acquiring banks should not accept virtual asset service providers as contracted merchants for the purpose of credit card transactions. The arising issue would then be whether virtual assets should be interpreted to include NFTs.
The authors understand there have been certain discussions between relevant blockchain/crypto industry players and the FSC and local bankers’ association in this regard. But even if the FSC held the view that NFTs should not be covered by the virtual assets prohibition – as if they simply represent, say, art creation or coupon, and do not have the nature of investment – in practice, it may not be easy for a local acquiring bank to confirm whether any NFT has the nature of investment.
So, whether a local acquiring bank will accept an NFT-related service provider as a contracted merchant for credit card transactions should still depend on the bank’s internal assessment and decision on a case-by-case basis.
NFT HOLDER RIGHTS, INTERESTS
Ownership of NFT assets depends on the structure and underlying asset. For example, after a transfer of an NFT representing a digital artwork to the purchaser, the purchaser as the NFT owner has access to the underlying asset. But this does not mean automatically obtaining ownership of the content of the underlying digital artwork.
Depending on the terms and conditions, the NFT purchaser might only be entitled to view the digital artwork, and does not acquire ownership in any form (e.g. any electronic files of the artwork).
For any NFT designed and intended to represent any physical asset – take sneakers as an example – the issue may be whether the NFT transfer would equate to transfer of the sneakers to the transferee. If yes, Taiwan’s Civil Code would view the transfer as similar to a claim against the warehouse operator with which the sneakers are deposited. The purchaser of an NFT may want to carefully assess and understand all the legal rights, titles and interests in and to the NFT before making the decision, from the perspectives of the NFT itself and the assets and/or interests linked to it.
NFT creators or issuers may want to specify the rights the holder would acquire in the offering terms (or equivalent to it), focused on accuracy of product descriptions and warranties, as well as avoidance of over-promise.
For example, the terms should not suggest offering a form of digital ownership behind the NFT when in reality the holder merely has the right to view the asset and does not own the content. Otherwise, civil or consumer disputes or even criminal liability might arise.
In practice, it is also expected there will be NFT marketplaces, platforms or exchanges where NFTs can be listed and traded. Similar to ordinary electronic commerce platforms, standard terms and conditions for these marketplaces should specify the rights and obligations of registered users or members.
Before launching or permitting the listing of any NFT, marketplace operators need to carry out necessary due diligence investigations, commercial and legal, to avoid potential liability due to any law violation or third-party claim by the creator or issuer. Agreement between the marketplace operator and creator or issuer might need to clearly state the division of liabilities that may arise.
An offering of NFTs and access to underlying assets might also be exposed to technology risks such as security breach, unauthorised intrusion by hackers, service disruption or technical malfunction of relevant networks, which may even cause unavailability of the offering. NFT creators and marketplace operators may want to address the risks by incorporating reasonable disclaimers, to the extent that applicable laws permit.
IP rights, especially copyright, can be a critical issue for NFTs if the underlying assets involve artworks, photographic works, musical works and recordings. NFT creators or issuers would need to obtain necessary licences or authorisation from the IP owners before issuing any NFT.
NFT marketplace operators may need to conduct relevant checks to mitigate the associated risks. It is important to ensure under marketplace terms that NFT holders hold and exercise only relevant rights and use of the NFT, and do not infringe any third-party rights, specifically IP rights.
METAVERSE AND NFTS
The Metaverse, a term combining the prefix “meta”, meaning beyond, and “universe”, generally refers to highly interactive virtual worlds or digital spaces accessed with technologies such as augmented reality (AR) or virtual reality (VR), and specific devices such as VR headsets and AR glasses. NFTs are perceived as a crucial element of this metaverse. For example, in traditional gaming, players pay to buy in-game assets, while most in-game assets are merely licensed to players, and can even be revoked by publishers. Some industry players believe this can be addressed by tokenising the assets and creating gaming NFTs so the concept of portable game assets – in-game assets that can be brought off the game or transferred across multiple platforms – can be made possible.
From a legal perspective, if this is the real intention of the game publisher, then the publisher might need first to amend the terms applying to the game so that an NFT purchaser may really “own” the underlying game asset, depending on the structure of the NFTs. Also, as the original game assets are subject to applicable terms and licences granted by the publishers, an agreement between publishers may be needed to allow the game assets to be portable or transferable between different platforms, or between games.
With respect to digital currency platform operators and transactions, the latest amended anti-money laundering law (AML) law has brought virtual currency platforms and trade businesses into Taiwan’s regulatory regime, under which enterprises falling within the designated scope will be subject to relevant rules applicable to financial institutions.
In April, the Executive Yuan (cabinet) issued the AML Ruling, which interpreted the scope of enterprises in virtual currency platforms and trading businesses. The FSC followed it by promulgating AML Regulations governing the law and countering financing of terrorism for enterprises of virtual currency platforms and trading businesses. According to the regulations, designated operators of crypto-asset platforms and trade businesses are required to establish internal control and audit mechanisms, reporting procedures of suspicious transactions and know-your-customer procedures, among others. Both the ruling and regulations took effect in July 2021.
It is unclear whether NFT market players fall within the designated scope described under the AML Ruling. The key issue will be whether the term “virtual currency” under the ruling will also be interpreted to cover NFTs. If yes, then relevant market players – especially marketplace operators and any business operators providing NFT custody-related services – will be obliged to follow the AML Regulations and perform the above-mentioned obligations.
The authors believe this will substantially increase compliance costs for relevant NFT market players. Considering that in practice trading NFTs might involve a massive amount of money, which may to some extent justify any potential AML obligations, industry players are well advised to follow the regulatory trends closely.
Lee and Li
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