NFT Legal Implications PDF

NFT LEGAL IMPLICATIONS Andrea Graziano Gitto 905148, Anna Guseleva 908323, Leonardo Gambarotto 904870, Anna Gianola 904695, Nicolò Gheller 904273, Luca Grigoriu 905695 , Luce Eva Innocente 905751, Giurato Martina 906502, Adal Imre Haberal 906669,...

NFT LEGAL IMPLICATIONS Andrea Graziano Gitto 905148, Anna Guseleva 908323, Leonardo Gambarotto 904870, Anna Gianola 904695, Nicolò Gheller 904273, Luca Grigoriu 905695 , Luce Eva Innocente 905751, Giurato Martina 906502, Adal Imre Haberal 906669, Yagmur Kulaksiz 906622 | Group 5 IT LAW Prof. Zanchi | Abstract NFTs represent cutting-edge technology combining several technologies and introducing a common standard for owning unique digital items. This paper examines different legal issues surrounding NFTs from intellectual property, privacy, security, tax, and environmental perspectives. NFTs disrupt the traditional intellectual property system; they only specify the ownership of the token without mentioning the rights to the underlying content, thereby creating a case for more reform to flush out copyright issues and oriented towards global cooperation in IP protection. The immutability of blockchains poses a challenge to privacy under regulations like the GDPR, while newer technologies like zero-knowledge proofs show a way forward. Fraud and regulatory gaps call for stronger global frameworks of regulations and guidelines, including KYC as well as user education. Taxing stands take several forms regarding NFTs, both across countries as well as understanding NFTs: property or digital goods. One more charge against blockchain is its spiraling environmental cost; newer models like Proof of Stake may be pressed to circumvent the problem. Innovation, regulation, and collaboration are necessary for addressing these challenges and thus solidifying NFTs as an ethical as well as a transformative asset class.  Introduction What does NFT mean? NFT stands for Non-Fungible Token. An NFT is a unique digital asset that represents proof of ownership over a specific item recorded inside the blockchain. Unlike cryptocurrencies (like Bitcoin, Ethereum, Solana) which are fungible, which means that they can be interchanged with one another by using crypto exchanges, NFTs are NOT interchangeable, or non-fungible, which means that you can’t trade an NFT for another NFT. For example, if an online artist creates a digital piece of art and publishes it as an NFT in an NFT marketplace, the user who buys the NFT will own the token, so he will have certificated ownership over the digital art piece. Usually, a token is a series of alphanumeric characters like: 0𝑥12𝑎𝑏34𝑐𝑑56𝑒𝑓78𝑔ℎ90𝑖𝑗12𝑘𝑙34𝑚𝑛56𝑜𝑝78𝑞𝑟90𝑠𝑡 The ID ensures that no NFTs are identical, even if they display a similar or identical appearance. Where are NFTs sold? NFTs are sold in NFT marketplaces, platforms that facilitate the buying, selling and trading of NFTs. These marketplaces are: - Ethereum: - Marketplaces: Opensea, Rarible, Foundation - The most popular blockchain for NFTs - Downside: High transaction fees - Solana: - Marketplaces: SolSea, Magic elden - Lower fees and faster transaction speeds - Polygon: - Marketplaces: Opensea - Lowest fees What are NFTs used for? - Digital art & collectibles - Access to events: owning an NFT can act as a ticket to concerts, conferences, online communities, everything exclusive to the so called “holders” - Gaming: NFTs can represent in-game items like characters, weapons, skins. - Physical assets - Verification system for members of a community  Blockchain technology and NFT At its core, blockchain technology is decentralized and distributed ledger that records transactions across many computers. Each "block" holds a list of transactions and the blocks are chained together with cryptographic hashes (example of a hash : “bfd280436f45fa38eaacac3b00518f29:1234”). Thus producing a blockchain which is tamper-evident and tamper-resistant because changing just one block would mean also changing all the blocks that come after it. Changing a block would mean having a block with a unique hash, based on this, the entire network will be able to notice that a block has been manipulated. The most important characteristic is that the blockchain is a decentralized network which means there is no central authority governing all the chain, but the controllers are every node(computer) of the chain. Linked with NFT, blockchain is designed to make these features commonly used for digital assets that will reap a lot of benefits. NFTs are not tethered to a central authority since this way of decentralization preserves the ownership and transaction history of an NFT in a distributed network. This would guarantee provenance, or a chain of custody from the original creator. Every transaction is recorded on the blockchain, which should ensure transparency — that is, each NFT can be verified to be unique (and real) and within which its owner will also have confirmation of their ownership. Nobody can ever manipulate it; once an NFT is inscribed onto the blockchain, that permanence guarantees its value and authenticity.  Ownership and Copyright NFTs also bring challenges when aligned with traditional IP frameworks. Blockchain’s immutable nature complicates IP law enforcement. This discussion explores IP laws in the context of NFTs, highlighting challenges and solutions, Marinova (2024) and Hosseini Bamakan et al. (2022). NFTs redefine digital ownership by embedding unique identifiers, creating digital scarcity and value. A key issue is whether buying an NFT includes content rights. Marinova (2024) states that NFTs prove token ownership but don’t inherently transfer reproduction rights. Buyers often don’t own copyright, leading to confusion. The Copyright, Designs and Patents Act 1988 (UK) vests copyright with the creator, but doesn’t specify NFT transfers. A proposed reform would clarify that NFT transactions don’t include copyright unless stated. Jurisdictional issues add complexity, as NFTs exist in a global, decentralized space. Marinova (2024) suggests international collaboration for IP protection. NFTs could also transform IP management, with Hosseini Bamakan et al. (2022) highlighting their use in patent tokenization to enhance transparency and automate royalties. Challenges include legal alignment and blockchain adoption. Lastly, AI-generated NFT content complicates IP further, as U.S. law requires human authorship for copyright. Legal updates are needed to clarify authorship in automated creations. In summary, while NFTs open new asset management paths, aligning them with current IP law requires copyright reform, global IP cooperation, and clear AI-related guidelines.  Right to Privacy and NFTs The relationship between NFTs and privacy rights poses a dilemma due to the unique characteristics of blockchain technology, in particular immutability, decentralization, and traceability. These features often clash with modern data protection laws, such as the General Data Protection Regulation (GDPR). Conflicts with Privacy Laws Because the blockchain ,which includes NFTs , naturally prevents data modification or erasure, there is a clear conflict with the GDPR’s "right to be forgotten," which ensures users the right to request personal data deletion. Data on a blockchain cannot be altered or removed, and as such, compliance is technically impossible unless some data obfuscation mechanisms or off-chain storage solutions are implemented. These methods may also not meet GDPR requirements fully, as metadata or indirect identifiers might still disclose personal data. Anonymity vs. Traceability A core feature of NFTs is their traceability, which ensures transparent ownership records and provenance. However, this openness can compromise privacy: if wallet addresses and transaction history are identifiable or linked somehow, then privacy is threatened. The two most promising ways around this are zero-knowledge proofs,which is a cryptographic technique that allows for verification of data without revealing the underlying information, preserving both privacy and transparency, and far more advanced cryptography, neither of which has yet found mainstream adoption in the production of NFTs. Issues in the Decentralized Governance Decentralized blockchains do not have central control, and therefore a single data controller responsible for compliance cannot be found. It is tough to enforce privacy laws such as GDPR in that matter. Private or consortium blockchains can do more significant control at the expense of decentralization and transparency. GDPR compliance requires identifying responsibilities for data protection, ensuring rights to erasure, and defining ownership. These are inherently difficult on decentralized platforms because data immutability and anonymity are core to blockchain. Private or Consortium Blockchains address some of these issues by sacrificing full decentralization. These systems allow better oversight and control but reduce the openness and trustless nature of the blockchain, which can undermine its primary value propositions. Security As far as security is concerned blockchains networks are very secure because they’re decentralized and no one person or company can alter the records. This makes it nearly impossible to fake ownership or steal NFTs, which is especially important for valuable digital assets. Although NFTs rely on blockchain secure technology, there are some inevitable risks. Protecting a digital asset requires a security-first mindset and adherence to best practices.(Numen Cyber Technology). This is crucial because once an NFT is stolen or lost, it is mostly not possible to recover. While ownership is public, personal details are not directly visible. Blockchain transactions are tied to wallet addresses (a string of numbers and letters) rather than real names. This means people can own and trade NFTs without exposing personal information. Also NFT security depends on users’ wallets, which can be vulnerable to hacks if users aren’t careful.  International Legal Aspects With the expansion of technology and digitalization, the field of IT law has developed in complex ways, regulating areas such as data protection, cybersecurity, and e-commerce. However, international legal frameworks remain fragmented, reflecting different priorities and approaches across the world. In the European Union, the General Data Protection Regulation (GDPR) is one of the strictest regimes in the world. It guarantees fundamental rights, such as data access and erasure, and imposes severe penalties for non-compliance. Its impact was highlighted in 2023 when Meta was fined €1.2 billion for illegally transferring data to the United States. In the United States, the absence of a unified federal framework results in a mix of sector-specific and state-level laws. Laws like the California Consumer Privacy Act (CCPA) cover certain industries but leave many gaps. The 2017 Equifax data breach exposed these regulatory deficiencies, raising concerns over consumer data protection. Asia adopts diverse approaches. China’s Personal Information Protection Law (PIPL) emphasizes data localization and state oversight, compelling companies like Tesla to build local data centers. Japan’s Act on the Protection of Personal Information (APPI) seeks to balance privacy rights with innovation, while India is implementing its Digital Personal Data Protection Act but faces infrastructural challenges in enforcement. Achieving global regulatory harmonization remains challenging. The EU prioritizes privacy, the US emphasizes innovation, and China focuses on state control and data sovereignty. Nevertheless, international cooperation could simplify the regulatory landscape, enabling businesses to comply more effectively while enhancing user rights worldwide.  Regulation and Fraud As NFTs get more used, so do concerns about frauds and regulatory gaps. Frauds or fraudulent activities include rug pulls where developers launch an NFT project and collect funds from buyers and then abandon the project, leaving buyers with worthless tokens and profiting from the promise. Other types of fraud can be wash trading and phishing scams, that is creating an illusion of high demand by inflating the value of an NFT in order to make the buyers pay more than they should and using fake websites or emails to trick users into furnishing access to their digital wallets for the purpose of stealing NFTs and cryptocurrencies stored in those accounts. There are existing laws that address these issues but they are inconsistent and lack coherence. Intellectual property laws can address copyright and trademark violations when unauthorized digital accounts are involved and consumer protection laws prohibit dishonest claims about an NFT’s value. However, these laws remain inadequate, especially when it comes to international issues. To fight them, stronger regulations are needed, including KYC (Know Your Customer) checks and more tools to certificate users’ identities. An useful example might be blockchain tools, that can be used to authenticate ownership and metadata and to reduce the risks of unauthorized copies of digital content violating property rights. What’s essential is to have an international collaboration to establish legal frameworks and definitions of NFTs and to educate users about potential risks in order to prevent and protect themselves from them.  Taxation Aspects The taxation of Non-Fungible Tokens (NFTs) has become a central issue as these digital assets gain popularity. NFTs are generally classified as property or digital goods, which presents challenges for regulators. Tax obligations vary by jurisdiction, covering capital gains, income, and value-added taxes. USA : In the U.S., NFTs are treated as property. The sale or exchange triggers capital gains tax, with rates varying depending on the holding period. Creators are taxed on sales and royalties as income, potentially subject to self-employment tax. European Union (EU) : NFT taxation in the EU is inconsistent: Germany and France : generally apply VAT and treat profits as taxable income. Italy : In Italy, gains from NFT transactions exceeding €2,000 are subject to capital income tax, with VAT applied to commercial activities related to NFTs. Asia : NFTs are generally taxed as digital assets, with income or consumption taxes applied depending on the jurisdiction, though regulations vary widely across the region. China : restricts cryptocurrencies heavily, but taxes NFT-related income as business or individual income. Japan : treats NFTs as digital goods, with profits subject to income tax and VAT.  NFTs and Environmental Impact Energy Consumption and Environmental Impacts of NFTs Most NFTs are minted on Ethereum and its other Proof of Work chains. Ordinals, on the other hand, are created on Bitcoin and other similar chains. Depending on the coding and architectural design of any given blockchain, transactions related to NFTs and Ordinals may also require pretty inconceivable amounts of energy. The principal reason for this is that there exists a prerequisite of computation on the Proof of Work blockchains because NFTs themselves seem to bathe up quite some energy, needed for minting, bidding, canceling, transferring ownership, and selling. An analysis of each sequence in the NFT life cycle Minting of NFTs: This is the point at which an NFT is made into an image or some digital item and posted on a blockchain. This results in the digitalization and storage of NFT information onto the blockchain system. Tokenization: this refers to the creation of a public key and a private key with access to a cryptocurrency wallet. The tokenization process leads to the minting of an NFT. Listing of the NFT: After the NFT has been minted on a blockchain, a creator can list it for viewing on an NFT marketplace, either at a fixed price or an auction. The NFT gets sold or bought: Buying triggers a blockchain transaction that validates and transfers ownership of the NFT over to its new owner.  Conclusion In conclusion, NFTs are a new technology that uses the blockchain to provide secure and traceable ownership of digital assets. It gives new opportunities for creators, investors, and buyers. Nevertheless, this massive surge of NFT adoption is giving rise to some formidable challenges requiring careful attention. Privacy and security are two pertinent concerns, for transparency in blockchain raises many dilemmas, particularly in light of the privacy principles under GDPR, thereby placing users in a quagmire. Though blockchain ensures no unauthorized access to records, the chance of letting personal data tied to NFTs remain exposed to the world will call for advanced privacy solutions and amendments in the law to protect user rights. NFTs further involve complicated IP issues. The existing copyright framework is too weak to settle the intricacies associated with NFTs, creating confusion among creators and colleagues about ownership. Legislative updates and international collaboration are essential for the protection of creators' intellectual property rights. Taxation is also inconsistent, authorities must somehow fill legal loopholes to prevent tax evasion and provide clarity of compliance for businesses and individuals alike. Finally, from the perspective of environmental impact, energy-heavy Proof of Work blockchains cast a shadow over NFTs. Moving over to more efficient systems like Proof of Stake would lessen that impact while enabling NFTs to align closer with myriad sustainability goals. Addressing these challenges will help NFTs evolve into a safer, secure, sustainable, and equitable ecosystem for all stakeholders.  References Fairfield, J.A.T. (2023) Intellectual property and NFT use in the metaverse: A global approach to regulation. ResearchGate. Available at: https://www.researchgate.net/publication/381260066_Intellectual_Property_and_NFT_Use_i n_the_Metaverse_A_Global_Approach_to_Regulation (Accessed: 22 November 2024). Xu, Y. and Yu, B. (2023) NFT use cases and legal challenges in intellectual property rights. arXiv. Available at: https://arxiv.org/abs/2304.10490 (Accessed: 22 November 2024). U.S. Department of the Treasury (2024) Treasury Secretary's press release on digital asset regulation. U.S. Department of the Treasury. 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