Changing Paradigm of NFTs: littlefish Action NFT
TLDR;
This document discusses the changing paradigm of NFTs, including different types of NFTs such as Collectible NFTs, Art NFTs, Utility NFTs, and Payment NFTs. It also explores the legal status of NFTs, particularly in relation to intellectual property and copyright aspects. The document further examines jurisdictional differences in the United States, the European Union, and Turkey and highlights the role of metadata in NFT transactions, including its implications in terms of IP rights, licensing, authenticity, agreements, validity, data privacy, and liability. The document concludes with an overview of Littlefish Action NFTs and their legal considerations, including intellectual property rights, tax consequences, and different sale methods. However, it is important to note that this document provides general information and does not constitute legal advice.
I. Introduction
NFTs are a sophisticated and compelling concept that can be seen as a certificate of ownership of digital or physical assets in a secure, blockchain-based marketplace. Essentially, blockchain technology is a decentralized database that tracks transactions, and NFTs are cryptographic assets that employ unique codes and metadata to distinguish one from the other. Since they are non-interchangeable, they cannot be replaced by identical copies, and this makes them a powerful tool for establishing ownership of digital creations. These unique digital tokens can be traded on digital platforms, enabling artists worldwide to sell their creations while retaining control over their copyrights.
II. Overview of Non-Fungible Tokens (NFTs)
NFTs are a relatively new addition to the crypto asset ecosystem. However, they are attracting even more attention than their predecessors. Like many other types of crypto assets, NFTs generally lack a legal definition. This causes some hesitation within the ecosystem. Although there is no uniform legal definition of NFTs, some prominent features may be used to tell what NFTs really stand for.
A. The Definition and Characteristics of NFTs
Non-fungible tokens (NFTs) are unique, indivisible, and non-interchangeable digital assets that exist on a blockchain. They may be used as useful tools to represent ownership of a particular digital or physical asset, such as artwork, music, videos, collectibles, virtual goods, or real estate. The main characteristics of NFTs include their uniqueness, provable scarcity, and ability to be transferred and traded on various platforms.
B. Underlying Technology of NFTs: BlockChain
NFTs are considered secure, transparent, and immutable like other crypto assets. To ensure these features, NFTs are built on decentralized blockchains that record transactions across multiple databases such as computers. This makes it almost impossible to alter or tamper with the data. Most popular NFTs are built on the Ethereum blockchain, which utilizes ERC-721 or ERC-1155 tokenization standards. However, Ethereum isn’t the only blockchain that enables the minting of NFTs. Other blockchains, such as Binance Smart Chain and Cardano, also support the minting of NFTs.
C. Real World Applications of NFTs
i. Art NFTs
Artists now may tokenize their physical or digital work. The tokenization of a work plays an important role in determining the uniqueness of a work. They primarily provide the ensurement of authenticity. Artists sometimes have a hard time getting the royalties they are actually entitled to. It is possible to set up a royalty system integrated into the NFT that enables the artists to earn a royalty due to the transactions of their work in the secondary market.
ii. Collectible NFTs
NFTs can be used to represent digital collectibles such as trading cards, virtual pets, and limited-edition items. These one-of-a-kind digital artifacts range in rarity and worth. These collectibles are frequently exchanged on specialized marketplaces and have the potential to increase in value over time.
iii. Gaming NFTs
NFTs in gaming enable the ownership and trading of in-game assets such as skins, weapons, and characters. This gives users full ownership of their digital things, allowing them to trade or sell them in secondary markets.
iv. Utility NFTs
Utility NFT’s main feature is that they give their holders rights, such as accessing certain products and services. Contrary to Collectible NFTs and Art NFTs, Utility NFTs aim to offer their holders some practical use. The certain practical use depends on the utility that the NFT has to offer. For example, some Utility NFTs enable their holder to have access to some exclusive content. Some Utility NFTs may be considered as symbol membership to certain clubs or platforms. Holders of such Utility NFTs may be considered partners or shareholders and, therefore, held liable for the debts and obligations of such entity or partnership.
v. Payment NFTs
Compared with other NFTs, Payment NFTs are a relatively new concept. NFTs’ nonfungible features may seem challenging to use as a means of exchange. However, the nonfungible feature of NFTs may be useful in providing customized digital currencies, which can be essentially used in loyalty or reward programs. These Payment NFTs may be used by companies or foundations to incentivize the members of their ecosystems. Companies and foundations may use Payment NFTs to build and strengthen loyalty and engagement.
III. Legal Status of NFTs
A. Current Legal Landscape
Although there is serious legislation in progress concerning crypto-assets and blockchain technology in different jurisdictions, currently, no legislation exists or is in the preparation process that exclusively targets NFTs. However, this does not mean that there is no applicable legislation to NFTs. It is important to emphasize that relevant laws and regulations may be applicable to NFTs, even if they do not explicitly mention them. Intellectual property law, consumer law, contract law, tax law, securities law, and CFT and AML regulation may be found applicable to NFTs and transactions involving them.
C. Intellectual Property and Copyright Aspect of NFTs
NFTs are not to be considered artworks, as they serve the purpose of recording the creation and ownership of an asset that may, in fact, be an artwork. Rather, NFTs are a tool of cryptography governed by a smart contract. Utilizing blockchain technology, this contract verifies the documents the existence and ownership of both digital and three-dimensional assets.
As an NFT buyer, you gain full control over the smart contract that governs the functions of the NFT. This contract registers your ownership on the blockchain, providing indisputable evidence of your possession of the asset associated with the NFT, whether it’s a stunning artwork or a valuable piece of property. It is important to note that while owning an NFT doesn’t grant you copyright or control over the artwork automatically, it’s still a powerful investment in today’s NFT industry and crypto community.
Copyright safeguards “the work,” but it is not synonymous with the creation or expression conceived by the author. This distinction is vital in understanding why NFTs do not inherently confer copyright. It is worth noting that the copyright is an autonomous property distinct from the work it protects.
i. Copyright ownership of NFTs
It is widely accepted by the United States and the world at large that, from a legal standpoint, copyright is a distinct form of property from the object or file that contains the protected work. This is because copyright entails several individual rights that can be exercised or sold separately. It is crucial to note that the object containing the work can be sold independently of all the copyright rights.
When purchasing digital art, it is important to note that unless the copyright is transferred to the buyer, they cannot make copies or derivative works of the original. Additionally, they cannot prevent others from making copies, whether authorized or not. However, owning an NFT linked to the artwork still designates the buyer as the registered owner of the original copy. Obtaining the copyright to the artwork can provide the buyer with several attractive rights, such as the right to copy, sell, and distribute the work. This is especially important if the art is to be used in future projects or activities that require copies to be made. By owning the copyright, the buyer can have a say in preventing unauthorized copying of both digital and physical art.
As a result, when someone purchases an NFT, they do not automatically obtain the copyright of the underlying asset linked to the NFT. NFT and its underlying asset are two separate, distinct things. In order to obtain copyrights of the underlying asset, there has to be an explicit written transfer between the copyright owner and the obtainer. Thus, purchasing an NFT does not mean that you obtain the copyright.
iii. Resale Royalties
NFTs represent a groundbreaking technological advancement, particularly in the art communities, as they provide a means for artists to receive resale royalties. By incorporating a royalty payment system directly into the NFT’s underlying “smart contract,” artists can rest assured that they will receive a ten-to-twenty percent cut of any future resales. This automated process eliminates the need for purchasers to comply with individual royalty agreements and ensures that payments are promptly delivered to the artist’s digital wallet. Overall, NFTs offer an elegant and persuasive solution for promoting fair compensation within the art industry.
Royalty is a right granted to authors of the copyrightable work. Authors are entitled to have a percentage of the resale of their work. NFTs constitute a reliable way of enabling authors to track the ownership of their work, therefore the royalty they may be entitled to.
C. Jurisdictional Differences
i. USA
In the United States, there are no specific laws regulating NFTs. However, this doesn’t mean that there is no applicable law to cases regarding NFTs. Existing laws such as intellectual property, contract, tax and securities law may be applicable to NFTs depending on the specific case. If a NFT is eligible to be considered as a work, then, intellectual property law regulations may be applicable. On the other hand, digital assets such as NFTs and other crypto assets may be accepted as property by the Internal Revenue Service. As a result, NFTs may be subjected to taxation such as capital gains tax.
When determining whether something is a security or not, the criteria stipulated in the Howey Test are used. It is unlikely but if a NFT is deemed a security, then, securities law may be applicable. It is important to evaluate NFTs in terms of investment contracts. In terms of the USA, in order to treat a NFT as a security, the Howey test shall be passed. According to this test, there shall be investment of money, investors shall be expecting to receive profits and this expectation of profit shall be due to the essential efforts of other people. If these criterias are met, then, a NFT, as well as anything, may be deemed a security.
ii. European Union
The main legislation in the European Union is the Markets in Crypto Assets (MiCA) Regulation. Even though MiCA offers a great clarity and foreseeability to crypto asset ecosystems, this regulation clearly states that it excludes crypto assets that are unique and non-fungible with other crypto assets. As a result, it is safe to say that as a rule, MiCA will not be applicable to NFTs.
The fact that MiCA is not applicable to NFTs in principle does not mean that there is no applicable law to NFTs in the EU. There are important regulations such as GDPR and 5th and 6th AML Directives that have to be followed. If a NFT involves personal data, then, GDPR can be applicable. Moreover, if necessary, KYC and AML regulations can extend to the NFTs.
In terms of intellectual property law, the EU, in general, recognizes copyright of digital assets. NFTs that have a copyrightable matter, may be subject to intellectual property laws of relevant jurisdiction, which in fact vary.
iii. Türkiye
It has been known for a long time that Türkiye has been working on introducing a new legislation regarding crypto assets. However, as of May 2023, there is still no specific legislation that exclusively targets NFTs or other crypto assets. Nevertheless, general rules and principles of law and relevant legislations are applicable to NFTs.
Just as classic works, digital versions of works are copyrightable in Türkiye. If a NFT involves a copyrightable work, then, Turkish intellectual property law rules will be applied.
V. Metadata and its Role in NFT Transactions
NFT metadata is the digital information associated with an NFT that provides details about the digital asset that is represented by the NFT. Metadata is a crucial part of NFTs and includes various types of data such as text, visuals, audio, links, and cryptographic signatures. This metadata provides important information about the NFT, including its title, creator information, creation date, and other attributes that define its uniqueness and value. It helps with identifying, verifying, and interpreting the digital asset associated with the NFT.
NFT content can include physical or digital items such as tweets, music videos, images, documents, artworks, and even immovable property. These items can be tokenized as NFT, and the multimedia file within can have various extensions like .png, .jpg, .mp3, .pdf, .mp4.
The intricacies of metadata within the realm of NFTs can be quite intricate and encompass a variety of legal domains such as intellectual property, contract, and data protection laws. It is imperative to take note of the following legal factors when dealing with metadata.
A. IP Rights, Licensing and Authenticity
The preservation of intellectual property rights is of the utmost importance in the digital age. Metadata serves as a valuable tool in identifying the creator of a digital asset and any pertinent copyright or trademark information. It is imperative that the metadata accurately reflects these rights in order to prevent any potential conflicts or infringement matters from arising.
Metadata holds valuable information on licensing and usage rights granted to NFT purchasers. Such information dictates the permissible ways of using, displaying, and reselling the digital asset. Comprehending the licensing terms and conditions outlined in the metadata is crucial for both parties to adhere to legal requirements and prevent any conflicts.
The use of metadata can elegantly establish the provenance and authenticity of a digital asset, which is crucial from a legal standpoint. This is particularly relevant in scenarios where disputes arise regarding the original creator or chain of ownership of a digital art piece. Consequently, safeguarding the precision and reliability of metadata is paramount in upholding transparency and trust within the NFT market.
B. Agreements and Validity
Metadata within NFT transactions may include contractual agreements or terms between parties. This can be exemplified by the specification of agreed-upon terms and conditions upon the purchase of an NFT. The enforceability of these agreements is subject to a variety of factors, such as jurisdiction, the clarity of the terms, and the mutual understanding and consent of the parties involved.
Assuming that a NFT has an agreement embedded on its metadata, is this agreement valid?
The validity of such agreements shall change according to the relationship between the parties. If we are talking about a consumer relationship regarding the purchase of the NFT, it is not sufficient enough to only state that the purchasing the NFT means agreeing to the said agreement. If you wish a consumer to agree to an agreement, the agreement must be read and accepted by that party such as pop-up agreements we come across in applications or application stores. If parties may not be deemed as a consumer or the purchase will not be deemed as a consumer purchase, one can state that purchasing an NFT means agreeing to that said agreement and this practice can be valid. In conclusion, the NFT’s you will buy from platforms or anonymously which states that purchasing the NFT means agreeing to that said agreement will not be sufficient by itself. The agreement shall be visible, readable, accessible to the other party and the relevant party shall accept (perhaps by clicking on the accept button) the agreement before buying the NFT. Regarding the applications of law worldwide, it is highly recommended to provide a separate agreement for the purchase.
C. Data Privacy
The inclusion of personal information within metadata pertaining to NFTs necessitates adherence to data protection and privacy laws, such as the GDPR in the European Union. Those handling such data must ensure compliance with applicable regulations, including obtaining consent, providing notice, and implementing proper security measures.
Furthermore, data protection regulations generally require data controllers to obtain explicit consent from persons prior to collecting persons’ personal data. Since metadata of an NFT may contain some personal data, the relevant consents shall be obtained. In this regard, individuals who are subject to data processing, shall be informed about the collection and processing of their data as well as the purpose of data processing.
In conclusion, the content of the metadata of a NFT has significant effects and consequences in terms of data protection regulations. General rules and principles stipulated in relevant data protection regulations are applicable to the metadata of NFTs.
D. Liability
The accuracy of metadata is of utmost importance as any inaccuracy or false information can result in legal disputes and potential liability for all parties involved. For instance, relying on incorrect metadata about the creator or licensing rights can cause NFT buyers to face legal issues related to copyright infringement and suffer damages. The individuals responsible for providing or maintaining the metadata may be held accountable for such consequences. Therefore, it is crucial to ensure the accuracy and authenticity of metadata to avoid any legal implications.
To summarize, metadata is a crucial component of NFT transactions, and its legal implications span across multiple areas of law, including intellectual property, contract, and data protection laws. It is imperative for both NFT creators and buyers to understand the legal ramifications related to metadata and implement necessary measures to guarantee its precision, reliability, and adherence to relevant laws and regulations.
VI. NFTs as Digital Notary
The role of a notary is much more than simply validating a signature and confirming transactions. It encompasses a vast array of responsibilities, including assessing the signer’s capacity and ensuring the legality of the transaction. The notary assumes full responsibility for drafting the document, guaranteeing its legality, and confirming that all parties involved comprehended its contents. Moreover, the notary also provides impartial advice, takes measures to prevent money laundering, and notifies the relevant public administration bodies of the transaction. In short, the notary is an indispensable resource for those seeking legal and ethical guidance in their dealings.
While it is true that blockchain technology can verify the authenticity and ownership of goods on a public network, it is incapable of performing the full range of functions that notaries offer in legal terms. Unlike notaries, for now, blockchain cannot draft legal documents, verify the grantor’s capacity or comprehension, or guarantee the legality of the transaction.
VII. Littlefish Action NFTs
littlefish Foundation’s Action NFTs offer a new method of doing business. littlefish Foundation provides the necessary ecosystem for people to gather around a purpose.
To incentivize the valuable contributions of the members of the ecosystem, littlefish users sell their Action NFTs through littlefish Foundation. These Action NFTs can be bought by the other users of the littlefish Foundation or by third parties. The value created in this process is distributed amongst littlefish Foundation and the relevant members , in accordance with the agreements between each.
Depending on their metadata, these Action NFTs may be considered as Art NFTs, Collectibles or Payment NFTs. Regardless of how they are artificially considered, relevant data protection, intellectual property, agreement, and tax laws may be applicable.
Most of the evaluations given on the Section IV. Metadata and its Role in NFT are still valid for Action NFTs. Here is how:
First of all, since members of the ecosystem transform their content and actions into Action NFTs, these Action NFTs may contain copyrightable works. As stated before, purchasing just the NFT does not mean that the purchaser also gained the intellectual property rights relating to the underlying work of NFT. Unless otherwise is explicitly stated, intellectual property rights of the work remain with the seller. In conclusion, it is strongly recommended for both seller and buyer to regulate the intellectual property rights relating to underlying work of the Action NFT.
Secondly, it is important to take into account the tax consequences of selling and purchasing an Action NFT. Depending on the nature and parties of the transaction, the seller may be subject to income tax, and capital gains tax. In terms of Turkish Law, if the seller is a business, then, the income generated from such sale may be considered as business income which is taxable. On the other hand, if the seller is an individual, then, the income generated may be regarded as self-employment income. The situation of the buyer is somewhat different. If the buyer resells the said Action NFT at a higher price than the price they paid, then, the realized profit from such transaction is taxable as capital gains tax.
With regards to the USA, the IRS recognizes NFTs as property alongside with other crypto assets. Basically, if you sell the Action NFT at a higher price than the price you bought, then, the gain resulting from such a transaction is subject to capital gains tax. However, if you are the creator of the Action NFT, then, the gains arising from your first sale of the Action NFT are accepted as ordinary income and taxed accordingly.
Thirdly, these Action NFT transactions may be executed through various sale methods such as direct sale or auction. The sale method of Action NFTs doesn’t really change much. The key components of selling and purchasing a NFT stipulated in this article are mostly applicable for different sale methods. It is strongly recommended that both buyers and sellers shall be well aware of the accurate information about the transaction they enter into such as intellectual property law.
The intent to use littlefish Action NFTs similar to the Patreon system is in fact possible. Parallel to the logic of littlefish Action NFTs, members of the Patreon are funded or incentivized for the valuable content they provide. First of all, establishing a business model where the members of the ecosystem are promoted to tokenize their work as littlefish Action NFTs and then selling those NFTs to fund themselves is in theory legal. However, it is important to beware of tax consequences. Depending on the jurisdiction one is subject to, using littlefish Action NFTs in this regard has a high chance of resulting in either income tax or self-employment tax.
LEGAL DISCLAIMER
THE INFORMATION PROVIDED IN THIS PAPER PROVIDES GENERAL INFORMATION AS TO THE POSSIBILITIES IN MULTIPLE JURISDICTIONS. PLEASE KEEP IN MIND THAT LAWS THAT APPLY TO THE SUBJECT HEREIN MAY DIFFER IN EACH JURISDICTION. THUS, NOTHING CONTAINED HEREIN CONSTITUTES ANY LEGAL OPINION OR SUGGESTION OF ANY KIND. PLEASE CONSULT TO LOCAL EXPERTS IN RELEVANT AREAS BEFORE TAKING ANY ACTION BASED ON ANY INFORMATION CONTAINED HEREIN.
