NFT technology application and legal regulation

Legal thinking about the development of NFT applications, the practice and exploration of the laws governing NFT products and industries has just begun.

NFT technology application and legal regulation

This article is written by Zhang Feng (Partner of Wanshang Tianqin Law Firm); Wu Pingping (Director of Legal Innovation Center of Tencent Group)

For some time now, people in the sports and art world, the collecting world, and the gaming and entertainment world have been joining the NFT industry. Music artists have released songs and albums in the form of NFTs; Rolling Stone, Time Magazine, and Snowden have all announced the launch of NFTs; a digital composite work created by a digital artist named Beeple, Mike Winkelmann, has shocked the art world by fetching $69.3 million at Christie’s. eBay will allow the sale on its platform of NFT for digital collectibles, becoming the first e-commerce company to venture into the NFT space.

Industry, investors and regulators are watching the boom closely. what exactly is the NFT application, what problems does it solve and what problems does it have? how is NFT different from other digital cryptocurrencies? What kind of legal logic does its issuance and trading need to follow and how should it be regulated? We summarize the product characteristics from the experience of popular applications and services to further analyze the legal nature of NFT products and the related regulation ideas of NFT industry.

In this paper, NFT (Non Fungible Token) refers to different quality tokens, NFT products are specific digital products formed by combining NFT, NFT industry is the related industries around NFT products such as NFT platform, NFT application refers to the application of NFT in specific scenarios, products and industries.

It should be emphasized that the legal thinking about the development of NFT applications, the practice and exploration of the laws of legal regulation of NFT products and industries has just begun. What we give here is a framework, on the one hand, to more accurately understand the legal nature of NFT applications and regulatory ideas based on this, on the other hand, we hope that this framework will inspire people to think about the legal features of NFT applications and regulatory ideas, and jointly explore the development of NFT applications for compliance operations, because this is the basis and key to the development of NFT technology applications and industry.

First, NFT applications provide a new service experience

We first look at the more successful NFT applications today. These applications are invariably based on the form of digital products; optimized for a certain experience; their content and value are some directly related to the chain, and some are purely on-chain digital products. More successful applications and more good experiences may emerge in the future, which may require our continuous summary and exploration.

(I) NBA TOP SHOT

NBA TOP SHOT is an NBA player collection card platform blockchain application built on the Flow blockchain in cooperation with the National Basketball Association (NBA) and Dapper Labs, which will feature a player’s career highlights such as three-pointers, dunks, assists, etc. NBA TOP SHOT is divided into several categories according to its rarity: “Common”, “Rare” and “Legendary”. ” and “Legendary”.

Probably due to the already market base of NBA star cards in the United States, NBA TOP SHOT products were popular after launch and topped the total sales in the NFT field. On February 23, 2021, the Cosmic Series 1 Set of LeBron James’ “Legendary Moments” sold 208,000 units. On February 23, 2021, LeBron James’ “Legendary Moment” from the Cosmic Series 1 Set sold for $208,000, the highest price ever paid for an NBA TOP SHOT collectible.

What role does NBA TOP SHOT play in optimizing the star card trading experience? In the past, with physical cards, the NBA may have charged a royalty on the initial sale of the card, but would not have increased revenue from secondary transactions. Through the ownership, programmability, uniqueness and scarcity features identified by the NBA TOP SHOT, the NBA and player associations can earn commissions on both the initial and secondary transactions. This is accomplished by Dapper Labs taking a 5% fee on each transaction, with these proceeds distributed to the NBA and the National Basketball Players Association. To date, Dapper Labs has contributed $49 million to the NBA and the Players Association, according to the website.

NBA TOP SHOT has completely transformed the traditional fan economy, reconnecting with fans and bringing not only economic value to the average fan, but also more fan loyalty and engagement. Of the past 3 million+ transactions, 1 million were between $10 and $50; furthermore, 90% of the NFT transactions that reached six figures were not resold again, but used for collection.

(ii) Sorare

Sorare is a global fantasy soccer game released in 2019 based on the ERC721 protocol that allows users to buy, sell and manage virtual soccer teams using digital player cards. To become Sorare’s soccer manager, users first register their team and claim 10 regular player cards. A starting lineup of 5 players can then be formed and players earn points based on their performance in actual soccer matches. Sorare is widely popular as it is officially licensed by teams such as Real Madrid, Bayern Munich and Liverpool.

What does Sorare offer to players? Sorare card owners can verify the scarcity and ownership of their cards and can transfer them freely. Each player card displays several attributes, such as rarity, scoring average and experience, and player cards in Sorare include three scarcity types: rare, super rare and unique. Each player card has a unique version, 10 copies of SuperRare and 100 copies of Rare.

(iii) SuperRare

SuperRare single-edition digital artworks marketplace. superRare is a digital art marketplace created by John Crain in 2017 based on the ERC721 protocol, where artists can convert their actual single-edition artworks into collectible digital works. superRare’s historical volume and traded digital products have made it the leading NFT platform for artwork.

What does SuperRare offer to artists? Artists can distribute authenticated digital artworks on SuperRare and have them certified on the ethereum blockchain to prevent forgery and provide historical provenance. Artists can use virtual reality galleries and digital displays to display their works in SuperRare. On the other hand, art collectors can purchase artworks on SuperRare and then resell NFTs on secondary marketplaces such as OpenSea. All transactions on SuperRare are conducted via ETH, and buyers pay a 3% transaction fee for all purchases. Similar to traditional art galleries, SuperRare charges artists a commission. For primary sales, the artist receives 85% of the revenue, while SuperRare keeps 15%. For secondary sales, the artist receives a 10% royalty. superRare describes itself as a combination of Instagram and Christie’s.

(iv) CryptoKitties

CryptoKitties is the first NFT mainstream application. cryptoKitties is a game developed based on the ethereum ERC721 protocol that allows users to collect and breed virtual cats, each Token representing a unique digital cat on the blockchain. These digital cats differ in appearance and characteristics and cannot be copied, destroyed or taken away.CryptoKitties was the first NFT protocol to attract mainstream attention in late 2017. The game garnered significant attention as users could breed rare digital cats and resell new Kitties for profit. Although CryptoKitties’ “prime time” has passed, the game has established itself as an icon in the NFT space.

CryptoKitties offers players an unprecedented user experience. To start breeding digital cats, users need to deposit ETH in the game’s official wallet Dapper. there are two ways to breed new kittens: breed two of your own or breed with the male father (i.e., the father). Users can get their first kitten by buying a product on the market or by bidding for a kitten in the game’s “Deals” system. Experienced CryptoKitties players are committed to collecting as many valuable digital kittens as possible. The value of each kitten depends on its rarity. “Generation 0” is the rarest kitten, with a fixed supply of 50,000. this makes Generation 0 kittens scarce, and their value increases over time. In addition, kittens with low ID numbers are also considered rare kittens, including Exclusive cat or Founder cat, which can be traded at a higher price on the CryptoKitties market.

(V) CryptoPunks

CryptoPunks are one of the first NFTs and consist of 10,000 unique characters or “punks”. Each punk is owned by a single person and ownership is recorded on the ethereum blockchain. These punks were offered for free during the initial release, and they were quickly claimed and traded on the marketplace. Owned by over 333,000 collectors. Users can buy and sell punks on marketplaces such as OpenSea by installing the MetaMask ethereum wallet. NFT data provider Cryptoslam revealed that CryptoPunks ranked 16th in the top 18 crypto collectibles sold, while CryptoPunk 7804 at 4,200 ETH ($7.8 million at the time of purchase) setting the highest collector price to date.

CryptoPunks also deliver an experience like no other. The rarity of Punks is based on their type, attributes and accessories. For example, males and females are the most common punks, while there are only nine types of alien punks. In addition, each punk has unique accessories, such as hats, glasses, etc. The value of each punk also depends on the number of accessories it has. Usually, two or three accessories are the most common, while the rarest punks have zero or seven accessories.

(vi) Rarible

Rarible is a marketplace for digital collectibles. rarible is an NFT marketplace created by Alexander Salnikov and Alexei Falin in January 2020. Thanks to its governance token, RARI, Rarible has gained widespread popularity among the crypto community. Despite the recent hype about governance tokens originating from the DeFi space, Rarible is the first NFT protocol to release its own governance token.The launch of RARI is the first step towards Rarible’s ultimate goal: to create Rarible’s decentralized, autonomous organization. As a RARI holder, users can submit and vote on proposed system upgrades, including decisions about Rarible transaction fees and added features.

Rarible can offer a whole new service for content creators and artists to distribute their work. rarible allows users to cast, buy, and sell their rare and varied digital collections and products, including digital art, domains, DeFi insurance policies, modalities, and the metaverse. casting digital collections in Rarible is relatively simple. Users can first upload their collection in any supported digital format (graphics, audio, etc.) and then add descriptions and pricing details. After that, users need to connect with their ethereum wallets to approve the casting transaction. the NFT casting feature attracts content creators and artists who can publish teasers of their content and make the full version available to users only after purchasing the relevant NFT.

(vii) Ethereum Name Services

Ethereum Name Services (ENS) is the leading domain name NFT. founded in May 2017 by the Ethereum Foundation, Ethereum Name Services is a distributed and scalable naming system based on the ethereum blockchain. The protocol has over 190,000 registered names and has integrated over 100 wallets and decentralized applications to date.

NFT provides a decentralized service for domain name transactions. Local TLDs (i.e. top-level domains) are “.ETH” on ENS. These “.ETH” domains are unique and irreplaceable, represented by ERC-721 compliant NFTs, and can be purchased and traded on NFT marketplaces such as OpenSea and Rarible, where they can be seamlessly plugged into NFT marketplaces and wallet interfaces, thus enhancing NFT and DeFi integration. According to OpenSea, the Ether Name Service is the leading NFT in the space with over 7,119 ETH ($12 million) in historical trading volume and over 31,000 owners.

Second, NFT application service experience from the unique technical application characteristics of NFT products

Technically speaking, NFT (Non-Fungible Token), that is, different quality (or non-homogeneous) tokens, are Tokens with specific IDs issued based on blockchain NFT technology protocols such as Ethereum’s ERC721 protocol, ERC1155 protocol, etc. The IDs can be attached with corresponding metadata, and since these metadata can point to NFT can be used to represent a specific digital product because these metadata can point to a specific online or offline digital product, so at this point it is called NFT digital product, NFT product. In contrast, FT (Fungible Token), which is a homogenized token, is generally considered not to be associated with a specific digital product and is usually used to represent some kind of equity credentials.

(i) Blockchain-based issuance, making digital products open, transparent and verifiable

NFT is issued based on blockchain technology protocol. NFT is issued based on blockchain network and can represent collectibles and other kinds of specific digital products in the digital era due to its characteristics of distributed bookkeeping, irreproducible, programmable, indivisible, irreplaceable, uniqueness and scarcity. nft value is based on verifiable digital proof of ownership in blockchain, thus enabling the flow of value in different ecologies.

(2) Based on information specificity, digital products are confirmed, scarce and have uniqueness

NFT can form digital products by specifying information. The NFT with specific ID can be attached with metadata, which can point to a specific digital product, which does not need to be anchored to a specific offline physical product. Developers can program contract code on the chain to keep specific attributes from changing over time. Metadata is particularly important for artwork or game props, as the value of the artwork depends heavily on the provable scarcity of the original work.

NFT can provide proof of ownership of digital products. nft provides ownership and license management for users. nft specifies and specifies owner addresses for digital products, and programmable designability of product attributes to enable interoperability between different programs. Based on this, NFT can be a unique digital product with a clear owner, containing rich information, exclusive and tradable. It can be said that the NFT technology protocol has become a tool for confirming the ownership of digital products.

NFT can increase the value of transactions because it can confirm ownership. With NFT, owning a digital media asset becomes exactly the same as owning a digital financial asset. the tradable value of NFT ownership is reflected in its transferability; it can be resold to almost anyone in the world, which means it has a wider pool of potential buyers.

NFT confirms the uniqueness and certifiability of a digital product. Once a work is recorded on the blockchain by generating an NFT, it is unique and cannot be copied. The transparency of blockchain technology also allows people to verify the authenticity of NFTs at any time. While we can also view the Stallion on the web, it’s not the same as owning it. Like Bitcoin, while you may not need a real physical coin to “prove” the existence of a bitcoin, you do need at least a wallet that can store it to “prove” your ownership of the asset you hold.

NFTs can confirm the scarcity of digital products. Many NFTs are unique or limited in number, and cannot be replicated even by the creator himself. The high sales of NBA TOP SHOT also proves that the scarcity value of NFTs issued based on strong IP is recognized.

(C) Based on programmable design, digital products are given value

NFT to digital product attributes programmable designable. Based on the specific data information and equity characteristics in the application scenario requirements of NFT, NFT can design more complex mechanisms through smart contracts, including forging, production process, exchange/redemption, random generation, etc. A very interesting example is CryptoKitties’ incorporation of reproduction mechanisms directly into crypto cat contracts.

NFTs can confer rights and interests associated with digital products. Some NFTs use physical items and personal rewards to increase the appeal of NFT transactions. Luka Garza, a top collegiate men’s basketball player, launched an NFT shortly after his NCAA basketball career ended, and it came with a litany of physical rewards: autographed sneakers Garza wore when he broke Iowa’s goal-scoring record during the Feb. 22 game; a private meditation with Garza; dinner with Garza, a movie, and a game with Garza; and a lifetime VIP pass to any basketball camp Garza hosts.

NFT digital products are subjective in nature. nft differences derive from the fact that their metadata is different, but these differences may be ignored due to subjective transaction requirements, which is consistent with the logic that value comes from consensus. From a purely technical perspective, the data of every FT, including Bitcoin, is also not perfectly consistent, but this inconsistency has no impact on transaction demand.

(iv) New digital products based on NFT bring a new experience

NFT transaction cards are often the most common application vehicle for NFT products, which can be created based on different blockchain networks, and whose metadata, such as images, can be stored, viewed, and transmitted through NFT-enabled wallets. nft transaction cards can be given immutability and public verification of ownership, based on the blockchain while existing. NFT creation, purchase and sale services are available on many platforms, for example some of the largest trading platforms currently include OpenSea, SuperRare and others. Based on specific basic information, usage information, and transaction information similar to NFT trading cards, NFT products can realize cross-ecological value flow and meet the transaction needs of different participants.

We believe that the development process of digital economy is a process of industry digitization, digital industrialization and governance digitization. This is accompanied by the digitization of assets and digital assets, as well as the digitization of commodities, finance and money. From the perspective of the current regulatory framework in countries around the world, cryptocurrencies broadly have several characteristics of monetary, commodity and securities attributes, which are reflected in both different cryptocurrency types and sometimes even in different development stages and different application scenarios of the same cryptocurrency. Yao Qian, the first director of the Digital Currency Research Institute of the People’s Bank of China, pointed out that in the future, digital asset is a kind of asset with full amount of information and full amount of data, and the properties of its underlying asset and financial asset are gradually merged into one, and gradually no longer separated from the underlying asset like the traditional financial asset. NFT application to a certain extent reflects the useful exploration of the digitization of industry, the digitization of goods.

Third, the legal nature of NFT products comparative analysis

In summary, we can see that NFT products are issued based on the blockchain network, due to its distributed bookkeeping, non-replicable, programmable, non-splittable, irreplaceable, uniqueness and scarcity characteristics of the digital era of the collection or other types of specific digital products. nft has many unique properties compared to other Tokens. In order to better understand the specific connotation of NFT, we may compare NFT and NFT products with related concepts. Through these framework comparisons, we may find that the basic features and attributes of NFT products may be reflected in many different interests or products, but it is difficult to be fully categorized into a particular traditional right or type of interest, or even to some extent into the traditional framework of pre-existing legal attributes to regulate.

NFT and FT. NFT is Non Fungible Token non-homogenized tokens, while FT is Fungible Token homogenized tokens. In contrast to FT, NFT generates a Token with a unique ID and specific metadata attached to it, while FT usually has no unique ID and metadata and only serves as a bookkeeping symbol. If each bitcoin has its own transaction history e.g. the bitcoin comes from a genesis block, then the bitcoin can be considered an NFT if the trader values this specificity, but the average trader does not care about this, so the bitcoin is generally considered an FT.

NFT products and currencies. Modern countries, including China, generally provide for legal tender to be used to pay all public and private debts within their borders. Since NFT is based on blockchain issuance, in practice it is generally traded through a homogeneous class of tokens FT based on the same blockchain, such as most NFTs developed on the Ether network are traded through ETH. There are also some NFTs issued based on federated chains that support trading through fiat currencies.

NFT products and securities. Securities is a collective term for a variety of economic interest certificates, and also refers to specialized kinds of products, which are legal documents used to prove a specific interest enjoyed by the holder of the coupon. Securities mainly include capital securities, monetary securities and commodity securities, etc. Securities in a narrow sense mainly refer to securities products in the securities market, which include equity market products such as stocks, debt market products such as bonds, and derivative market products such as stock futures, options, interest rate futures, etc. Generally, when we mention securities, we usually refer to securities products in the narrow sense, i.e. securities market. Securities are essentially financial products, and there are strict regulations in various countries as to what securities are and how to judge them. The development of the application of blockchain technology has posed a challenge to securities regulation in countries around the world. Currently, the US SEC believes that Bitcoin and Ether are not considered securities due to their relatively high degree of decentralization.

According to the newly amended Securities Law of the People’s Republic of China in 2019, within the territory of the People’s Republic of China, the issuance and trading of stocks, corporate bonds, depositary receipts and other securities determined by the State Council in accordance with the law; the listing and trading of government bonds and shares of securities investment funds, as well as the management of the issuance and trading of asset-backed securities and asset management products, shall be prescribed by the State Council in accordance with the principles of this Law.

According to the specific digital product characteristics of NFT, it belongs to the broad sense of securities, that is, it represents a specific commodity, rather than a security certificate with a certain future income cash flow.

NFT products and commodities. NFT is issued based on blockchain, unique and irreproducible, and can point to the owner, which is suitable to make game props, digital artwork, tickets, etc. become NFT products. Thus NFT is a blockchain tool for digital products or digital goods. Although NFT can anchor commodity data information outside the network, it is primarily a digital product. As physical goods are increasingly digitized, the applicability of NFT will likely become more and more spacious.

NFT products and digital assets. The specific connotation of digital assets has been repeatedly discussed since the development of blockchain technology application, but there is still no consistent statement at present, some think that “digital assets are programmable and controlled assets in the form of electronic data”, while some think that “digital resources are released onto the network through When digital resources are released to the network through the blockchain, they will be authorized and become trusted digital assets on the blockchain, which can be used for circulation and trading”. Yao Qian, the first director of the Digital Currency Research Institute of the People’s Bank of China, believes that “digital assets in the true sense should be assets that are native, contain the full amount of information, and are presented and circulated in digital form.”

NFT products have all the attributes of digital assets. Digital assets are programmable assets that can be designed to exist in digital form, including the two main types of traditional assets digitized and new programmable digital assets, and these two characteristics are intertwined. Broadly speaking, there are two major categories. First, traditional physical assets and equity assets are digitized, and physical assets or equity assets such as property rights, equity, debts, other property rights and copyrights will probably become digital assets gradually. Second, programmable digital assets. With the deep development and integration of industrialization and financial innovation, the uniform specifications of industrial products produced in the industrialization era in the past can no longer meet the demand, and people hope to get more personalized services suitable for them and digital assets programmable by digital design.

NFT products based on the independence and interoperability of blockchain information confirmation, as well as the openness and transparency, and the specificity of data information, provides a way of operation to confirm the rights of digital products. Since the development of the Internet to trade and consume various digital assets through the network, including some irreplaceable digital assets such as domain names, event tickets, in-game items, and even statements, likes, retweets, etc. on social networks such as Twitter or Facebook, all of which will likely become NFT products.

NFT products and claims. Claims (creditor’s rights) are the rights of the subject of rights in the relationship of debt, which can require the subject of obligations to do certain acts or not to do certain acts. NFT can refer to a specific owner and a specific digital product, but does not constitute a legal interest relationship between two subjects, in the legal sense that it is an interest of possession, domination and disposal, so the NFT holder does not have a claim.

NFT products and intellectual property rights. At present, most NFT products only provide proof of ownership, and what is traded is the ownership of the “original” of the work. But theoretically, under technically supportable conditions, the programmable and designable features of the contract can be used to realize the trading of intellectual property rights through NFT, such as limiting the playing time, playing method, playing environment and even playing objects through technical means.

How do NFT products protect copyright? Due to the lack of clear legal constraints, the existing technology of NFT does not fully guarantee that the copyright of the creator is respected, such as no one can prevent the first-hand seller from putting the same NFT on different blockchains for repeated sales. On the other hand, while NFT technology can guarantee that no one can copy or transfer an NFT without the holder’s permission, there is no way to control who is the first person to make an NFT of a work. For example, Swedish illustrator Simon Stålenhag, who did not distribute his own NFTs and did not license them to anyone, found one of his works turned into a “MarbleCard” (an NFT). The current lack of oversight of NFTs can make creators feel that their copyright is not being respected.

Under decentralized conditions, the rights of copyright owners face a whole new challenge. One of the ways blockchain can solve the copyright problem is that collective rights management can be made to operate based on the community-based operating characteristics of blockchain. The use of collective management organizations (CMOs) by individual copyright owners may suffer from lack of transparency, time lag in payment of royalties/licenses, abuse of monopoly position and inefficiency, but it is possible to fix and trade such individually enjoyed copyright rights in the form of NFT digital products.

NFT products and data rights. as digital products, their own properties and values are also established and described based on data, including their IDs are issued through contracts, while their metadata storage also has important data rights. Whether the metadata is stored on the creator’s own server or hosted on a decentralized storage system, technical means need to pay particular attention to protecting the mapping relationship between NFT’s ID and metadata, metadata and the objective existence of specific products, which is directly related to the use and transaction of NFT products.

NFT products and virtual property rights. Article 127 of China’s Civil Code provides that “Where the law provides for the protection of data and network virtual property, in accordance with its provisions.” Previously, the NPC’s Legal Affairs Committee, in interpreting this provision of the original General Principles of the Civil Law, said that it was necessary for the General Principles of the Civil Law to provide for new types of civil rights objects such as data and network virtual property. However, in view of the complexity of data and network virtual property, limited to the chapter structure of the general principles of the civil law, how to define data and network virtual property, how to specify the data and network virtual property rights attributes and rights content, with a certain degree of difficulty and controversy.

Although there is a certain controversy in the definition of the concept of virtual property, the basic consensus view is that the game props as virtual property are the carriers of the content of online game service contracts, but they have certain protectability under the control of players. Combined with the nature and characteristics of NFT products, the holder of NFT products has strong domination and control over NFT products, and the fact that NFT products belong to virtual property that should be protected by law is indisputable.

NFT products and property rights. In summary, the property rights of NFT products, including the following features, one is based on its rights content can be designed to achieve the expansion of the benefits of the use of digital assets; second, based on decentralized distributed bookkeeping, to achieve the transaction records can not be tampered with; third, based on decentralized smart contracts, to achieve the right to confirm and automatically enforce.

Unlike FT, NFT can easily issue tokens with specific numbers, while descriptive metadata can be added to the token. Developers can programmatically enforce that only a specific number of specific rare items can be created, and can also enforce that specific attributes do not change over time by encoding them on the chain to maintain the stability and permanence of digital item attributes. Based on these features, NFT gives digital assets rights similar to those of property rights.

The use of NFT is still essentially the use and consumption of objects related to the digital content it specifies, and its digital form extends the connotation of “objects”. The connotation of assets is greatly enriched and the convenience of transactions is greatly enhanced. In the case of NFT, the subject matter is directed to a digital product, whether online or offline, which can be designed and specified in a human programming language and can be easily executed.

As for the legal protection of NFT products, before creating new types of rights to protect them, only the protection of property rights is most appropriate to their rights characteristics. In the existing legal system of property rights, in addition to property rights, claims, intellectual property rights, inheritance rights, equity and other investment rights, and even the legal protection of data and virtual property are unable to provide targeted and effective protection for digital assets, because all other property rights other than property rights are basically based on the possession, use, disposal and benefit of property rights in specific situations and special provisions; and NFT is in a sense a non-traditional form, i.e., a non-natural property, but a socialized form of things, and this socialization is reflected in the design of programmable, intelligent transactions can be executed, etc.

NFT products and cultural products. Application to engage in operational Internet cultural activities, should apply to the local provincial, autonomous regional or municipal government administrative department of culture, the provincial, autonomous regional or municipal government administrative department of culture for review and approval. Internet cultural products refers to the production, dissemination and circulation of cultural products through the Internet, mainly including: (a) specifically for the Internet and the production of Internet music entertainment, online games, network performance plays (programs), network performances, network artwork, network animation and other Internet cultural products; (b) the music entertainment, games, performance plays (programs), performances, artwork, animation and other cultural products with certain technical means to produce and copy the Internet cultural products for dissemination on the Internet.

The provision of Internet cultural products and services activities, including: (a) the production, reproduction, import, distribution, broadcast and other activities of Internet cultural products; (b) the cultural products posted on the Internet, or through the Internet, mobile communication networks and other information networks sent to computers, fixed-line telephones, cell phones, televisions, game consoles and other user terminals and Internet Internet service business such as Internet cafes places, for users to browse, enjoy, use or download online communication behavior; (c) the Internet cultural products exhibition, competition and other activities.

Therefore, although NFT itself does not belong to the creation of Internet cultural products, but only to provide a blockchain-based technical device for the product, used to indicate the owner with specific content, but if the consumption and trading, products belonging to the framework of the regulation should comply with the corresponding provisions, obtain the relevant qualifications and permits.

IV. Legal regulation of NFT industry and platform-related issues

So what issues should we pay attention to in the NFT products and industrial applications, and how to carry out legal regulation? Let’s analyze. We closely follow the market demand and application characteristics on the one hand, on the other hand, rational and objective face some new risks and challenges faced in the development of the NFT industry, through these holistic, framework thinking to provide some prudent legal regulation recommendations, of course, these recommendations need to be combined with the practice of continuous improvement and maturity, the formation of a new development model and regulatory model.

(A) NFT industry application of basic issues

NFT and industrial applications. NFT industry refers to the relevant industries that provide services such as distribution, trading and use of NFT digital products. The process of digital economy development is also a digital asset, asset digitization and governance digitization process, NFT is a useful exploration of the digitization of assets. We have already seen the combination of NFT in the fields of artwork, game props, content production, domain names, etc. In the future, the combination of NFT with other industries may become a trend.

There are many factors that affect the industrial application of NFT. First, the issue of technical standards. nft technical standards are not rich enough, the current access control, transmission and combination with the application can be achieved through the application of product attributes are still relatively simple, support the application of wallet is still relatively small, these may limit the application of nft. Second, the storage problem. From a technical point of view, the problem of storing NFT metadata has not been completely and effectively solved. Currently limited by the storage capacity of the blockchain itself, only a small amount of NFT metadata exists on the blockchain, the other generally exists in the NFT issuer’s own server to decentralized form of storage such as with the help of the Interstellar File System IPFS to store still needs to be improved. Third, the issue of diversification of rights and interests, NFT is currently more to solve the problem of proof of rights of owners of digital works, but how to achieve the technical protection of other rights and interests, including intellectual property rights, which may require further exploration. Fourth, the problem of digitalization of industry. The digitalization of information in many industries is not yet high, and the issuance of NFT requires insufficient infrastructure, which can cause application blockage. Fifth is the problem of preventing related illegal activities. Some black sheep will use NFT for illegal financing, fraud and other activities, and this requires higher identification costs, which will also affect the normal development of the NFT industry.

(ii) NFT platform-related issues

The NFT platform should be a commodity trading information aggregation platform. Based on the digital product nature of NFT, it should first be clear that the platform is not acting as an NFT transaction broker, nor as a financial institution, credit institution, or guarantee institution. The services provided by the company’s platform are limited to facilitating transactions between buyers and sellers, and do not themselves constitute any agreement regarding the cryptocurrency assets of buyers and sellers or between users, but only as an information aggregation platform. It may also provide an NFT casting service that serves users, making the process of applying smart contracts more general and easy.

As a website operator you need to apply for ICP filing. Domain name filing is a website filing procedure, there is no operational and non-operational, as long as the website is running in the country must apply for filing. icp filing can be completed by the server hosting provider where the website is located, the hosting provider will submit the relevant data to the operator’s server location communications authority, the communications authority review and approval, the data will be transmitted to the ministry of industry and information technology, the ministry of industry and information technology to issue the filing number.

As an Internet information service provider, you need to apply for an ICP license (Internet Information Service Business License). ICP licenses are issued by the local communications management authorities. The content of operating ICP business is mainly online advertising, generation of web pages, APP website, paid information platform website, game website, etc. The State implements a licensing system for operational ICPs. Operators must apply for ICP license. ICP license is the license for website operation, according to the national “Internet Management Measures”, operating websites must apply for ICP license, otherwise they are illegal to operate.

As an e-commerce platform for the registration of market entities. E-commerce platform operator, refers to the e-commerce for the two or more parties to provide network business premises, transaction aggregation, information dissemination and other services for the two or more parties to the transaction to independently carry out trading activities of legal or unincorporated organizations. This definition covers all aspects of the transaction, including transaction aggregation, information dissemination, etc. Therefore, the issuing platform, even if only as a platform for information release and aggregation, has a certain degree of possibility to be identified as a platform operator. The platform operator needs to implement the main audit and information disclosure obligations, in particular, the platform operator’s obligation to verify and regularly update the main identity and business license information of the operators in the platform. The rules of the platform agreement regarding the entry and exit of platform services, quality assurance of goods and services, promotion rules, protection of consumer rights and interests, consumer information protection and other provisions need to be focused on. Platform operators also need to fulfill the obligations of keeping information on goods and services and transaction information. The platform needs to set out the list of information on prohibited and restricted goods and information on prohibited and restricted goods.

As a platform for operating Internet cultural activities, it should apply to the provincial government’s cultural administrative department in its location for review and approval. Although NFT itself is not primarily the creation of Internet cultural products, but only provides a blockchain-based technical device for the product to indicate the owner with specific content, if it is to be consumed and traded, the products belonging to the framework of the regulation should comply with the corresponding regulations and obtain relevant qualifications and licenses.

As an online auction platform, it should apply to the provincial government department in charge of commerce for an administrative license to auction. If involved in the auction of cultural relics need to obtain separate permission from the provincial government administrative department in charge of cultural relics. According to the Ministry of Commerce’s recommended national standards “network auction procedures”, the establishment of a network auction platform, should meet the following basic requirements, one is in line with the auction law and other relevant laws, regulations and rules; second is to protect the normal operation of the network auction computer information system, functions can include: the announcement, the auction subject online display, network bidding, recording the bidding process, generating electronic confirmation of the transaction, Online settlement services, network and on-site synchronized auction; third is to carry out network auction activities of the business process, which can include: user registration, auction subject qualification audit, announcement, the auction subject online display, bid registration, network bidding and transaction confirmation, online settlement, data archiving; fourth is to engage in network auctions and the scale of business and supporting the server, network facilities, technical staff, auction professionals Fifth, according to the “Internet Information Services Management Measures”, according to the nature of the platform to obtain permission or record. As the “Dutch auction” and “English auction” belong to the specific rules of the auction, they can be disclosed before the auction activity.

As a blockchain application platform, it needs to apply to the State Internet Information Office for registration of blockchain information services. Blockchain information service providers should fill in the name of the service provider, service category, service form, application area, server address and other information through the State Internet Information Office blockchain information service filing management system within ten working days from the date of service provision to fulfill the filing procedures. The judicial blockchain application platform built by the Supreme People’s Court and the Guangdong-Hong Kong-Macao Greater Bay Area trade and finance blockchain platform built by the People’s Bank of China are both blockchain platforms that provide relevant services for enterprises.

Does the NFT platform belong to the target of the inter-ministerial joint meeting system established by the State Council to clean up and rectify various trading venues? According to the decision issued by the State Council in 2012 on the cleanup and rectification of various trading venues to effectively prevent financial risks, and the approval of the establishment of the inter-ministerial joint meeting system to clean up and rectify various trading venues, the task of the inter-ministerial joint meeting is to “coordinate the relevant departments and provincial governments to clean up and rectify illegal securities and futures trading, and supervise the establishment of a system for the regulation and management of various trading Places and trading products to regulate the management system, to complete other matters assigned by the State Council.” The General Office of the State Council in accordance with the decision of the State Council issued the implementation of the views clearly “the scope of the cleanup and rectification include all types of trading venues engaged in equity trading, commodity forward trading and other standardized contract trading, including trading venues that do not use the word “exchange” in their names. But only engaged in physical transactions such as vehicles, real estate and other trading venues.” Therefore, the NFT platform is for digital products trading, not for equity trading, commodity forward trading and other standardized contracts trading.

Other relevant obligations of the platform. Depending on the specific business involved in the platform, the platform should also ensure the privacy of users, indicate the risks of blockchain technology application itself, as well as avoid platform transactions being used for illegal activities such as money laundering, clarify the relationship with copyright protection, and explain dispute resolution. If the platform itself does not keep users’ assets, such as assets on the chain, third-party servers or decentralized storage systems, and does not keep users’ funds, which are in their own blockchain-based wallets, then the platform does not have financial attributes and professional management attributes for such business.

NFT and coalition chain. Some of the alliance chains with the function of running smart contracts have obtained wide consensus through the common construction of credible nodes and other means, and have the technical basis for issuing NFT on the chain, which is a manifestation of actively innovating application scenarios using blockchain technology.

Platform NFT casting service. The platform makes it easier for anyone to cast NFT without having the development skills to deploy smart contracts. Microsoft (Microsoft) issued the Azure Heroes badge for Azure ecosystem contributors. The Ministry of Commerce and the Ministry of Finance in 2017 proposed to “strongly support the innovation and upgrading of supply chain core enterprises’ traceability systems. Focus on promoting the application of two-dimensional code, radio frequency identification (RFID), video identification, block chain, GS1, object identifier (OID), electronic settlement and third-party payment, etc., to promote the innovation and upgrading of the traceability system; promote large and medium-sized wholesale markets and large supermarkets, logistics enterprises, etc. to carry out information transformation, encourage supermarkets to use GS1 for settlement to achieve traceability functions, integrate product traceability into the existing ERP system, realize the docking of enterprise information system and traceability system; encourage the core supply chain enterprises to integrate the development of online and offline, and form a traceability network with full-channel integration and seamless offline connection.” The release of relevant digital products for use in certain scenarios is both a traceability application and an innovative application of different quality blockchain points. If the characteristics of financing are not involved, there is no fraud as well as its metadata can maintain functional stability, it should not have financial properties and there is no substantial legal obstacle.

Digital wallet for platform users. The People’s Bank of China clarified in the relevant regulations as early as 2001 that cash cards can be used as electronic passbooks and electronic wallets without overdraft. The National Development and Reform Commission issued regulations in 2008 to encourage telecom operators or content service providers with better infrastructure conditions to develop mobile e-commerce services by widely applying smart mobile terminals such as cell phones, personal digital assistants and palmtop computers. On the one hand, in the fields of public utilities, transportation and tourism, employment and home economics, leisure and entertainment, market commerce, etc., based on cell phone wallets, carry out small payments and settlement services; on the other hand, using the mobility of cell phones and two-dimensional bar codes, RFID, various types of intelligent identification technology achievements, based on mobile automatic identification, information exchange, instant transactions, shipment and receipt of goods, mobile payment and other technologies and systems. Carry out various forms of automatic transaction services.

In a document on accelerating the development of strategic emerging industries in 2018, the Shenzhen Municipal People’s Government proposed to accelerate the establishment of financial technology research institutions, breakthroughs in key technologies such as digital currency wallets, smart contract verification and management, and intelligent analysis of financial big data, strengthen the innovative application of financial technology around key directions such as blockchain, smart finance, and financial risk management, actively explore new technology application scenarios, and build The world’s leading financial technology center.

Whether it is a coalition chain or a public chain, as long as the underlying base chain with certain decentralized characteristics can run smart contracts, then the blockchain assets generated on the blockchain and smart contracts, regardless of the UXTO or account mode, we can manage them with wallets. Since there is no financing characteristic per se, and if we can ensure its metadata storage function is stable and there is no fraud, we think there is no substantial legal obstacle.

NFT platform and viable operation, illegal operation. Regarding the regulation of technical reliability, blockchain applications are more technical and spread widely, and should have certain reliability requirements for its products. For example, China’s network security law on the relevant network products and services should meet the requirements of national mandatory standards, all belong to this type of concern. From the perspective of project operation, one is to prevent transaction risks, data forgery, price manipulation, insider trading and technical risks; second is project promotion, whether it infringes on investors’ rights and interests, such as whether it is suspected of pyramid selling; third is project promotion, business capabilities, functions, etc. should not be exaggerated to release news with unrealistic slogans.

NFT platform and taxation. Blockchain NFT issuance transactions should also comply with tax laws and cooperate with tax authorities to make it easier for consumers to calculate taxes and avoid burdens. It is recommended to separate settlement from billing and to fulfill tax-related obligations.

NFT platforms and information protection and data security. Work with regulation to prioritize privacy and consumer protection. No user information or financial data should be collected or shared, except to prevent fraud or criminal activity. In terms of data privacy, any data added to the blockchain will be subject to consistent controls across the system. The draft personal information protection law and the draft data security law under consideration in China provide for provisions including controller accountability and data minimization, data subject control, data portability rights, and data protection by design. The draft personal information protection law holds controllers responsible for ensuring compliance with all privacy principles such as legality, fairness and transparency, purpose limitation, data minimization, accuracy, storage limitations, integrity, and confidentiality. In addition, the draft requires each organization to be able to demonstrate compliance with all of the principles.

The digital identity management solution offered on the blockchain is conditional on the return of control of the user’s personal data, through the data, to achieve the stated control goals. In the case of permission-based blockchains, users can use their digital private keys to download data and transfer it from one digital identity management platform on the blockchain to another. The decentralized identity technology based on the federated chain and the access control technology of smart contracts both safeguard regulation and protect user privacy at the same time.

NFT platform with anti-fraud anti-manipulation anti-illegal use. We need to achieve real-name system of assets for regulatory purposes, because payments may be used for goods and services transaction scenarios, and also for financial transaction scenarios, and in some financial or goods and services transactions, many times may often require users to have certain qualifications or need to know their identity. For example, only real-name authentication of their assets in the wallet can be relevant transfer operations, such as not real-name authentication can only receive digital passes. In this sense, DID plus real-name authentication is the blockchain infrastructure. Real-name verification of users is performed and relevant user information and transaction records are kept.

NFT platform and anti-money laundering and anti-terrorist financing. Implementing safeguards to combat money laundering and terrorist financing activities, any new efforts must comply with anti-money laundering rules, and we don’t mind competition. We want a level playing field. Conduct real-name verification of users and keep records of relevant user information and transactions, while avoiding disorderly pricing of NFT products.

NFT platform with smart contract regulation. Smart contracts are embodied as code, while a typical contract is a text with legal implications. In the context of smart contracts, honesty and credit, contract performance and automatic enforcement, and liability for breach of contract are embedded in code. It is recommended to establish a sound mechanism for ex ante review, ex post supervision and ex post handling of smart contracts based on technical, legal and business perspectives.

NFT platform and cross-border regulation. Any wallet created based on a blockchain network can interact with other wallets to provide network value, and in some regions will have its own wallet. Blockchain applications are naturally cross-border in nature. Blockchain, as an information technology facility, is a tool and vehicle for global communication. But its users are located in different countries and regions, and different legal regulations are bound to apply to them. For example, Internet access and the governance of cyberspace are similar. For China, as the capital account is not yet fully opened and the internationalization of RMB is still in process, how to prevent the impact of cross-border transactions is an urgent concern. In particular, the encrypted nature of NFT and peer-to-peer payments can bypass capital controls and weaken the effectiveness of cross-border capital regulation, while also exacerbating shocks from cross-border capital flows. It is recommended that different wallets and user qualification review standards be adopted for users in different jurisdictions, while certain on-chain dispute resolution mechanisms be established.

NFT platforms and illegal fund raising. As NFT can be specified, NFT can be issued for consumption and transaction through digital products based on specific items online or offline, and its commodity attributes are primary and main, but of course, it also has certain financial attributes based on the characteristics of crypto products. Especially from the technical point of view, NFT is also a kind of Token, and it is possible to issue FT based on NFT similar to asset securitization operation, then this is very similar to the previous ICO, in which there will be a lot of compliance issues. There are already some token illegal financing projects packaged as NFT in the market, which is something that investors need to pay careful attention to. The biggest hidden danger currently affecting the healthy development of NFT is that NFT is being used as a tool for illegal fundraising. Engaging in the NFT industry must strictly comply with the provisions of China’s laws and regulations related to fund-raising, including the “Announcement on Preventing the Risks of Token Financing” issued by the People’s Bank and seven other ministries on September 4, 2017, as well as the provisions in the Regulations on Preventing and Disposing of Illegal Fund Raising, which will be implemented on May 1, 2021. Of course the general NFT industry does not normally involve crowdfunding financing as it is linked to a specific product. It is strongly recommended to avoid using NFT to become a financial financing tool and a pyramid scheme.

NFT platform and asset securitization. Asset securitization, on the other hand, is the issuance of securities for sale to investors based on the future earnings of a particular asset, and the original owner of the asset transfers the right to the future earnings of that particular asset to the holder of the securitized asset. Specifically to NFT and FT, we can consider that each specific asset is an NFT, and the securities issued according to that specific asset are similar to FT. the platform should be fully docked to the traditional asset securitization operation if it cannot do all the transaction cash flow to run on the whole chain; if all the transaction cash flow can be run on the chain, it should strengthen the communication with micro-regulators on the basis of ensuring safety.

In short, NFT technology applications and industrial development is surging, and the application scenarios and application experiences it brings are unprecedented, perhaps opening a new era of digitalization of goods, industry and governance, but the challenges and risks it brings are undeniably unprecedented. This article is a summary of our thinking based on the application of NFT technology and legal regulation experience at home and abroad, to give a preliminary framework of application and legal regulation thinking, of which there is still a lot of in-depth and detailed work to be done, I hope this article can inspire the industry and regulators to rational thinking, so that we continue to form a consensus in the communication, the collision of ideas, both to stimulate innovative applications, encourage industrial development and at the same time We hope that this paper can inspire the industry and regulators to think rationally, so that we can continue to form a consensus in the communication and thought exchange, to stimulate innovative applications, encourage industrial development and at the same time protect the legitimate rights and interests of relevant users, industrial development and social public interests, to explore an effective practice model, and to make efforts to better promote the development of digital economy and explore effective digital governance model.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/nft-technology-application-and-legal-regulation/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

Like (0)
Donate Buy me a coffee Buy me a coffee
Previous 2021-05-15 22:28
Next 2021-05-16 09:08

Related articles