What Are NFTs And How Are They Regulated? – Fin Tech

A Non-Fungible Token (“NFT”) is a type of
cryptocurrency asset that exists on the blockchain, which is a
network that supports different types of cryptocurrencies (for
more information on the blockchain, click here). NFTs are programmed in a way that
limits their tradability, and usability to the confinements of the
blockchain itself. In the context of NFTs, the blockchain serves as
a distributed database that has the ability to store data, with a
consensus mechanism which ensures that each new entry complies and
is compatible with previous records of the same data, in the same
database.

Tokens, which are digital assets that are built on another
cryptocurrency’s blockchain, are components of value linked to
digital properties. Likewise, tokenisation can exist in many
different of domains, from the well-known crypto-coin to equities,
securities, real estate, and contracts. The commonality, on the
other hand, was registered on a public blockchain, which means that
the digital infrastructure and standard of a blockchain determines
the token’s compatibility with such. Many NFTs already use the
Ethereum blockchain as a transactional platform. Furthermore, NFTs
differ from fungible tokens, that can be substituted with an
identical token and whose value may be traded. Fungible coins are
well-known in the form of cryptocurrencies, whereas NFTs are
non-divisible and separate from other depictions of a physical or
electronic commodity.

As already indicated, non-fungible token transactions involve a
blockchain-based infrastructure to function correctly, that
facilitates the underlying model that enables non-fungible token
transactions. Conversely, in order for NFTs to function as intended
on the blockchain, they must first be minted, which implies they
must be manufactured or generated before being recognized on the
Ethereum compatible blockchain. The produced NFTs are then
deposited on the same distributed network or blockchain,
demonstrating possession of the commodity in question.

What is the value of Artistic NFTs?

NFTs have swept the artistic sector, with electronically
preserved artworks being offered on the blockchain to clients. Even
though NFTs are non-fungible, they can also be sold online.

More significantly, NFTs validate art forms in its virtual form,
in which it uses a specific non-fungible encryption to identify
works of art, that renders them as distinct one-off works, creating
a demand comparable to tangible works of art.

Thus, when questions arise surrounding the originality and/or
legitimacy of an art piece, it is important to note that an NFT is
more inclined to be profitable; because it is difficult to recreate
and no two NFTs are identical, hence their popularity and
exclusivity are likely to expand.

However, irrespective of the market value, in addition to the
scarcity of an NFT as a piece of art, the question can be raised as
to whether NFTs hold any value at all. This question is
particularly valid when considering the legal enforcement of rights
that are associated with the ownership of an NFT. Although,
cryptocurrencies are slowly becoming regulated by
financial/governmental institutions around the world, the current
regulations in place do not define any legal enforcement over the
ownership of, or violation thereof, an NFT; ownership without the
means of enforcement is without value.

Legal Implications & NFTs

NFTs have the potential to be used to serialise property, but
not to symbolise financial instruments. Moreover, when minting
(‘Minting’ is the process of taking a digital asset and
converting the digital file into a digital asset, and storing it on
the blockchain) an asset, it is essential to consider the
quantity of rights granted to token holders.

Token holders, for instance, can have revenue privileges or
something equivalent. These assets will be classified as security
tokens and subject to applicable financial reporting framework. As
previously stated, NFTs hardly offer such privileges and typically
just provide access to potential resource or retaining future
compensation entitlements.

Therefore, generally NFTs will not confer any protections on the
purchaser against the issuer. Significantly, the issuer has no
choice control over the project, and the commodity flow is rarely
decipherable. Regardless of the fact that NFTs are fungible and
movable, NFTs are not tradable on organized market systems. As a
result, there are no legal channels for the circulation and
surveillance of the same.

Intellectual Property over NFTs

While possession of an NFT doesn’t quite imply possession of
an artistic creation, the applicability of IP rights over NFTs is
relatively minimal under the Central Bank of Bahrain’s current
regulatory framework. Furthermore, acquiring an NFT does not always
guarantee that you will receive the IP rights that are typically
associated with the purchase of unique commodities.

An NFT essentially functions as a virtual certificate in terms
of authorship over the goods, implying that the owner possesses a
rendition of a work in the form in which it was acquired.

Obtaining intellectual property rights within the context of
NFTs might also be problematic due to the prospect of extended
legal analysis/debate. Despite the benefits of digital property,
NFTs are not flexible enough to eliminate misconceptions of
tokenization and the rights that are commonly associated with
it.

NFT as a Legal Instrument

The potential utility of using NFTs for filing/maintaining
public papers is easy to see, but it is difficult to foresee how a
blockchain solution adds much value to those initiatives already in
place. The current system in place for the storage and regulation
of such is centralised, and to revert the whole system to a
decentralised one would be a difficult task to plan, let alone to
achieve and implement efficiently. In any event, it would be a
large-scale task for any one network to take on these large-scale
initiatives, but that isn’t to say it isn’t feasible.
Within the present institutional framework it would be very
unlikely to be able to deploy a ready-made system that would
operate across the GCC, and even more so across the various legal
jurisdictions around the world.

In addition, in various jurisdictions, the monitoring system may
vary, with officials legally approved to do distinct tasks.
It’s a significant challenge to address, and with institutional
inertia as it is, it is unlikely that we will see much
NFT/blockchain adoption in the legal sector. However, if a protocol
can effectively sell and implement the notion, it will be granted
the authority to issue money within this framework.

Final Remarks

Control over such digital commodities within the blockchain is
still in its early stages. As a result, it is vital to consider
whether a specific NFT conforms with the CBB’s relevant
Anti-money laundering and financial legislation. Regardless of this
preceding condition, as illustrated above, the legal rights
associated with NFTs are ambiguous, and no present framework exists
to defend the privileges of digital ownership as compared to
physical ownership of a tangible asset. NFTs are just an expansion
of crypto, with the exception that they do not even claim to be a
financial instrument. It employs the same technique to provide
false exclusivity and collectability to a limitless supply of
otherwise free downloadable commodities. Furthermore, NFTs do not
ensure licensing rights. There are currently legal avenues for
getting comprehensive distribution privileges (copyright laws,
permissions, and royalty revenues) at reduced rates when compared
to those offered by NFTs, hence it is a fundamentally flawed
concept when considering them from a legal perspective.