Tencent Si Xiao: An Analysis of the Property Legal Issues of the Blockchain Non-Homogeneous Token (NFT)

As a key technology from the Internet of Information to the Internet of Value, the combination of blockchain and digital assets is the most eye-catching social experiment of blockchain so far. In short, the blockchain provides a new paradigm for the creation, issuance, custody, transaction, and use of digital assets. The great success of cryptocurrency represented by Bitcoin is proof. Different from the cryptocurrency as a fungible token, the huge auction of encrypted digital art as a non-fungible token (NFT) since 2021, plus some celebrities The blessing and use of NFT has allowed NFT to enter the mainstream vision, and its value has also risen. For example, an original painting by artist Banksy was burned in a live video broadcast and then sold for $380,000 in the form of NFT; Twitter CEO Jack Dorsey sold the first tweet in history, and the final bid was 2.9 million U.S. dollars; the highest price of pixel avatar cryptopunks reached 7.5 million U.S. dollars; the pure digital artwork “Everydays: The First 5000 Days” of artist Beeple sold a staggering 69.3 million U.S. dollars.

Spending huge sums of money to buy virtual art that does not exist in the real world sounds a bit like a fantasy, but driven by standards such as Ethereum ( Ethereum ) ERC-721, NFT is developing rapidly to meet people’s digital Continued demand for collections. Every NFT is unique and represents a unique digital asset. From the early “CryptoKitty” (CryptoKitty) to the current hot digital art auctions, the combination of blockchain and online games, IP and original digital art is injecting tremendous vitality into the NFT market. Moreover, as a type of blockchain digital asset, NFT can be combined with smart contracts to write different functions and behaviors into digital assets in the form of code and realize automatic execution, which makes the law become code; for example, based on the Ethereum EIP-2981 standard The smart contract can automatically allocate a part of the subsequent NFT sales income to the initial owner, so that the initial owner can share the income from the secondary market. In short, the changes that blockchain may bring in terms of asset forms, financial systems, and business models are expected. At the same time, NFT and related transactions that break through traditional imagination have also brought a certain impact on the application of existing intellectual property rights, property rights and other relevant legal rules.

Overview of the development path of NFT

(1) The market logic of NFT development

The rise and prosperity of NFT are not pure capital carnivals and market bubbles, but have their own market development logic. In fact, there are two market attributes behind the NFT investment boom. First of all, from the perspective of market supply, NFT reflects the scarcity of supply value, which is also the root cause of the rapid popularity of the blockchain digital asset market. With the help of the storage and transaction mechanism of the blockchain, NFT has the physical characteristics of non-copying, non-tampering, and full traceability, which can effectively overcome the “copy and paste” problem in traditional Internet applications. Secondly, from the perspective of consumer demand, NFT represents unique demand value. For a long time, human beings have attached great importance to the uniqueness and scarcity of goods economically and emotionally. Economically, the scarcer a thing is, the more people are willing to spend money; emotionally, people add unique value to the item based on personal experience. The decentralized account of blockchain technology is the first step, producing scarce Bitcoin and other digital assets; the emergence of NFT further creates unique digital assets, allowing people to buy and sell like in the physical world And own unique digital objects such as digital artwork.

NFT actually refers to a data unit (data unit) stored in a digital ledger, generated by a specific software program on a public blockchain platform (such as “Ethereum”, etc.), and recorded in the smart contract (smart contract) generated by the platform. Among them, as an identification tool for the source of a specific digital asset, it has indivisible, irreplaceable, and unique characteristics, and cannot be exchanged with any other NFT, just like everyone’s fingerprint or retinal blood vessel identification. NFT usually uses a long string of English letters and numbers to interface with a specific blockchain and its smart contracts, which is also called a “hash function” (hash) [1]. Because of this feature, NFT has recently become an excellent tool for the preservation and identification of any electronic files, whether image files, audiovisual works or even various intangible “virtual properties” such as “treasures” in online games. Clothing, weapons, real estate, etc., can all be “branded” with the NFT mark and become a unique “block” for permanent preservation and verification. NFT itself has therefore become an object (virtual entity) with collection value.

(2) Application scenarios of NFT

NFT really got the attention of the public in 2017, when CryptoKitties (“Ether Cat”) promoted the fashion of buying NFT collectibles worth hundreds of thousands of dollars. “Ethere Cat” refers to the images stored on a specific ERC-721 token. The ownership of these tokens is determined by a smart contract. When the holder wants to sell an “Ethere Cat”, the pass Being traded from one digital wallet to another, the ownership of the token is recorded as a legal right by the smart contract. Just like the usual situation of cryptocurrency and NFT, the value of Ethercat is reflected in the system, and the only way other people want to obtain it is reproduction (creating a new encrypted cat with new characteristics) or purchase.

After CryptoKitties, Axie Infinity expanded the application of collecting props to a richer online game environment. On Axie, users can buy and raise Axie that looks like a little monster. [2] Each monster can be used in adventure or arena style games or against other players. Axie not only provides customizable skins for characters, it actually allows players to create a completely unique character. On Axie, players can make money by selling their Axie, in-game land, and collectible items. [3]

The field of digital art is also one of the main application scenarios of NFT technology. Through NFT, the ownership of digital art can be proved, and owners can use their tokens in various online social spaces. At present, some NFT market trading platforms have emerged, which have further promoted the rapid development and trading of NFTs. For example, Rarible is a comprehensive trading platform on Ethereum that allows creators to make money from downstream sales of their products. In the process of each NFT sale, creators can obtain a certain percentage of copyright shares from it. Another digital art market, SuperRare, is different from other market platforms that store digital art outside the Ethereum blockchain. SuperRare stores the hash value of digital art directly in the token of the smart contract, that is, digital art exists in The token itself, so when someone buys a token, even if the external server stops maintenance, digital art will continue to exist. SuperRare also focuses on developing a social environment for digital items owned by users by creating a digital art social media space (not just a market).

At present, the main categories of NFT include: 1) digital art; 2) collectibles; 3) decentralized finance (DEFI); 4) games; 5) metaverse (virtual world); 6) sports; 7) Functionality; 8) domain name; 9) trading card. And the use of NFT has gone beyond the scope of digital assets. For example, Zora’s NFT agreement allows users to use tokens to sell rare or unique physical items. Each item will be granted an NFT, and users can buy and sell this token. This token is not bound to a digital artwork, but a physical object. The token allows users on Zora to trade the item and obtain its increased value without the need to transport the item. Once a user wants to buy a physical object, he can choose to exchange the token, and then the physical object will be delivered to the user. That is to say, the further application of NFT on physical assets can provide a more effective market for assets that are frequently traded such as artworks, automobiles, and even land. [4]

(3) Features and technical principles of NFT

1. Basic concepts and characteristic attributes

NFT stands for non-homogeneous tokens, which are irreplaceable tokens with specific identification (ID) issued on blockchain platforms such as Ethereum in accordance with technical agreements or technical standards. The identification (ID) can Append corresponding metadata. [5] In the traditional digital world, ownership of digital assets cannot be compared with ownership in civil law, but blockchain technology gives digital assets new attributes and characteristics, enabling their holders to enjoy ownership comparable to that in civil law Rights and interests. NFT is a digital asset endowed with brand new attributes by blockchain technology, and its attributes can be summarized as follows [6]:

(1) Scarcity and uniqueness. NFT is scarce, and smart contracts allow developers to set a hard cap on the supply and issuance of NFT, even the creator himself cannot copy it at will [7]. NFT is unique, and the smart contract forces the NFT to execute properties that cannot be modified forever after issuance.

(2) Standardization. By identifying the NFT on the public blockchain, developers can build universal, reusable, and inheritable standards related to the NFT. The standards include ownership, change and transfer, and simple access control. The standardization of NFT is similar to the JPEG or PNG file format of images, HTTP requested between computers, and HTML/CSS addresses used to display content on web pages.

(3) Interoperability. The universal NFT standard provides a clear, consistent, and reliable API to read and write data, which can help non-homogeneous tokens transfer in multiple digital ecosystems. When a developer starts a new NFT project, the NFT project can be viewed in different wallets, traded in different markets, etc. at the same time.

(4) Tradability. Tradability is based on interoperability. Users can transfer digital items from the original ecosystem to another market for trading. The tradability of digital assets represents the transition from a closed economy to an open and free market economy. Market players do not need to continue. Manage every link from resource supply to pricing to capital control.

(5) Liquidity. Instant tradability promotes stronger liquidity. The NFT market can meet the needs of different audiences ranging from old transaction subjects to more novice players, so that a wider range of buyers can access more abundant assets.

2. Technical standards

NFT technical standards ensure that digital assets operate in a specific form and can accurately interact with the basic functions of digital assets. NFT evolved from the ERC721 standard. At this stage, the NFT technical standards are typically represented by ERC721 and ERC1155. ERC721 is further developed based on the ERC20 smart contract, which defines the minimum interface required to exchange and distribute tokens, including ownership details, security and metadata. The ERC1155 standard reduces the transaction and storage costs required by NFTs, and batches multiple types of non-homogeneous tokens into the same contract. [8]

Specifically, ERC721 was first proposed by CryptoKitties [9]. It is the first standard in the field of NFT and the most popular technical standard for NFT. ERC721 is an inheritable smart contract standard, that is, developers can create a brand new ERC721-compliant smart contract by directly importing a new ERC721-compliant smart contract from the OpenZeppelin [10] library. The operating mode of ERC721 is relatively clear and simple. It provides a unique identification (ID) to address mapping process. Each identification (ID) represents a digital asset, and each address represents the holder of the identification (ID). In addition, ERC721 also allows the transfer of related digital assets by using the transferFrom function. In short, ERC721 represents the basic content of NFT, one is the proof of holding NFT, and the other is the method of transferring NFT.

ERC1155 is a brand-new smart contract concept, which takes a semi-alternative path to express NFT. In the ERC1155 standard, what each identifier refers to is not a single asset, but a category of assets. Specifically, an identifier in the ERC1155 standard represents the NFT of a certain asset class, and each wallet holds more than one specific asset under the asset class.

These two technical standards have their own advantages and disadvantages. In terms of transferring digital assets, under the ERC721 standard, assuming that users need to transfer 1000 digital assets, they need to modify the state of the smart contract by calling the transferFrom function to obtain 1000 irreplaceable and unique tokens in order to realize the transfer; and In the ERC1155 standard, you only need to call the transferFrom function, and perform a single transfer operation after the number is determined to be 1000, and there is no need to obtain another 1000 tokens for transfer. In comparison, ERC1155 can provide a more convenient and efficient transfer and transmission path; while the ERC1155 standard achieves high efficiency, it sacrifices information records. Under the ERC1155 standard, it is based on the category of digital assets. After the transfer, it cannot be traced back to the information record of a specific or designated asset.

3. Metadata

Metadata is data that provides information about other data, that is, data about data [11]. In NFT, metadata provides descriptive information about a specific identification (ID). For example, in CryptoKitty, metadata is about the name of the cat, the picture of the cat, description, and any other characteristics.

Metadata can be stored on the chain or off-chain. Metadata stored on the chain has the following advantages: (1) Metadata can remain in the token permanently; (2) Metadata can be changed according to the on-chain logic; (3) In digital technology, even if the original website is not Existence can also ensure the continued existence of metadata. [12] Although the benefits of storing metadata on the chain are more obvious, due to the existing technical storage limitations of the Ethereum blockchain, most metadata are actually stored off-chain. In the original ERC721 standard, the metadata extension specifies a tokenURI, which is a URI that can return the identification (ID) of a single token, that is, the metadata of a given item can be located by the application through the tokenURI. [13]

There are two main ways to store metadata outside the chain. The first type is centralized servers, but the defects of centralized servers are more obvious. The main manifestation is that developers can change metadata at will, and if the project is offline, the metadata may be affected. Obliterated in the original source. The second category is IPFS (InterPlanetary File System). IPFS is a peer-to-peer file storage system that allows content to be hosted across computers so that files can be copied to different locations. Compared with centralized servers, IPFS ensures (1) the immutability of metadata, which is uniquely located by the hash value of the file, and (2) as long as a node is willing to host the data, the data will exist for a long time. [14]

Analysis of NFT’s Intellectual Property Protection

Generally speaking, the subject matter of the NFT transaction is limited to the NFT asset itself, that is, the subject matter of the NFT transaction is only the identification of the specific electronic file to which the original work belongs, that is, the specific NFT itself, not as much as the work it points to. In other words, most NFT transactions do not involve the transfer or license of copyright, and many NFT trading platforms even explicitly exclude the right of NFT purchasers to make commercial use of the work in the user agreement. Unless otherwise agreed by both parties, the original author of a work still fully retains the relevant intellectual property rights of his work. However, whether the NFT itself under the blockchain technology can be protected by copyright, and the unauthorized casting of other people’s existing works into NFT and other issues need to be further explored.

(1) Separation of NFT ownership and NFT pointing content intellectual property rights

In terms of the ownership of rights, the ownership of the NFT as a unique token does not mean that it directly enjoys the copyright of the content or works pointed to by the NFT. In intellectual property law, the object of intellectual property is immaterial, and the object of intellectual property is often attached to the material carrier, but this does not mean that the object of intellectual property is the material carrier itself. Therefore, obtaining the material carrier itself does not mean Enjoy the intellectual property rights carried by the material carrier. [15] After the work is NFTized, the NFT is the material carrier of the work on the blockchain. The work exists on the blockchain by being attached to the NFT. Therefore, the holder of the NFT does not necessarily enjoy the NFT. Point to the intellectual property of the work.

In the process of NFT circulation transactions, whether the purchaser of NFT obtains intellectual property rights and what kind of intellectual property rights he obtains depends on the relevant contractual agreement. Take the NBA TOPSHOT transaction as an example. NBA TOPSHOT is originally owned and operated by Dapper Labs. After the transaction, Dapper Labs cannot seize, freeze or otherwise modify the holder’s ownership of the NFT. Unlike ownership, its license contract template states that the transaction of NFT does not transfer any related intellectual property rights of NBA TOPSHOT. Dapper Labs can revoke the holder’s intellectual property license related to NFT, including making or selling copies of NBA TOPSHOT and transferring NBA TOPSHOT. The copyright or the right to create derivative works based on NBA TOPSHOT, for example, Dapper Labs can revoke the holder’s permission to use and display NBA TOPSHOT in video clips. [16] The separation of ownership and intellectual property rights in NFT transactions can easily lead to transaction conflicts. In March 2021, some purchasers in the United States filed civil lawsuits for not obtaining relevant intellectual property rights. [17]

Furthermore, whether intellectual property rights are included in the transaction object, on the one hand, depends on the contractual agreement, on the other hand, it depends more on whether the technical conditions allow it. Theoretically, with the development of technology, under the condition that the technology can be supported, the contract can stipulate a specific technical method, so that the intellectual property rights of the works pointed to by the NFT are included in the transaction object, such as the use of the programmable and design feature of the smart contract Realize the transaction of intellectual property rights, such as limiting the playing time, playing method, playing environment, and even playing objects through technical means, so that non-material intellectual property rights can be effectively controlled by specific entities after the transaction. [18]

(2) The risk of intellectual property infringement in the NFTization of works

In practice, the process of casting a digital file protected by copyright into an NFT (that is, NFTization) may face significant risks of copyright infringement. On the one hand, the digital objects pointed to by the NFT may be pirated content. On the other hand, there may also be cases where the copyrighted works are NFTized without the permission of the copyright owner. For example, in March 2021, an automatic NFT tweet generation robot named @tokenizedtweets appeared on Twitter. [19] Twitter users can use the robot’s automatic NFT function to copy and plagiarize the works published on Twitter without the artist’s informed permission. You only need to attach the robot’s link to the tweet. Automatic NFTization of the works of others, and then selling the NFT works to the auction website to obtain profit based on infringement.

Whether it is counterfeiting or piracy, or unauthorized NFTization, they are all violations of the rights of copyright owners as stipulated in the Copyright Law. NFT, as a digital product with blockchain as the underlying technology, is difficult under the existing technical conditions. Identify the legal status of its digital objects. Moreover, casting a pirated NFT will also affect the scarcity or uniqueness of the genuine NFT, which may detract from the economic value of the digital asset, thereby affecting the legitimate rights and interests of the owner of the genuine NFT. Therefore, in the context of copyright NFTization, how to use the storage and authentication of the blockchain and the authorization and performance mechanisms of smart contracts to balance the interests of all parties is also a problem that needs to be fully considered in the future development of the NFT economy.

In addition, the open source trend of NFT technology may increase the risk of intellectual property infringement related to NFT. At present, the practice of NFT autonomy (DIY) has appeared in the market, that is, with the help of a simple ledger agreement to create an NFT, so that creators can freely select works for casting and auction. [20] The open source of NFT may become the next outlet in the digital asset market. On the one hand, it can accelerate the integration and implementation of blockchain technology and digital works, and on the other hand, it will bring new copyright protection issues. First of all, NFT open source will increase the use and circulation of technology and reduce the technical cost of the public using NFT, but it also means that works uploaded by copyright owners on the Internet may become “non-homogeneous products” for others to perform NFT. Lost the “casting right” of the work without knowing it. While open source technology provides creators with opportunities to realize their works, it may also force right holders to preemptively and prevent infringement risks by casting their works into NFTs in advance. In addition, in the future, the landing of NTF assets may be conducted through private transactions between users in addition to bidding and auctioning through intermediaries. In the absence of the endorsement of a third-party intermediary, NFT buyers need to pay more attention to the verification and verification of the copyright of the work to avoid copyright defects and hidden dangers of copyright infringement in NFT transactions; NFT sellers also need to confirm their own rights before casting non-self-owned works into NFTs The legitimate rights and interests of electronic works or the necessary copyright permission has been obtained. [21] Therefore, in the context of NFT open source, how to authenticate, license, protect and fully regulate copyright abuses of copyright owners’ works is also a question worth pondering.

(3) The infringement liability of the platform subject in the NFTization of the work

In the above circumstances, when the copyright owner of the work pointed to by the NFT claims that the NFT product on the NFT platform infringes its copyright, the subject of the infringement liability is not clear under the existing legal provisions, except for the work NFT It is an unavoidable topic whether the NFT platform should bear the responsibility for infringement.

At this stage, in order to minimize infringement disputes in the process of NFTization of works, different NFT platforms take the initiative to make different responses. Some NFT platforms will make a disclaimer in advance, clarifying that they will not be liable for copyright infringement that may exist in the process of NFTization of the work; some NFT platforms such as SuperRare will verify the identity of the creator and take the initiative to reduce the risk of copyright infringement; partly Platforms such as Opensea take the initiative to take the “notice-delete” path, and clearly state in the terms of service that NFT-related content will be withdrawn according to the formal infringement notification requirements, and if the uploading user is determined to be a repeat infringer, the user’s access to the Opensea platform will be terminated. Visit. [22] The risk of copyright infringement is one of the unavoidable important contents that the NFT platform has to face and deal with. The NFT platform’s initiative to set up the pre-platform liability clause is a measure to minimize the possibility of conflicts. The predecessor clause of the NFT platform is a unilateral statement of responsibility. It is also necessary for the judicial and even legislation to pay attention to the issue of the division of the main infringement liability in the process of NFTization of works.

In current laws and existing legal practices, the liability of the NFT platform can be compared with the liability of the WeChat applet platform. In the “WeChat Mini Program Case” [23], the court held that the content on the mini program was directly provided by the developer to the user, and the mini program platform could not take measures to deal with the specific service content actually provided by the developer. Therefore, the mini program platform It is impossible to achieve the necessary measures such as deletion and blocking that can be taken by general network service providers, and the responsibility model of the applet platform does not apply to the “notification-delete” rule. After clarifying that the mini program platform’s liability model does not apply to the “notification-delete” rule, the court still emphasized the statutory obligation of the mini program platform, that is, the platform should take necessary measures within the scope of technically feasible after effective notification by the right holder.

Similar to the “WeChat Mini Program Case”, the NFT platform also has technical characteristics such as non-discrimination, technicality, and passivity. It is also not an information storage service space or provides search and link services, so it is also not universally applicable on the NFT platform. “Notice The responsibility model of the “delete” rule requires comprehensive consideration of specific factors such as the nature of the relevant network services and the faults of the platform, and the establishment of technically achievable, reasonable and reasonable platform responsibilities that do not exceed the necessary limits. Although certain platforms, such as Opensea’s technology, allow proactive responsibility for this path, this should not apply to all NFT platforms broadly and indiscriminately. Moreover, due to the distributed and immutable characteristics of the blockchain network, it is also very challenging to delete related certificates from the blockchain network and delete specific digital files from the IPFS network outside the chain.

Although at this stage, according to the existing technology, the NFT platform does not assume the responsibility path of the “notice-delete” rule, the NFT platform’s liability for copyright infringement should not be viewed from a static perspective, and the degree of liability should be developed with the level of technology. Match. With the development of technology, when technical conditions permit, the platform’s duty of care should be gradually increased, instead of ignoring the status quo of technological progress, and blindly relaxing the possibility of platform’s duty of care and responsibility. In the future, the NFT platform should maintain an open and transparent policy as much as possible, disclose documents and materials related to NFT, so that users have enough information to make a basis for risk research and judgment beforehand, and at the same time, they should do their best to the extent that technology can be realized. It is possible to set up a convenient infringement complaint mechanism for right holders, and jointly maintain a network environment that respects the intellectual property rights of others.

Analysis of NFT’s Property Rights Protection

(1) NFT meets the characteristics of property rights

Blockchain digital assets such as NFT have characteristics different from traditional virtual assets, and it is necessary to clarify their positioning and protection in my country’s private law system. Article 127 of my country’s “Civil Code” stipulates: “Where the law has provisions on the protection of data and network virtual property, follow those provisions.” However, there is still a lack of relevant supporting provisions to link with it. Whether the object of “data and network virtual property” points to the level of data files, and what kind of right protection is this type of protection, whether it is a creditor’s right, real right or intellectual property, or a new type of right or right, does not matter. Clear. As far as new digital assets such as NFTs are concerned, they have new characteristics different from traditional virtual assets because they exist in the blockchain system. These characteristics make the asset ownership and asset quantity information clearly determined, and the holder can perform Exclusive control is in line with the characteristics of property rights and should be protected by referring to the path of property rights protection.

Ownership under the real right system of our country includes exclusive possession, use, profit and disposal of the object of right. The object of general right is all kinds of movable and immovable properties that are exclusive and competitive. Non-exclusive and non-competitive data files are easy to tamper with, not easy to specify, and difficult to be controlled and monopolized by civil subjects, making it difficult for data files to become the object of property rights protection. [24] NFT makes data files have de facto exclusivity through blockchain technology, and effectively solves the problems of data files being easy to tamper with and difficult to specify. The rights of NFT holders to their NFT include exclusive possession, access, control, use, profit and disposal, etc., which are closer in nature to ownership under the property rights protection system, but are similar to traditional claims, intellectual property rights, etc. There is a big difference.

Specifically, on the one hand, each NFT is unique and cannot be copied, which effectively overcomes the lack of scarcity of traditional digital assets, and NFT technology can accurately display the creator, owner, quantity and other information of the NFT. The combination of digital assets has sustainable value, which means that NFT has objectivity. The value of a digital token is that the person possessing data (such as a private key) can initiate, confirm and validate the transaction according to the rules of the relevant blockchain system, which proves that the digital token is a concrete and relatively independent object . On the other hand, the transaction subject enjoys exclusive control over the NFT held by it. Although NFTs cannot be physically and realistically possessed and controlled like tangible objects, the holder of private key can exert actual exclusive control over a specific NFT through the private key, and such control is absolute. Don’t be diverted by the will of others. This exclusive control comes from the cryptographic authentication process adopted by the blockchain architecture, which only allows private key holders to dispose of (such as transactions) related assets.

Moreover, NFT can effectively overcome the publicity problem of “intangible things as property rights protection”. A blockchain system with features such as immutability, verifiability, and trustlessness is an excellent way to publicize digital assets and related transactions. The NFT’s public key contains information such as the ownership, value, and transaction history of the asset, which is recorded in the blockchain network and disclosed to the world or system participants. In fact, NFT is a digital ownership certificate that can be used in blockchain network transactions, which is verified by the blockchain network. There is no situation where the ownership is unknown or the ownership is confused. Furthermore, in the digital age, it will be difficult to adapt to the development of the digital society if it still follows the rule of “property rights must be based on physical objects” established in the pre-digital era. With the application of blockchain, especially the tokenization of assets The development of the token economy requires a response from the property law.

Finally, the NFT market is different from the existing business model of the virtual goods market. In traditional online virtual markets, the e-books, music, etc. that we buy from virtual electronic platforms such as Google, Apple, or Amazon do not obtain their ownership, but are more of a license to use these content. For example, Amazon can delete books purchased by users from the buyer’s Kindle account for certain reasons. Such situations are becoming more and more common in the digital economy. Therefore, the book “The End of Ownership: Personal Property in the Digital Economy” (The End of Ownership: Personal Property in the Digital Economy) points out that the development of the digital economy has eroded people’s ownership. However, the NFT market is transforming this business model, reversing the erosion of ownership in the digital world. Pictures, videos, music, texts, tweets and other digital objects can be converted into NFTs for trading. Fans can also collect and trade NFTs related to specific players or teams. In this mode, NFTs can become objects of property rights. , The buyer can enjoy ownership. This means that with the help of blockchain and NFT, ownership in the digital world can be reshaped.

(2) Legal analysis of smart contracts for realizing NFT transactions

NFT ownership transactions are mainly realized through smart contracts. Blockchain-based smart contracts are written into the blockchain in a digital form. The content is open and transparent and cannot be tampered with. When the preset conditions are met, the smart contract will be triggered. With automatic execution, both parties to the transaction can realize the transaction with confidence. However, the legal status and liability of smart contracts for trading NFT ownership still need to be further clarified.

On the one hand, smart contracts are different from contracts formed by mutual agreement between the parties. my country’s contract law focuses on the process of contract formation, emphasizing the agreement between the parties and the purpose of signing the contract. The smart contract mainly uses computer code to capture information to verify whether the preset conditions are met. When the conditions are met, the automatic execution produces the desired transaction results. The emphasis is on the automatic execution process, which is difficult to be recognized in the legal sense. The contract is more likely to be regarded as a contract performance tool.

On the other hand, if there is a problem in the automatic operation of the smart contract technology that causes losses to the parties, the dispute resolution mechanism is uncertain. In the case of breach of contract in the traditional contract law relationship, the breached party can seek relief from the court or arbitration agency, but the smart contract is different from the contract under the traditional contract legal system. A related case has appeared in the United States. In the case of Rensel v. Centra Tech[25], the Florida court was required to determine whether a buyer who purchased cryptocurrency through a smart contract was bound by the terms of the arbitration agreement appearing on the seller’s website. The court held that because the buyer purchased the cryptocurrency directly through a smart contract rather than through the website, it was not subject to the arbitration agreement on the website. With the development of digital assets such as NFTs, the number of transactions realized through smart contracts will continue to increase. It is necessary to seek effective supervision and corresponding remedies in my country’s laws based on the particularities of smart contracts to protect NFT transactions.

NFT’s future application space

Since the development of NFT, the creation tools have become more and more powerful. Blockchain technology has proven to be the best solution for the creation, issuance, registration, storage and trading of digital assets, and it is applicable to any form of assets. The development prospect of the blockchain digital asset market represented by NFT is promising, and the future space is huge.

(1) Asset digitization

Asset digitization is a process of “certification” transformation of traditional assets, which can bring new advantages to the registration, storage and trading of traditional assets. Under the blockchain framework, all property can be turned into smart property, that is, the property is written into the blockchain and represented by a unique identifier (ie, “digital certificate”), so that the property can be Tracking, controlling and trading. This means that all tangible and intangible properties can be registered and circulated on the blockchain. This is the great vision of blockchain in the asset trading market, and it is expected to build a new asset trading model.

The tokenization of financial assets is the first wave, because these markets have been digitized and involve asset transfers and ledgers, which are naturally suitable for blockchain. Traditional liquid financial markets such as stocks, debt and derivatives markets are excellent applications for tokenization. Security token offering (STO) will be a phenomenon in the short and medium term. Financial assets with poor liquidity, such as private equity, venture capital, and real estate, can also be tokenized to enhance liquidity. Non-listed financial instruments, such as employee shares of private companies, can also gain liquidity with the help of tokenization. Real estate on the chain is also expected, people will be able to directly register, transfer, and trade real estate on the blockchain. For example, the US commercial real estate trading company Red Swan and the blockchain platform Polymath have collaborated to certify real estate worth $2.2 billion to create a blockchain-based real estate transaction business and provide investors with high liquidity. And let people who can’t afford to invest in the entire real estate can invest part of it. [26]

(2) Digital assetization

NFT is an effective way to create digital scarcity, promote digital assetization, and establish ownership of digital items. Blockchain-based digital art auctions and transactions have become a phenomenon-level existence this year, and the virtual gift and digital collection market will have greater development in the future. In the future, people may be able to give their own virtual items with real ownership to their favorite anchors or their friends point-to-point, instead of relying on a certain platform or application as they do now.

Online games are also where the blockchain is used. Virtual items in online games are a hugely valuable market. However, these virtual items exist in the servers of game service providers. Players do not actually own them and face Lost, damaged, stolen, black market transactions and other issues cause hundreds of millions of losses every year. Blockchain will provide a safe and reliable new way to store, control, use and even trade in-game items, which will greatly increase the functional value, economic value and social value of these virtual items. With the help of blockchain technology, game developers can create rare virtual items and ensure their scarcity, and users can truly own the virtual items purchased by themselves. Ethernet cats, Decentraland such as block chain game has demonstrated this potential. In the future, the in-depth combination of new modes such as NFT, cryptocurrency and virtual reality is expected to build a new virtual world “metaverse” in the game field, which has now become a new outlet in the game field. Blockchain can also provide safe and reliable solutions for data transactions and data monetization, ensure data ownership, and track data flows.

In addition, tokenization can be used to measure, value, and trade traditionally untradeable things, such as environmental impact and other economic “negative externalities”. Such “externalities” are considered to have important economic and social characteristics, such as carbon credits. It will be practical to use blockchain technology to certify such non-financial assets. For example, under the background that the country has proposed carbon neutrality goals, carbon emission rights trading has been put on the agenda. Blockchain will provide a transparent and credible solution for the registration and trading of carbon emission rights, and help carbon neutrality. Goal.

(3) NFT lending market

With the vigorous development of the NFT economy, the performance of many foreign NFT platforms continues to rise, setting a record high. But behind the prosperity of the NFT market, there are also hidden worries such as poor liquidity and insufficient financing. In other words, the debt market is the missing link in the NFT economic ecology. To build a mature NFT ecosystem, it is first necessary to establish a complete capital circulation market to give full play to the asset value of NFT holders so that they can obtain loans through NFTs and at the same time obtain income by leasing their NFTs. At present, some NFT platforms have paid attention to the financing needs in this regard, and by setting up NFT lending and mortgage platforms, they have fully expanded the NFT financing market and promoted the circulation of funds and the maximization of asset value.

Currently, mortgage financing of NFT assets is becoming an important part of the blockchain economy. There have been some platforms that use NFT lending as collateral in practice abroad, such as Starter, UniLend, Lendroid and NFTfi. On these platforms, NFT owners can borrow through NFTs to make the best use of their idle NFT assets. Take NFTfi as an example. The platform is a peer-to-peer NFT mortgage loan market that allows NFT asset holders to use their NFT as collateral to engage in lending activities. The platform anchors the global NFT art and collectibles market, and has developed a set of fruitful NFT lending models in response to its poor liquidity and low realization rate. Specifically, borrowers can pledge any ERC-721 tokens (NFT assets), and other users can provide loans on demand. If the borrower accepts this loan, he will receive wETH (Ether) and DAI (a stable currency cryptocurrency) from the lender . At the same time, the NFT asset is locked into the smart contract of NFTfi until The borrower pays off the loan. If the borrower is unable to repay the loan on time, the NFT asset will be automatically transferred to the lender when the performance period expires. For the lender, you can provide a loan for any NFT asset you like, setting the loan amount, loan period, and the total amount that the borrower hopes to repay after maturity. If the borrower fails to repay the loan on time, the lender will get the NFT. [27] Based on these practical explorations, the combination of NFT and intellectual property rights will burst out new innovations, which will provide new approaches and implementation methods for the securitization of intellectual property rights, and will also lead to the transfer, licensing, and pledge of intellectual property rights. Come to a new business model.

(4) Helping the development of Metaverse

The combination of NFT, DeFi and other blockchain digital asset applications with technologies such as artificial intelligence, virtual reality (VR), and Internet of Things (IoT) is gradually realizing the concept of “Metaverse”. From the current infrastructure to hardware, content ecology, and demographic characteristics and needs, the concepts implied by the metaverse are becoming reality step by step. Before modern society, precious metals and national credit-backed currencies assumed the role of general equivalents. The meta-universe in the virtual world requires different currency exchange systems. Blockchain-based cryptocurrency and NFT may have broader application scenarios. From meta universe to real world, cryptocurrency is expected to become the most valuable connector.

Meta-Universe replicates the underlying logic of the real world, making Meta-Universe a platform that allows any user to participate in creation, and the results of labor are guaranteed. In the blockchain world, NFT is the core of solving such problems. First of all, NFT can realize the capitalization of virtual items. NFT can map virtual items and map any data content on the chain through links, making NFT an asset “entity” of data content, thereby realizing the value flow of data content. That is to say, assets in the physical world can be issued exclusively through NFT to form a “virtual expression on the chain” of physical assets, with actual value, sustainability, and free growth in an infinite world. This model may change the business model of virtual creation. Turn virtual goods from services to transaction entities. Secondly, NFT can become the materialization of meta-universe rights, just like a physical key. The program can confirm the user’s authority by identifying the NFT, and the NFT has also become a token for the confirmation of the information world. NFT can allow holders to bring their virtual wealth and virtual identity, no longer limited to any platform, to any virtual space, which can create the foundation and necessary conditions for shaping a unified meta-universe in the future.

This article was first published in “Copyright Theory and Practice” Issue 7, 2021

Notes:

[1]See Patrick Schueffel, Nikolaj Groeneweg, and Rico Baldegger, The Crypto Encyclopedia: Coins, Tokens and Digital Assets From A to Z. (2019).

[2]See The Lunacian, Axie Community Alpha: Getting Started!, AXIE INFINITY (Jan. 8, 2020)

[3]See AXIE INFINITY, axieinfinity.com/.

[4]Zora Team, How to Buy and Sell on Zora, ZORA (July 30, 2020),

[5] See Zhang Feng and Wu Pingping: “NFT Technology Application and Legal Regulation”, https://mp.weixin.qq.com/s/INf3yTCV4NVZOgBJmepvDA 

[6]Devin Finzer:The Non-Fungible Token Bible: Everything you need to know about NFTs

[7] See Zhang Feng and Wu Pingping: “NFT Technology Application and Legal Regulation”, https://mp.weixin.qq.com/s/INf3yTCV4NVZOgBJmepvDA

[8] Rakesh Sharma, non-fungible tokens (NFT) Definition 

[9] See the official website of CryptoKitties

[10] See OpenZeppelin official website

[11]metadata noun, plural in form but singular or plural in construction

[12]Devin Finzer:The Non-Fungible Token Bible: Everything you need to know about NFTs

[13]EIP-3569: Sealed NFT Metadata Standard

[14]Devin Finzer:The Non-Fungible Token Bible: Everything you need to know about NFTs

[15] See Wang Qian: “Intellectual Property Law (Sixth Edition)”, Renmin University of China Press, 2019 edition.

[16]Darius Gambino, Zachary Kizitaff:NBA Top Shot Moments – What Are You Actually Buying?

[17]Legal Analysis: NFT Lawsuit Alleges Sale of NBA Top Shot Moments by Dapper Labs Violates Securities Laws

[18] See Zhang Feng and Wu Pingping: “NFT Technology Application and Legal Regulation”, https://mp.weixin.qq.com/s/INf3yTCV4NVZOgBJmepvDA 

[19]James Purtill: Artists report discovering their work is being stolen and sold as NFTs

[20]Jamie Redman: A Step-by-Step Guide to Creating and Selling Non-Fungible Tokens Built With Bitcoin Cash

[21] Sun Yuanzhao: “Blockchain Transaction, Non-Homogeneous Token (NFT) and Intellectual Property”

[22]David Ervin, Deirdre Long Absolonne & Carissa Wilson:NFT Risks and Opportunities in the IP, Advertising, and Brand Management Spaces

[23] First instance case number: (2018) Zhejiang 0192 Minchu No. 7184; second instance case number: (2019) Zhe 01 Minchu No. 4268

[24] See Ji Hailong: “Private Law Positioning and Protection of Data”, in “Law Research”, Issue 6, 2018.

[25]See Rensel v. Centra Tech, Inc., No. 17-24500-CIV, 2018 WL 4410110 at *12 (S.D. Fla. June 14, 2018)

[26]See https://cointelegraph.com/news/red-swan-and-polymath-tokenize-22-billion-of-high-end-real-estate, accessed on March 21, 2021.

[27]NFT Labs: “Deep Analysis of NFT Lending Market”, https://mp.weixin.qq.com/s/DLUG8YhaISWdsSiCMQP02g

Author; Si Xiao, Vice President of Tencent Group, Dean of Tencent Research Institute

 

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/tencent-si-xiao-an-analysis-of-the-property-legal-issues-of-the-blockchain-non-homogeneous-token-nft/
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