Authors of this article: Zhang Feng (Partner of Wanshang Tianqin Law Firm); Wu Pingping (Director of Tencent Group Legal Innovation Center)
For a period of time, people from sports art circles, collection circles, games and entertainment circles have joined the NFT industry. Music artists released songs and albums in the form of NFTs; Rolling Stone, Time Magazine, and Snowden all announced the launch of NFTs; a Crypto composite work created by a Crypto artist named Beeple, Mike Winkelmann, sold for $69.3 million at Christie’s auction The price shocked the entire art world. eBay will allow NFTs to sell Crypto collectibles on its platform, becoming the first e-commerce company to set foot in the NFT field.
The industry, investment community and regulatory authorities are closely watching this boom. What exactly is an NFT application, what problems it solves, and what problems exist? What is the difference between NFT and other Crypto cryptocurrencies? What kind of legal logic does its issuance transaction need to comply with and how should it be regulated? We start with popular application service experience to summarize its product characteristics to further analyze the legal nature of NFT products and the relevant regulatory ideas of the NFT industry.
In this article, NFT (Non Fungible Token) refers to different quality tokens. NFT products are specific Crypto products formed by combining NFTs. The NFT industry is related to NFT products such as NFT platforms. NFT applications generally refer to the specific aspects of NFT. Applications in scenarios, products, and industries.
It needs to be emphasized that the legal thinking on the development of NFT applications, the practice and exploration of NFT products and industrial laws and regulations have just begun. What we give here is a framework. On the one hand, it is to more accurately understand the legal nature of NFT applications and the regulatory ideas based on this. On the other hand, we hope to use this framework to inspire people to apply legal characteristics and regulatory ideas to NFTs. We will jointly explore the compliance operation of NFT application development, because this is the foundation and key of NFT technology application and industrial development.
1. The NFT application provides a new service experience
Let’s first look at the more successful NFT applications nowadays. Without exception, these applications are based on the form of Crypto products; they optimize a certain experience; some of their content and value are directly related to off-chain, and some are purely on-chain Crypto products. There may be more successful applications and more good experiences in the future, which may require us to continue to summarize and explore.
(1) NBA TOP SHOT
NBA TOP SHOT is an NBA player collection card platform blockchain application established on the Flow blockchain by the National Basketball Association (National Basketball Association) and Dapper Labs. This card will make a player’s life exciting Moments such as three-pointers, slam dunks, assists and other short videos are accompanied by unique NFT products that include match information, rarity, recent sales records and other information for players to buy, sell, and display. NBA TOP SHOT divides them into several categories based on their rarity: “common”, “rare” and “legendary”.
Probably because the American NBA star cards have a market foundation, the NBA TOP SHOT product is very popular after its launch, and it ranks among the best in the total sales of the NFT field. Five months after the launch of the public beta, it has more than 800,000 registered accounts, processed more than 3 million transactions, and reached sales of US$460 million in the secondary market. On February 23, 2021, LeBron James’ “LeBron James” in the Cosmic Series 1 Set sold for $208,000, which is the highest purchase price for NBA TOP SHOT collections so far.
What role does NBA TOP SHOT play in optimizing the card trading experience? For physical cards in the past, the NBA may charge royalties when the card is sold for the first time, but it will not increase the revenue from the second transaction. Through the characteristics of ownership, programmability, uniqueness and scarcity determined by NBA TOP SHOT, the NBA and the Players Association can obtain commissions in both the first transaction and the second transaction. The specific implementation is that Dapper Labs will take a 5% fee on each transaction, and these proceeds will be distributed to the NBA and the National Basketball Players Association. According to official website data, so far, Dapper Labs has contributed $49 million to the NBA and the Players Association.
NBA TOP SHOT has completely changed the traditional fan economy and re-established the connection with fans. It not only brings economic value to ordinary fans, but also reflects fan loyalty and participation. In the past more than 3 million transactions, 1 million transactions have a transaction value of between 10 and 50 US dollars; in addition, 90% of the NFT transaction prices reaching six figures are not resold but used for collection.
(Two) Sorare
Sorare is a global fantasy football game released in 2019 based on the ERC721 protocol, allowing users to use Crypto player cards to buy, sell and manage virtual football teams. To become Sorare’s football manager, users must first register their team and apply for 10 regular player cards. Then you can form a starting lineup of 5 people and earn points based on the players’ performance in the actual football game. Users can also participate in various competitions and get ETH rewards. Sorare has obtained official licenses from teams such as Real Madrid, Bayern Munich, Liverpool, etc., and is therefore widely welcomed.
What convenience does Sorare bring 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, average score, and experience value. The player cards in Sorare include three types of scarcity: rare, super rare and unique. Each player card has a unique version, 10 super rare copies and 100 rare copies.
(Three) SuperRare
SuperRare single-version Crypto artwork market. SuperRare is a Crypto art market founded by John Crain in 2017 based on the ERC721 agreement, where artists can convert their real single-page artworks into collectible Crypto works. SuperRare’s historical trading volume and Crypto products traded have made it a major art NFT platform.
What convenience does SuperRare bring to artists? Artists can issue authenticated Crypto art works on SuperRare and be authenticated on the Ethereum blockchain to prevent forgery and provide historical sources. Artists can use virtual reality galleries and Crypto displays to display their works in SuperRare. On the other hand, art collectors can buy art on SuperRare, and then resell NFT on secondary markets such as OpenSea. All transactions on SuperRare are done through ETH, and buyers need to pay 3% for all purchases. transaction fee. Similar to traditional art museums, SuperRare also collects commissions from artists. For a sale, the artist receives 85% of the income, while SuperRare retains 15%. For the second sale, the artist will receive a 10% royalty. SuperRare describes itself as a combination of Instagram and Christie’s.
(4) CryptoKitties
CryptoKitties is the first NFT mainstream application. CryptoKitties is a game based on the Ethereum ERC721 protocol that allows users to collect and breed virtual cats. Each Token represents the only Crypto cat on the blockchain. These Crypto cats are different in appearance and features and cannot be copied, destroyed or taken away. CryptoKitties is the first NFT protocol to attract mainstream attention at the end of 2017. Because users can breed rare Crypto cats and resell new kitty for profit, the game has attracted great attention. Although the “prime time” of CryptoKitties has passed, the game has established its iconic status as the NFT field.
CryptoKitties brings players an unprecedented user experience. To start breeding Crypto 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 kittens or breed with your father-in-law (that is, father). Users can get their first kitten by buying goods in the market or bidding for kittens in the game’s “discount” system. Experienced CryptoKitties players are committed to collecting as many valuable Crypto cats 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 Gen 0 kittens scarce, and their value increases over time. In addition, kittens with low ID numbers are also regarded as rare kittens, including Exclusive cats or Founder cats, both of which can be traded at higher prices on the CryptoKitties market.
(5) CryptoPunks
CryptoPunks. CryptoPunks is one of the earliest NFTs, consisting of 10,000 unique characters or “punks”. Each punk is owned by one person, and the ownership is recorded on the Ethereum blockchain. These punks were provided for free during the initial release, and they were quickly claimed and traded on the market. Owned by more than 333,000 collectors. Users can buy and sell punk in markets such as OpenSea by installing the MetaMask Ethereum wallet. NFT data provider Cryptoslam revealed that CryptoPunks ranked 16th among the top 18 crypto collectibles sales, while CryptoPunk 7804 set the highest collection price to date with a price of 4,200 ETH ($7.8 million at the time of purchase).
The experience that CryptoPunks brings is also unprecedented. The rarity of punk is based on its type, attributes and accessories. For example, males and females are the most common types of punk, while there are only nine types of alien punk. 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 punk has zero or seven accessories.
(6) Rarible
Rarible is a market for Crypto collectibles. Rarible is an NFT market created by Alexander Salnikov and Alexei Falin in January 2020. Due to its governance token RARI, Rarible has gained widespread popularity in the crypto community. Although the recent hype about governance tokens originated in the DeFi field, Rarible was the first NFT protocol to issue its own governance token. The launch of RARI is the first step towards Rarible’s ultimate goal: the creation of Rarible’s decentralized autonomous organization. As holders of RARI, users can submit system upgrade proposals and vote on them, including decisions on Rarible transaction fees and new features.
Rarible can provide new services for content creators and artists to distribute their own works. Rarible allows users to forge, buy and sell its rare Crypto collectibles and products, including Crypto art, domain names, DeFi insurance policies, memes and metaverse. The casting of Crypto collectibles in Rarible is relatively simple. Users can first upload collections in any supported Crypto form (graphics, audio, etc.), and then add descriptions and pricing details. After that, users need to connect with their Ethereum wallet to approve the minting transaction. The NFT casting function attracts content creators and artists, they can publish trailers of their content, and the full version can be provided to users only after purchasing the relevant NFT.
(7) Ethereum Name Services
Ethereum Name Services (ENS) is the leading domain name NFT. The Ethereum Name Service was established by the Ethereum Foundation in May 2017. It is a distributed and scalable naming system based on the Ethereum blockchain. The agreement has more than 190,000 registered names and has integrated more than 100 wallets and decentralized applications to date.
NFT provides a decentralized domain name transaction service. The local TLD (ie top-level domain) is “.ETH” on the ENS. These “.ETH” domain names are unique and irreplaceable. They are represented by ERC-721-compliant NFTs, and can be purchased and traded on NFT markets such as OpenSea and Rarible. They can be seamlessly inserted into the NFT market and wallet interface to enhance Integration of NFT and DeFi. According to OpenSea data, the Ethereum name service is the leading NFT in this field, with a historical transaction volume of more than 7,119 ETH ($12 million) and more than 31,000 owners.
2. NFT application service experience comes from the unique technical application characteristics of NFT products
Technically speaking, NFT (Non-Fungible Token) is a heterogeneous (or non-homogeneous) token, which is issued based on the blockchain NFT technology protocol such as Ethereum’s ERC721 protocol and ERC1155 protocol. Token of a specific ID, the ID can be attached with corresponding metadata. Since these metadata can point to a specific online or offline Crypto product, NFT can be used to represent a specific Crypto product, so it is called NFT Crypto product at this time , NFT products. In contrast, FT (Fungible Token) is a homogenized token. It is generally believed that FT is not associated with a specific Crypto product and is usually used to represent a certain kind of equity certificate.
(1) Based on blockchain issuance, making Crypto products open, transparent and verifiable
NFT is issued based on the blockchain technology agreement. NFT is issued based on the blockchain network, and can represent the collections of the Crypto age and other specific Crypto products due to its distributed accounting, non-copyable, programmable, indivisible, irreplaceable, uniqueness, and scarcity characteristics. The value of NFT is based on the verifiable Crypto ownership certificate of the blockchain, which can realize the value flow of different ecology.
(2) Based on the specificization of information, make Crypto products right, scarce, and unique
NFT can specialize information into Crypto products. An NFT with a specific ID can attach metadata, and the metadata can point to a specific Crypto product, which does not need to be anchored to a specific offline physical product. Developers can program the contract code on the chain to keep specific attributes from changing over time. Metadata is especially important for artwork or game props, because the value of artwork depends to a large extent on the provable scarcity of the original work.
NFT can provide proof of the owner of the Crypto product. NFT provides users with ownership and license management. NFT specifies Crypto products and clarifies the owner’s address, and can program and design product attributes to achieve interactive operations between different programs. Based on this, NFT can become a unique, tradable, unique Crypto product with a clear owner, rich information, exclusive property. It can be said that the NFT technology agreement has become a tool for confirming the rights of Crypto products.
NFT can increase transaction value because it can confirm ownership. With NFT, the way to own Crypto media assets becomes exactly the same as the way to own Crypto financial assets. The tradable value of NFT ownership is reflected in its transferability. It can be resold to almost anyone in the world, which means that it has a wider pool of potential buyers.
NFT can confirm the uniqueness and provability of Crypto products. Once a work is generated NFT and recorded on the blockchain, it is unique and cannot be copied. And based on the transparency of blockchain technology, people can also verify the authenticity of the NFT at any time. Although we can also view “Stealing Horse” on the Internet, it is not the same as owning it. Just like Bitcoin, although you may not need a real physical coin to “prove” the existence of Bitcoin, you need at least a wallet that can store Bitcoin so that you can “prove” your ownership of the assets you hold.
NFT can confirm the scarcity of Crypto products. Many NFTs are unique or limited, and even the creators themselves cannot copy them. For example, the Crypto basketball card of NBA TOP SHOT, many fans hope to cherish such a card that cannot be tampered with and will not be damaged. The high sales volume of NBA TOP SHOT also proves that the scarcity value of NFT based on strong IP issuance is recognized.
(3) Based on programmable and designable, Crypto products are endowed with value
NFT can program and design the attributes of Crypto products. Based on the specific data information and equity characteristics in the application scenarios 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 that CryptoKitties integrates the reproduction mechanism directly into the CryptoKitties contract.
NFT can grant related rights and interests to Crypto products. Some NFTs use physical items and personal rewards to increase the attractiveness of NFT transactions. Luka Garza, a top American college student basketball player, launched an NFT shortly after finishing his NCAA basketball career. It comes with a series of physical rewards: Garza broke the University of Iowa scoring record in the game on February 22. Autographed sneakers worn at the time; private meditation with Garza; dinner with Garza, watching movies, and playing games with Garza; and a lifetime VIP pass for any basketball training camp held by Garza.
NFT Crypto products are subjective. The different qualities of NFTs come from their different metadata, but these differences may be ignored due to subjective transaction requirements, which also conforms to the logic that value comes from consensus. From a purely technical point of view, the data of every FT including Bitcoin is not completely consistent, but this inconsistency has no effect on transaction demand.
(4) Based on new Crypto products, it brings a whole new experience
The above-mentioned Crypto product application based on NFT technology brings a brand new experience to users. NFT transaction cards are usually the most common application carrier for NFT products. They can be created based on different blockchain networks, and their metadata, such as images, can be stored, viewed, and transmitted through wallets that support NFT. NFT transaction cards can be given immutability and public verification of ownership, and exist based on the blockchain. Many platforms provide NFT creation, purchase and sale services. For example, some of the largest trading platforms currently include OpenSea, SuperRare, and so on. Based on specific basic information, usage information, and transaction information similar to NFT transaction cards, NFT products can realize cross-ecological value flow and meet the transaction needs of different participants.
We believe that the development process of the Crypto economy is a process of industrial digitization, Crypto industrialization, and governance digitization. Which is accompanied by asset digitization, Crypto assetization, as well as commodity digitization, financial digitization and currency digitization. Judging from the current regulatory frameworks of various countries in the world, cryptocurrencies generally have several characteristics: currency attributes, commodity attributes, and securities attributes. These attributes are reflected in different types of cryptocurrencies, and sometimes even in different development stages of the same cryptocurrency. And in different application scenarios. Yao Qian, the first director of the Digital Currency Research Institute of the People’s Bank of China, pointed out that in the future, Crypto assets are assets with full information and full data. Their basic assets and financial asset attributes are gradually merged into one, and they are gradually no longer like traditional financial assets and foundations. Fragmentation of assets. NFT products are mainly Crypto products and Crypto commodities, but they also have good circulation. To a certain extent, the application of NFT reflects the beneficial exploration of industrial digitization and commodity digitization.
3. Comparative analysis of the legal nature of NFT products
Based on the above analysis, it can be seen that NFT products are issued based on the blockchain network, due to its distributed accounting, non-copyable, programmable, non-divisible, irreplaceable, unique and scarce collections in the Crypto age. Products or other types of specific Crypto products. Compared with other tokens, NFT has many unique attributes. In order to better understand the specific connotation of NFT, we might as well compare NFT and NFT products with related concepts. Through these framework comparisons, we may find that the basic characteristics and attributes of NFT products may be reflected in many different rights or products, but it is difficult to completely categorize them into a particular type of traditional rights or rights, or even to a certain extent. It is also difficult to completely fall into the traditional framework of existing legal attributes to regulate.
NFT and FT. NFT stands for Non Fungible Token non-qualified tokens, and FT stands for Fungible Token homogenized tokens. Compared with FT, the Token generated by NFT has a unique ID and additional specific metadata, while FT usually does not have a unique ID and metadata and is only used as an accounting symbol. If every bitcoin has its own transaction history, for example, the bitcoin comes from the genesis block, and if the trader cherishes this particularity, then the bitcoin can also be regarded as an NFT. But ordinary traders don’t care about this, so Bitcoin is generally regarded as FT.
NFT products and currencies. Modern countries including China generally require legal tender to be used to pay all public and private debts within their borders. Because NFT is issued based on the blockchain, in practice, it is generally traded through the homogenous token FT based on the same blockchain. For example, most NFTs developed on the Ethereum network are traded through ETH. There are also some NFTs issued based on the alliance chain that support transactions with legal currency.
NFT products and securities. Securities is a collective term for a variety of economic rights and interests certificates, and also refers to specialized types of products. It is a legal certificate used to prove that the holders of coupons enjoy a certain kind of specific rights and interests. Securities mainly include capital securities, currency securities and commodity securities. Securities in the narrow sense mainly refer to securities products in the securities market, including property market products such as stocks, debt market products such as bonds, and derivative market products such as stock futures, options, and interest rate futures. Generally, when we refer to securities, we usually refer to securities products in the securities market in a narrow sense. Securities are essentially financial products. All countries have strict regulations on what securities are and how to judge securities. The application and development of blockchain technology poses a challenge to the securities supervision of countries around the world. The US SEC currently believes that Bitcoin and Ethereum are not considered securities due to their relatively high degree of decentralization.
According to the newly revised “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 recognized by the State Council according to law; the listing of government bonds and securities investment fund shares The regulations governing transactions and the issuance and trading of asset-backed securities and asset management products shall be formulated by the State Council in accordance with the principles of this Law.
According to the characteristics of specific Crypto products possessed by NFT, it belongs to securities in a broad sense, that is, it represents a specific commodity, rather than a security certificate with a certain future cash flow.
NFT products and merchandise. NFT is issued based on the blockchain, which is unique and non-copyable, and can be directed to the owner. It is very suitable for making game props, Crypto art, tickets, etc. into NFT products. Therefore, NFT is a blockchain tool for Crypto products or Crypto commodities. Although NFT can anchor product data information outside the network, it is mainly a Crypto product. As more and more physical goods are digitized, the application space of NFT may become larger and larger.
NFT products and Crypto assets. Regarding the specific connotation of Crypto assets, it has been repeatedly discussed since the development of blockchain technology, but there is still no consensus. There is a view that “Crypto assets are programmable control assets in the form of electronic data.” There is also a view that “when Crypto resources are released to the network through the blockchain, they will be confirmed, and the Crypto resources will become trusted Crypto assets on the blockchain, which can be used for circulation and transactions.” Yao Qian, the first director of the Digital Currency Research Institute of the People’s Bank of China, believes that “Crypto assets in the true sense should be native assets that contain full information and are displayed and transferred in Crypto form.”
NFT products have all the attributes of Crypto assets. Digital assets are designable and programmable assets that exist in Crypto form, including the digitization of traditional assets and the new programmable Crypto assets, and these two characteristics are intertwined. Generally speaking, there are two major categories. One is the digitization of traditional physical assets and equity assets. Physical or equity assets such as property rights, equity, debt, other property rights, and copyrights may gradually become Crypto assets. The second is programmable Crypto assets. With the in-depth development and integration of industrialization and financial innovation, the industrial products of uniform specifications produced in the industrial age can no longer meet the demand. People hope to obtain more personalized services suitable for themselves and Crypto assets that are Cryptoly designed and programmable.
NFT products are based on the independence, interoperability, openness and transparency of blockchain information confirmation, as well as the characteristics of specific data information, and provide an operation method for Crypto product confirmation. Since the development of the Internet, various Crypto assets have been traded and consumed through the Internet, including some irreplaceable Crypto assets such as domain names, event tickets, in-game items, and even comments, likes, and reposts on social networks such as Twitter or Facebook. Both will likely become NFT products.
NFT products and claims. Creditor’s rights (creditor’s rights) refer to the right that the subject of rights has in the debt relationship that can require the subject of obligation to perform a certain behavior or not. NFT can refer to specific owners and specific Crypto products, and does not constitute two The legal rights and interests relationship between the individual subjects is a kind of rights to possess, dominate and dispose of in the legal sense, so what NFT holders have is not creditor’s rights.
NFT products and intellectual property rights. At present, most NFT products only provide proof of the owner, and what is being traded is the ownership of the “original” of the work. Well-known NFT platforms including SuperRare have made it clear that the NFT traded does not include the intellectual property rights related to the work. However, in theory, under technically supportable conditions, the programmable and designable features of the contract can be used to realize intellectual property transactions through NFT, such as technical means to limit the playback time, playback mode, playback environment, and even playback objects.
How do NFT products protect copyright? Due to the lack of clear legal constraints, NFT’s existing technology cannot completely guarantee that the creator’s copyright is respected. For example, no one can prevent the first-hand seller from placing the same NFT on different blockchains for repeated sales. On the other hand, although NFT technology can guarantee that no one can copy or transfer the NFT without the holder’s permission, it cannot control who is the first person to make a work into an NFT. For example, the Swedish illustrator Simon Stålenhag, who has not published NFT works himself, nor authorized anyone, but discovered that one of his works has become a “MarbleCard” (a kind of NFT). The current NFT is extremely lack of supervision, which makes creators feel that their copyright is not respected.
Under the conditions of decentralization, the rights and interests of copyright owners face new challenges. One of the ways that blockchain solves copyright issues is to operate collective rights management based on the community-based operation characteristics of blockchain. The use of collective management organizations (CMOs) by individual copyright owners may have problems such as lack of transparency, time lag in payment of royalties/authorizations, abuse of monopoly status, and inefficiency, but the use of such individual copyright rights in NFT Crypto products It is possible to fix and trade in form.
NFT products and data rights. As a Crypto product, NFT’s own attributes and value are also established and described based on data, including its ID is issued through a contract, and its metadata storage also has important data rights. Regardless of whether the metadata is stored on the creator’s own server or hosted on a decentralized storage system, technical means especially need to pay attention to the mapping relationship between the ID and metadata of the NFT, and the metadata and the specific product that exists. This is directly related to the NFT. Use and transaction of products.
NFT products and virtual property rights. Article 127 of the Civil Code of my country stipulates: “Where the law has provisions on the protection of data and network virtual property, follow those provisions.” Previously, the Law Commission of the National People’s Congress stated that the Civil Law The General Provisions must 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 Civil Law, how to define data and network virtual property, and how to specify the right attributes and content of data and network virtual property are difficult and controversial.
Although there are certain disputes on the concept of virtual property, the current consensus view is that the game props as virtual property are the carriers of the content of the online game service contract, but they have a certain degree of protection under the control of the players. In view of the nature and characteristics of NFT products, NFT product holders have strong control and control over NFT products, and the fact that NFT products are virtual property that should be protected by law is undisputed.
NFT products and property rights. In a nutshell, the property rights of NFT products include the following features. One is that it can be designed based on the content of its rights, which can achieve the expansion of the use of Crypto assets; the other is that it is based on decentralized and distributed accounting, and it is impossible to achieve transaction records. Tampering; The third is based on decentralized smart contracts to achieve verifiability and automatic execution.
Unlike FT, NFT can easily issue tokens with specific numbers and at the same time add descriptive metadata to the tokens. Developers can enforce it programmatically, and can only create a specific number of specific rare items. They can also enforce specific attributes not to change over time by encoding on the chain to maintain the stability and permanence of Crypto item attributes. Based on the above characteristics, NFT enables Crypto assets to obtain rights similar to property rights.
In essence, the use of NFT is still the use and consumption of objects related to its specific Crypto content, and it has expanded the connotation of “things” because of its Crypto form. NFT products may be able to specify property rights that are difficult to specify under the original conditions of non-Crypto assets, or property rights that can be specified but costly, so that the connotation of assets is greatly enriched and the convenience of transactions is greatly improved. For NFT, its target is to directly point to a certain Crypto product, regardless of whether the product is online or offline, a programming language that can be designed and customized by humans and can be conveniently executed.
As far as the legal protection of NFT products is concerned, before a new type of right is created for protection, only the protection of property rights is the most suitable for the characteristics of its rights. Judging from the existing legal system of property rights, in addition to property rights, claims, intellectual property rights, inheritance rights, equity and other investment rights, as well as the legal protection of data and virtual property, cannot be targeted and effective for Crypto assets. Protection, because other property rights except property rights are special provisions based on the specific circumstances of the possession, use, disposal, and income of property rights; while NFT is a non-traditional form in a sense That is, things with unnatural attributes, but a kind of socialized form. This kind of socialization is embodied in the design and programmable, intelligent transaction execution and so on.
NFT products and cultural products. To apply for engaging in commercial Internet cultural activities, an application should be submitted to the cultural administration department of the people’s government of the province, autonomous region, or municipality directly under the Central Government where it is located, and the cultural administration department of the people’s government of the province, autonomous region, or municipality directly under the Central Government shall review and approve it. Internet cultural products refer to cultural products produced, disseminated and circulated through the Internet, mainly including: (1) Online music entertainment, online games, online performance dramas (programs), online performances, online art, Internet cultural products such as network animation; (2) Cultural products such as music entertainment, games, performances (programs), performances, works of art, animation, etc., are produced and copied to the Internet and spread on the Internet by certain technical means.
Activities to provide Internet cultural products and services mainly include: (1) Activities such as the production, copying, import, distribution, and broadcasting of Internet cultural products; (2) The publication of cultural products on the Internet, or through the Internet or mobile communication networks Information networks such as those sent to users such as computers, fixed telephones, mobile phones, televisions, game consoles, and Internet cafes and other Internet Internet service business places for users to browse, appreciate, use or download online communication behavior; (3) Internet Cultural product exhibitions, competitions and other activities.
Therefore, although NFT itself does not belong to the creation of Internet cultural products, it only provides a blockchain-based technical device for the product to indicate the owner and specific content, but if it is to be consumed and traded, it belongs to the framework of the regulations. Products should comply with relevant regulations and obtain relevant qualifications and permits.
Fourth, the legal regulation of NFT industry and platform related issues
So what issues should we pay attention to in NFT products and industrial applications, and how to carry out legal regulations? Let’s analyze it. On the one hand, we closely follow the market demand and application characteristics, and on the other hand, we rationally and objectively face some new risks and challenges in the development of the NFT industry, and provide some prudent legal regulatory suggestions through these holistic and framework thinking. Of course These suggestions need to be continuously improved and mature in combination with practice to form a new development model and regulatory model.
(1) Basic issues of NFT industry application
NFT and industrial applications. NFT industry refers to related industries that provide services such as the issuance, transaction and use of NFT Crypto products. The development process of the Crypto economy is also a process of Crypto assetization, asset digitization and governance digitization. NFT is a useful exploration of asset digitization. We have already seen the combination of NFT with art, game props, content production, domain names and other fields. In the future, the combination of NFT with other industries may become a trend.
There are many factors that affect the application of NFT industry. One is the issue of technical standards. The technical standards of NFT are not rich enough. At present, the product attributes of applications that can be realized through access control, transmission, and combination with applications are relatively simple, and there are relatively few wallets that support applications, which may limit the application of NFT. The second is the storage problem. From a technical point of view, the storage problem of NFT metadata has not yet been completely solved effectively. Currently limited by the storage capacity of the blockchain itself, only a small amount of NFT metadata is stored on the blockchain, and the others are generally stored in the NFT issuer’s own server and stored in a decentralized form, such as with the help of the Interplanetary File System IPFS. Storage needs to be perfected. The third is the issue of diversification of rights and interests. NFT is currently more important to solve the problem of the proof of rights of the owners of Crypto works, but how to realize the technical protection of other rights and interests, including intellectual property rights, may require further exploration. The fourth is the degree of industrial digitization. The degree of informatization and digitization in many industries is not high, and the infrastructure required for issuing NFTs is not enough, which will cause application blockage. The fifth is to prevent related illegal activities. Some black sheep will use NFTs for illegal financing, fraud and other activities, which require higher identification costs and will also affect the normal development of the NFT industry.
(B) NFT platform related issues
The NFT platform should be a commodity trading information aggregation platform. Based on the nature of NFT’s Crypto products, we must first make it clear that the platform is not acting as an NFT transaction broker, nor is it acting as a financial institution, credit institution, or guarantee agency. The services provided by the company’s platform are limited to facilitating transactions between buyers and sellers, not itself Any agreement between the cryptocurrency assets or users that constitutes a buyer and a seller is only used as an information aggregation platform. At the same time, it may provide a NFT casting service that serves users, even if the process of smart contract application is more popular and simple.
As a website operator, you need to apply for ICP filing. Domain name registration is a website registration procedure. There is no distinction between operating and non-operating. As long as it is a website operating in China, it must be filed. ICP filing can be completed by the server hosting provider where the website is located. The hosting provider submits the relevant data to the Communications Administration where the operator’s server is located. The Communications Administration passes the review and passes the data to the Ministry of Industry and Information Technology. The Ministry of Industry and Information Technology issues the record number .
As an Internet information service provider, you need to apply for an ICP license (Internet information service business license). The ICP license is issued by the communications management department of each locality. The content of business ICP operations is mainly online advertising, agency production webpages, APP websites, paid information platform websites, game websites, etc. The state implements a license system for operating ICP. The operator must apply for an ICP license. An ICP license is a license for website operation. According to the national “Internet Management Measures”, a business website must apply for an ICP license, otherwise it is illegal operation.
Register as an e-commerce platform for market entities. An e-commerce platform operator refers to a legal person or unincorporated organization that provides services such as network operations, transaction matching, and information release for both parties or multiple parties in e-commerce for the two parties or multiple parties to independently carry out transaction activities. This definition involves all aspects of transactions, including transaction matching, information release, and so on. Therefore, even if the issuance platform only serves as a platform for information publishing and aggregation, it may be recognized as a platform operator to a certain extent. Platform operators need to implement the subject review and information disclosure obligations, especially the platform operators’ obligation to verify and regularly update the identity and business license information of the operators on the platform. The rules of the platform agreement concerning entry and exit of platform services, product and service quality assurance, promotion rules, consumer rights protection, consumer information protection, etc. require key attention. Platform operators also need to fulfill their obligation to preserve product and service information and transaction information. The platform needs to specify a list of prohibited and restricted commodities and information on prohibited and restricted commodities.
As a commercial Internet cultural activity platform, it should apply to the cultural administration department of the local provincial government for review and approval. Although the NFT itself is not mainly the creation of Internet cultural products, it only provides a blockchain-based technical device for the product to indicate the owner and specific content, but if it is to be consumed and traded, it falls under the framework of this regulation. Products should comply with relevant regulations and obtain relevant qualifications and permits.
As an online auction platform, it should apply for an auction administrative license to the provincial government commerce department. If it is involved in the auction of cultural relics, it is necessary to obtain permission from the cultural relics administrative department of the provincial government. According to the Ministry of Commerce’s recommended national standard “Online Auction Regulations”, the establishment of an online auction platform should meet the following basic requirements. First, there must be rules that comply with the auction law and other relevant laws, regulations, and rules; second, the normal development of online auction business should be guaranteed Computer information system, functions can include: issuing announcements, online display of auction targets, online bidding, recording the bidding process, generating electronic transaction confirmations, online settlement services, online and on-site simultaneous auctions; third, there is a business process for conducting online auction activities, It can include: user registration, auction subject qualification review, announcement release, online display of auction targets, bidding registration, online bidding and transaction confirmation, online settlement, and data archiving; fourth, there is a server that is compatible with the online auction business and scale engaged in , Network facilities, technical personnel, auction professionals and funds; fifth, in accordance with the “Internet Information Service Management Measures”, according to the nature of the platform to obtain a license or record. Since “Dutch auction” and “English auction” belong to specific auction rules, they can be made public before the auction.
As a blockchain application platform, it is necessary to apply to the National Cyberspace Administration of China for the registration of blockchain information services. The blockchain information service provider shall fill in the service provider’s name, service category, service form, application field, and server address through the blockchain information service filing management system of the National Internet Information Office within ten working days from the date of providing the service. Wait for information and perform 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 finance blockchain platform built by the People’s Bank of China are both blockchain platforms that provide related services for enterprises.
Does the NFT platform belong to 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 clearing and rectifying various trading venues to effectively prevent financial risks, and the approval to establish an inter-ministerial joint conference system for cleaning and rectifying various trading venues, the task of the inter-ministerial joint conference is to “coordinate and coordinate Relevant departments and provincial people’s governments clean up and rectify illegal securities and futures trading, supervise the establishment of a standardized management system for various trading venues and trading products, and complete other matters assigned by the State Council.” In the implementation opinions issued by the General Office of the State Council in accordance with the decision of the State Council It is clear that “the scope of this clean-up and rectification includes all types of trading venues engaged in equity transactions, bulk commodity forward transactions, and other standardized contract transactions, including trading venues that do not use the word “Exchange” in their names, but only engage in vehicles, Real estate and other physical transactions are excluded.” Therefore, the NFT platform conducts Crypto product transactions, not equity transactions, bulk commodity forward transactions, and other standardized contract transactions.
Other related obligations of the platform. According to the specific business involved in the platform, the platform must also ensure the privacy of users, remind the risks of the application of blockchain technology itself, and prevent platform transactions from being used for illegal activities such as money laundering, clarify the relationship with copyright protection, and explain dispute resolution methods, etc. . If the platform itself does not retain user assets, such as assets are on the chain, third-party servers or decentralized storage systems, and user funds are not retained, and user funds are all in its own blockchain-based wallet, then the platform Such businesses do not have financial attributes and professional management attributes.
NFT and alliance chain. Some consortium chains with the function of running smart contracts have achieved broad consensus through the joint construction of credibility nodes, and have the technical foundation for issuing NFTs on the chain. This is a manifestation of the use of blockchain technology to actively innovate application scenarios.
Platform NFT casting service. The platform makes it easier for anyone to forge NFT without having the development skills to deploy smart contracts. Microsoft has issued the Azure Heroes badge for use by contributors to the Azure ecosystem. The Ministry of Commerce and the Ministry of Finance proposed in 2017 to “strongly support the innovation and upgrading of the traceability system of core enterprises in the supply chain. The focus is on the promotion of QR codes, radio frequency identification (RFID), video recognition, blockchain, GS1, object identifiers (OID), Electronic settlement and third-party payment applications, promote the innovation and upgrade of the traceability system; promote the informatization transformation of large and medium-sized wholesale markets, large-scale supermarkets, and logistics companies, encourage supermarkets to use GS1 for settlement to achieve traceability, and integrate product traceability into existing products ERP system realizes the docking of enterprise information system and traceability system; encourages the integration of online and offline development of core enterprises in the supply chain to form a traceability network with omni-channel integration and seamless connection between online and offline. “Release related Crypto products for use in certain scenarios, It is not only a traceability application, but also an innovative application of different quality blockchain points. If it does not involve the characteristics of financing, there is no fraud and its metadata can maintain stable functions, it should not have financial attributes, and there are no substantial legal obstacles.
Platform user Crypto wallet. As early as 2001, the People’s Bank of China stated in relevant regulations 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 basic conditions to widely use smart mobile terminals such as mobile phones, personal Crypto assistants and handheld computers to develop mobile e-commerce services. On the one hand, in the fields of public utilities, transportation and tourism, employment and housekeeping, leisure and entertainment, and market business conditions, small payment and settlement services are developed based on mobile wallets; on the other hand, the mobile phone’s mobility, two-dimensional barcodes, and RFID , Various types of intelligent identification technology achievements, based on mobile automatic identification, information exchange, instant transaction, goods delivery and reception, mobile payment and other technologies and systems, to develop various forms of automatic transaction services.
The Shenzhen Municipal People’s Government proposed in the document on accelerating the development of strategic emerging industries in 2018 to accelerate the establishment of financial technology research institutions, breakthrough key technologies such as Crypto currency wallets, smart contract verification and management, and financial big data intelligent analysis, and focus on blockchain , Smart finance, financial risk management and other key directions, strengthen the innovative application of financial technology, actively explore new technology application scenarios, and build a world-leading financial technology center.
Whether it is a consortium chain or a public chain, as long as the underlying basic chain with certain decentralized characteristics can run smart contracts, then based on the blockchain assets generated on the blockchain and smart contracts, whether it is UXTO or account mode, we can Use wallet to manage. Since there is no financing feature, and if the metadata storage function can be guaranteed to be stable and there is no fraud, we believe that there is no substantial legal obstacle.
NFT platform and feasibility operation, illegal operation. Regarding technical reliability supervision, the application of blockchain technology is relatively strong, and its dissemination is strong and involves a wide range of areas, and its products should have certain reliability requirements. For example, China’s Cyber Security Law is concerned that related network products and services should meet the requirements of national mandatory standards, which all fall into this category. From the perspective of project operation, the first is to prevent transaction risks, data fraud, price manipulation, insider trading, and technical risks; the second is to promote the project, whether it infringes the rights of investors, such as whether it is suspected of pyramid schemes; Functions, etc. cannot be exaggerated and publicized, and 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 and accounting to fulfill tax-related obligations.
NFT platform and information protection and data security. Cooperate with supervision and prioritize privacy and consumer protection. Users should not be collected or shared user information or financial data, unless it is to prevent fraud or criminal activity. In terms of data privacy, any data added to the blockchain will be under the consistent control of the entire system. The draft personal information protection law and the draft data security law under consideration in my country include controller accountability and data minimization, data subject control, data portability, and data protection by design. The draft personal information protection law requires the controller to be responsible for ensuring compliance with all privacy principles, such as legality, fairness and transparency, purpose restrictions, data minimization, accuracy, storage restrictions, integrity and confidentiality. In addition, the draft requires every organization to prove that it has complied with all the principles.
The Crypto identity management solution provided on the blockchain is based on the condition of returning the control right of the user’s personal data, through data, to achieve the established control goal. In the case of a permissioned blockchain, users can use their Crypto private keys to download data and transfer it from one Crypto identity management platform on the blockchain to another. Through the decentralized identity technology based on the alliance chain, and the access control technology of smart contracts, it not only guarantees supervision but also protects user privacy.
NFT platform and anti-fraud, anti-manipulation and anti-illegal use. We need to implement a real-name system for assets to facilitate supervision, because payment may be used in commodity and service transaction scenarios, and may also be used in financial transaction scenarios. In some financial or commodity and service transactions, users may often need to have certain Qualifications or need to know their identity. For example, only the assets in the wallet can be transferred with real-name authentication, and only Crypto tokens can be received without real-name authentication. In this sense, DID plus real-name authentication is a blockchain infrastructure. Perform user real-name verification and save relevant user information and transaction records.
NFT platform and anti-money laundering and anti-terrorist financing. To implement 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. Perform user real-name verification, save relevant user information and transaction records, and avoid disorderly prices of NFT products.
NFT platform and smart contract supervision. Smart contracts are embodied as codes, while a typical contract is a text with legal significance. In the context of smart contracts, good faith, contract performance and automatic execution, and liability for breach of contract are all embedded in code. It is recommended to establish and improve the pre-review, in-process supervision, and post-processing mechanisms of smart contracts based on technology, law, and business perspectives.
NFT platform and cross-border supervision. Any wallet created based on the blockchain network can interact with other wallets, provide network value, and have their own wallets in some regions. Blockchain applications naturally have cross-border characteristics. As an information technology facility, blockchain is a tool and carrier for global communication. However, its users are located in different countries and regions, and they must be subject to different legal supervision. For example, Internet access is similar to the governance of cyberspace. As far as China is concerned, the current capital account has not been fully opened and the internationalization of the RMB is still in progress. How to prevent the impact of cross-border transactions is an urgent need for attention. In particular, the crypto nature of NFT and peer-to-peer payments can bypass capital controls, weaken the effectiveness of cross-border capital supervision, and at the same time intensify the impact of cross-border capital flows. It is recommended that different wallets and user qualification review standards be adopted for users in different jurisdictions, and a certain on-chain dispute resolution mechanism should be established.
NFT platform and illegal fundraising. Since NFT can be specific, it can issue NFTs for consumption and transactions through Crypto products based on specific items online or offline. Its commodity attributes are primary and important. Of course, based on the characteristics of crypto products, it also has a certain degree of finance. Attributes. Especially from a technical point of view, NFT is also a kind of Token, and based on NFT, similar asset securitization operations can be carried out to issue FT, then this is very similar to the previous ICO, which will have many compliance issues. At present, some illegal financing projects of tokens have been packaged into NFTs in the market. This is something that investors need to pay attention to. At present, the biggest hidden danger affecting the healthy development of NFT is that NFT is used as a tool for illegal fund-raising. Engaging in the NFT industry must strictly abide by my country’s relevant laws and regulations on fund-raising, including the “Announcement on Preventing Token Financing Risks” issued by seven ministries including the People’s Bank of China on September 4, 2017, and from May 1, 2021 Regulations in the “Prevention and Treatment of Illegal Fund Raising Regulations” implemented. Of course, since the general NFT industry is connected with specific products, it does not normally involve fund-raising and financing issues. It is strongly recommended to avoid using NFT as a financial financing tool and MLM tool.
NFT platform and asset securitization. Asset securitization is the issuance of securities to investors based on the future income of a particular asset, and the original owner of the asset transfers the future income right of the particular asset to the holder of the securitized asset. In terms of NFT and FT, we can think of each specific asset as an NFT, and the securities issued based on that specific asset are similar to FT. If the platform cannot run all transaction cash flows on the entire chain, it should fully integrate traditional asset securitization operations; if all transaction cash flows can run on the chain, strengthen communication with micro-regulatory agencies on the basis of ensuring safety.
In short, the application of NFT technology and industrial development are surging, and the application scenarios and application experience it brings are unprecedented. It may open a new era of commodity Cryptoization, industry Cryptoization, and governance Cryptoization, but it is undeniable that it has brought about Challenges and risks are unprecedented. This essay is based on our thoughts on the application of NFT technology and legal regulation experience at home and abroad, and gives a preliminary framework application and legal regulation thinking. There is still a lot of in-depth and detailed work to be done. I hope this article can Inspiring the rational thinking of the industry and regulators, enabling us to continuously form consensus in communication and ideological collisions, which not only stimulates innovative applications and encourages industrial development, but also protects the legitimate rights and interests of related users, industrial development interests and social public interests, and explores a path Its effective practice model is to better promote the development of the Crypto economy and explore effective Crypto governance models.