Categories
NFT

Virtual assets: Non-fungible tokens and law

MOKHFI SMAHI, UNIVERSITÉ CAEN NORMANDIE

Introduction

The world is changing significantly in recent years. The development of new technologies has led to a great advance in society.

Nowadays, we do not only think of the internet when we talk about evolution but also of many other concepts that have emerged in recent years. Artificial intelligence, cryptocurrency and non-fungible tokens (NFT) are just a few examples.

All these new terms and especially the concept of NFT will have a major impact on the future of law and legislation in general. It is therefore essential to ask what is really the relationship between NFTs and the law?

To deal with this issue, three distinct parts will form the analysis of this topic. First of all, a part will be dedicated to cryptocurrency in general and its impacts on society. Then, the concept of NFT will be explained. The last part will focus on the legal aspect of NFTs with the consequences of this technological evolution on the law.

I – The world of cryptocurrency

To understand how a cryptocurrency works, it is necessary to be aware of the function of money. According to Aristotle, money has 3 functions: unit of account (through the amount of a banknote for example), reserve of value (for example a value is attributed to a product thanks to money) and intermediary of exchanges (thanks to money, it is possible to make commercial exchanges).

Money is based on a basic concept: trust. Indeed, the condition for the existence of money is that there is a common agreement. Two individuals can exchange with money because they trust its value. When buying a baguette, the seller and the buyer trust the value of the currency. But money also has its limits. When sending money from one person to another, it is customary to make what is called a bank transfer.

As the name suggests, the bank acts as an intermediary between the sender and the receiver. The problem is that in the event of a crisis such as the one in 2008, the bank may fail and unfortunately the consequences will also affect the customers. As a result, bank transfers for example will be compromised.

In addition, the bank can be hacked and bank accounts can be hacked with card fraud schemes. This is just one of the vast problems with using a bank account. This was the system used until the invention of a revolutionary system, the blockchain.

With this new concept, the use of money and exchange in general is undergoing a major change. The blockchain is a register, a computer file, which is multiplied by a peer-to-peer network (without a central entity), which means that each node of the network will hold a copy of this file (it will be multiplied). In other words, no bank or financial institution will mediate the network, but all members of the blockchain network will be able to verify the creditworthiness of creditors.

By sending money on the blockchain, all the members of the network will be able to see the amount of cryptocurrency (Bitcoin, Ether…) that the actors of this financial transaction have. The register issued on the blockchain is unforgeable because it is protected by cryptography, indestructible (because it is constantly growing) and open (the information on a blockchain can be read by everyone but this is not always the case because it can be encrypted or reserved for certain users). The files of the blockchain will be composed of blocks, pages, which can only be extended and not reduced. The pages are therefore kept in chronological order.

On this blockchain, exchanges are not made in current currency (euro, dollar, dinar…), but rather in what is called crypto-currency. These are virtual currencies, allowing financial transactions to be made virtually. The best known crypto-currencies are Bitcoin and Ether.

Bitcoin was the first blockchain to appear, two years after its creation by Satoshi Nakamoto. Nakamoto is highly skilled in cryptography and owns 5% of the Bitcoin issued, in an account that never moves, without any transactions. Ether is a rapidly developing currency. The blockchain dedicated to it, Ethereum, is experiencing a meteoric rise, particularly with what are called non-fungible tokens (NFT).

II – Revolutionary creation: Non-Fungible Tokens

Nowadays, a new technological concept is taking the cryptography world by storm: non-fungible tokens. The term fungibility is not well known, but it is essential for understanding how NFTs work. A fungible item is something that can be substituted for another without changing its value.

For example, a €2 coin is fungible because when it is exchanged with the same coin of the same amount and currency, the value will remain unchanged. Bitcoin is fungible. Effectively one bitcoin is equal to another bitcoin. So a non-fungible item, as the name implies, is something that is unique, that can’t be substituted for another.

So to return to NFTs, they are assets, digital tokens, unique, that can be bought and sold through blockchain technology, so through cryptocurrency. They are usually bought and sold in Bitcoins and Ether but other crypto-currencies are appearing in the NFT system.

NFTs can be divided into several categories depending on their nature.

Collectibles are, as the name suggests, NFTs that allow the user to make collections. This type of NFT is developing enormously, particularly with the creation of CryptoKitties. These are cats, in the form of NFTs, which are collectible. Each cat is a unique NFT and therefore different from the others. This system is inspired by the tamagotchi, with the difference that it uses the blockchain system.

Another category of NFT, the metaverses, is growing more and more. This corresponds to the fact that on video games or websites, it is possible to pay for access to plots, in the form of NFTs. These plots are not substitutable and belong exclusively to their owner, hence their uniqueness.

So there can be furniture, land, cars or even houses in the form of NFTs that will be useful for building a virtual world. Many video games such as Decentralized, Sandbox, Acxinfinity use this system of NFT plots. It is possible to associate this concept of video games with Minecraft, except that on this one, there is no NFT system.

The third category of NFTs are Trading cards games. They allow the player to evolve in a game. They are special, unique cards, allowing for example to have a special skill more and which have their value in the private key of the cryptographic wallet of the owner, thus in the associated NFT.

Utilities are NFTs that provide services. To illustrate this category, we can mention Project Ternoa. These are NFT capsules that allow data (photos, videos, texts, etc.) to be stored and programmed, and thus, like a will, once the owner of the NFT dies, it will be revealed in the blockchain in order to transmit the wishes and elements present on the NFT capsule.

Finally, the category of NFTs that is the most renowned due to its importance and value is the artistic NFT. These are digital works created virtually and displayed on the blockchain as NFTs. Unlike a JPEG image, an NFT is valuable because of its uniqueness. The fact that this NFT is rare makes it valuable. The price of each NFT varies according to supply and demand. The most expensive NFT that was sold on the blockchain was Beepl’s work, at a price of $6.6 million.

In the past, JPEG images and video elements had no financial value, but this has all changed with the advent of the blockchain. This participatory and decentralised computer system, which is defined above, allows transactions to be certified.

This is because each element of the blockchain has a private code and the other members of the blockchain can attest to the authenticity of the element. It is therefore possible to certify that a digital creation has been purchased by a certain user by generating a unique code. If this code is unique, it means that it is non-fungible because it is irreplaceable and therefore the concept of rarity is introduced. What is rare can increase in value according to supply and demand.

The first NFTs appeared in the early 2010s. Today, NFTs are everywhere. For example, the NBA has created NFTs (unique videos of the most magical moments in basketball). Some artists offer a unique limited edition of their album as an NFT, in addition to offering visual elements of their album as an NFT. It is also possible to buy NFT furniture that can be used on Minecraft creations, for example, or NFT shoes that can only be worn virtually. NFTs now make it possible to prove the ownership of a technological tool.

NFTs are a trend at the moment. Some people buy NFTs that nobody will use at huge and overvalued prices. Right now, the NFT market is associated with a speculative bubble, where everyone invests without necessarily being sure of their profit. This innovative system will also cause major changes, especially in the legal world, if it gains importance in society.

III- The impact of the NFT on the law

Law is essential in society. People need a structure, rules to be able to live together without falling into anarchy. Since Antiquity, rules, laws and duties have changed greatly. Before that time, most of this legal change was due to wars and revolutions. The people rose up against injustices and the legal system of society changed as a result. During the French Revolution, for example, the majority of the French people, the so-called “Third State”, suffered from the privileges of the Nobility. The accumulation of inequalities pushed the people to revolt.

As a result, the absolute monarchy was abolished and the Universal Declaration of Human Rights was written. This was one of the major turning points in French law. This case of legal development could be identified with many others in the world and it proves that the law is constantly evolving.

However, one historical turning point pushed the law to adapt strongly to society: technological progress. This has led to the creation of many new legal concepts such as digital law, through the evolution of the internet or intellectual property law. The world is now governed by technology and innovation, and it is essential to regulate all these new elements through the law.

Now, a new shake-up in the legal environment is emerging through the creation of NFTs. These virtual elements are a major innovation, particularly in the artistic world, but they have a real impact on the law. It used to be absurd to have to regulate the authentication of JPEG images or videos on the internet, but that has changed. NFTs, because of their uniqueness, demonstrate the importance that property and digital law can have on society.

The first major change the world will face as a result of this innovation is related to certification and authentication. Before the advent of NFTs, the law had many ways of proving the authenticity of an item: signature, fingerprint, facial recognition, auctioneer… NFTs do not need this system because the blockchain allows them to be certified through unique cryptographic codes.

In this virtual domain, elements such as signatures are no longer necessary and the jurisdiction will have to adapt. Certification and authentication professions such as art experts or auctioneers will become obsolete.

Certification will only be present through the NFTs, so everything that used to be in place will become unnecessary. Auctions will be conducted directly on the blockchain.

Indeed, the NFTs are already authenticated and each one offers its price until the sale is over, so no intermediary is necessary. The disappearance of these trades that NFTs could bring about in the future would considerably reshape current international law.

In addition, copyright and property law will also be disrupted. The major problem facing society today in the commercial environment is the concept of counterfeiting.

This concept is defined as a reproduction or imitation of an object by a clandestine or known company that appropriates the trademarks of a company’s products, a document (especially an official one), a work or a commodity, either by indicating or implying that the thing is genuine, or by violating an intellectual property right or copyright.

Thanks to blockchain technology, which protects the identity of original assets, the sale of fakes is virtually impossible, unlike the tragic situation of counterfeits in the real world. Furthermore, the concept of copyright is often linked to a fungible element. In the opposite case, given the uniqueness and scarcity of NFT, copyright could disappear, as long as this concept linked to blockchain is only a passing trend.

Of course, the purpose of law is to set limits, but as with any product or service, abuse is commonplace. NFT technology is based on cryptography. Once some people have mastered how it works, they may use it in a harmful way, so as to damage the NFT world. The law will have to take these abuses into account and therefore put in place a new, innovative and adaptive legal framework to deal with these acts of virtual delinquency.

However, NFTs will be good for the law in the sense that contracts can be more secure. As explained above, some NFTs are linked to services. It will be possible to create contracts (sale, labour, supplier…) in the form of NFTs. It will therefore take a unique form and will be available to only one party of the contract.

For example, in a sales contract, the buyer will have an NFT with his obligations and rights under the contract and the part where he commits himself and the seller will have an NFT with his rights and duties and the part reserved for his signature. This element will be decisive for securing contracts in different areas.

Conclusion

In conclusion, it is necessary to pay attention to the development of NFTs because they will have a determining impact on the world of tomorrow.

The law will be turned upside down and must prepare itself now for the advent of these digital assets. Cryptography has been legally framed, so the law is beginning to be familiar with this area, but it is essential to be able to enact new legislation to deal with any eventuality concerning NFTs. It is a young technology, with many years behind it, but it is important to remain vigilant and to understand the importance of an NFT before investing in it.

Some people have paid millions of euros in this innovative virtual product but without certainty of its value. Governments will have to educate their citizens on the use of this new technology.

But in ten years’ time, will the world really see the rise of NFTs, or will they be the remnants of a fallen technology?

Cryptocurrency and legislation in Ukraine

Share

Leave a Reply

Your email address will not be published.