New applications of cryptocurrency and blockchain technology called non-fungible tokens (NFTs) are a hotly discussed topic in Taiwan. Currently, there are no regulations specifically addressing the rise and development of NFTs in Taiwan, and the regulator does not seem to have revealed any official view on this trend.
From a local perspective, the classification of any NFT and related activities or transactions should be determined on a case-by-case basis, and one can only resort to existing laws and regulations to analyse the same.
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 the linked assets or interests, among other factors. It is less likely that an NFT would be deemed to be securities, or any other financial instrument that falls under existing financial instruments regulation, as long as the NFT is linked to or represents a unique underlying asset, and there would not be multiple NFTs that are linked to or represent the same asset. However, we still cannot completely rule out the applicability of financial law and securities regulations due to its possible investment character.
NFT holder rights, interests
Ownership of NFT assets depends on the structure and the 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 that the purchaser automatically obtains 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 its 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 mean the 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. The NFT creators or issuers may want to specify the rights the NFT holder would acquire in the offering terms (or equivalent to it), with a focus on the accuracy of the product descriptions and warranties, as well as the avoidance of over-promise. For example, the terms should not suggest to offer a form of digital ownership behind the NFT, while 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 that there will be NFT marketplaces, platforms or exchanges where NFTs can be listed and traded. Similar to ordinary electronic commerce platforms, the standard terms and conditions for these marketplaces should specify the rights and obligations of the registered users or members.
Before launching or permitting the listing of any NFT, the marketplace operators need to carry out necessary due diligence investigation, commercial and legal, on the NFT to avoid any potential liability due to any law violation or third-party claim by the NFT creator or issuer. The agreement between the marketplace operator and the NFT creator or issuer might need to clearly state the division of liabilities that may arise.
An offering of NFTs and the access to the underlying assets might also be exposed to technology risks, such as security breach, unauthorised intrusion or breach by hackers, service disruption or technical malfunction of relevant networks, which may even cause the 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 the necessary licences or authorisation from the IP owners before issuing any NFT.
The NFT marketplace operators may need to conduct relevant checks to mitigate the associated risks. It is important to ensure under the NFT and marketplace terms that NFT holders hold and exercise relevant rights and use of the NFT, and that they would not infringe upon any third-party rights, specifically IP rights.
Metaverse and NFTs
Metaverse, a term that combines the prefix “meta”, meaning beyond, and “universe”, generally refers to highly interactive virtual worlds or digital spaces that can be accessed with technologies such as augmented reality (AR) or virtual reality (VR) and specific devices, such as VR headsets, AR glasses, etc. NFTs are perceived as a crucial element of it.
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 that this can be addressed by tokenising the in-game assets and creating gaming NFTs so that 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 the 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 (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 the relevant rules applicable to financial institutions.
In April, the Executive Yuan (the cabinet) issued the AML Ruling, which interpreted the scope of enterprises in virtual currency platforms and trading businesses. The Financial Supervisory Commission (financial regulator) followed it by promulgating the regulations governing anti-money laundering and countering the financing of terrorism for enterprises of virtual currency platforms and trading businesses (AML Regulations).
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 (KYC) 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 to perform the above-mentioned AML-related obligations.
The authors believe this will substantially increase the compliance cost of 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.