Navigating Non-Fungible Tokens, Copyright Challenges, and Regulatory Perspectives in the UAE and EU

What are NFTs?

From a technical standpoint, NFTs, or non-fungible tokens, are segments of code hosted on a digitized decentralized ledger known as the Blockchain. The composition of an NFT primarily comes down to three pieces of coded information alongside relevant metadata: the Author ID, Smart Contract Address, and Smart Contract ID. The Author ID represents the NFT’s minting source and ensures that initial creators are always determinable; Smart Contracts are self-executing contracts baked into the code of an NFT. They are built on pre-determined parameters, meaning that transactions are trustless and can be carried out between disparate, anonymous parties without the need for a central authority, legal system, or external enforcement mechanism. They can also contribute additional functionality, such as automatically deducting royalties on behalf of the initial author from all future transactions.

Although they’re typically brought up in conversation synonymously, it is essential for consumers to understand the differences between cryptocurrencies and NFTs. They are both realized as digital assets built upon the shared foundation of blockchain technology, but they differ significantly in their structure, properties, and use cases.

Cryptocurrencies operate on a fungible basis, similar to fiat currencies. Meaning that each unit of a cryptocurrency is identical, whereas NFTs are non-fungible and contain unique metadata that differentiates them from one another. Cryptocurrencies are predominantly used as a medium to facilitate peer-to-peer transactions; NFTs serve as proof of ownership or proof of authenticity for a unique asset.

Legal Side Effects of NFTs

Because NFTs are often linked to digital art, music, or other forms of creative content, the question arises as to whether purchasing an NFT should carry with it the transfer of any intellectual property rights. A key misconception is that buying an NFT entitles some form of ownership over its represented content when in reality, acquiring one does not necessarily transfer any copyrights associated with the underlying work unless expressly stated within the smart contract or accompanying agreement. Thus, buyers must be aware that their purchase may only constitute ownership of the token itself, not the underlying asset. In the UK, for example, the law requires a written or otherwise documented acknowledgment from the original author of a work to transfer copyright. This isn’t something that is facilitated in NFT transactions.

For example, in 2020, former CEO of Twitter Jack Dorsey minted and sold an NFT of his first-ever tweet to a private buyer for over $2.9 Million. The purchaser of this NFT then gained the commercial rights to use, copy and display the NFT; however, he did not attain intellectual property over the tweet itself, meaning he couldn’t place the tweet on merchandise and sell it nor claim ownership over the live version of the tweet. Moreover, in 2022, when the buyer of the tweet attempted to auction it off, the highest bid for the token sat around a mere $10,000, highlighting the often inflated hype-based nature of the pricing associated with these tokens.

NFT Regulation & Investment in the UAE

Within the United Arab Emirates, the legislation that potentially pertains to NFTs varies between internal jurisdictions. At this point, the SCA (Securities and Commodities Authority) and the Federal Government have yet to introduce specific legislation pertaining to NFTs.

At the Emirate level, Dubai currently leads its peers with regard to autonomous local regulation. The recent creation of the Virtual Asset Regulatory Authority (VARA) as a measure of The Dubai Virtual Asset Regulation Law, enacted by HH Sheikh Mohammed bin Rashid Al Maktoum highlights efforts to develop a consolidated authority dedicated to the regulation of virtual asset technologies, including NFTs in Dubai. At this time, VARA does not explicitly mention guidelines for NFTs. However, it provides a broad definition of virtual assets, inclusive of ‘Virtual Tokens.’

Both the SCA’s and VARA’s respective structures only pertain to virtual assets being digitally traded or transferred and used for payment or investment purposes.

With regard to specialized domestic jurisdictions, such as the DIFC, no regulations exist specifically addressing NFTs. The DFSA (Dubai Financial Services Authority), DIFC’s internal financial regulator, has recently instilled an overhauled ‘crypto asset regime’ to regulate investment tokens and their markets. However, this regime does not extend to crypto, virtual, or digital assets. Although, the regulator is currently considering whether NFT creators and service providers outside the proposed regulatory perimeter should fall within the DIFC’s Designated Non-financial Business and Profession (‘DNFBP’) designation. Similarly, The Abu Dhabi Global Market (ADGM) and its internal financial regulator, the Financial Service Regulatory Authority (FSRA), have also developed a proprietary regulatory infrastructure for certain forms of virtual assets within their jurisdiction. This framework includes measures pertinent to regulating digital and virtual assets but explicitly excludes NFTs from its purview. The FSRA has recently acknowledged the advent of NFTs within the market, putting forward its position that “NFTs, being akin to intellectual property rights over unique creations, may not themselves constitute Specified Investments or Financial Instruments.” Further indicating that the regulator would be “open to NFT activities (where such NFTs do not relate to Specified Investments and would then otherwise see them caught by FSRA’s existing regulatory framework)” as per Consultation Paper No.1 of 2022.

NFT Regulation & Investment in the EU

In the European Union, the regulatory landscape for NFTs is rather fragmented, with individual Member States establishing their own approaches. For instance, in Ireland, no designated regulatory framework for crypto-assets goes beyond the already established rules for preventing money laundering and terrorist financing. The Central Bank of Ireland assesses each case individually to determine if a particular crypto-asset is a regulated financial instrument under national rules. This approach is common among the majority of EU Member States that have decided not to develop a national framework for crypto-assets. On the other hand, member states such as Germany have developed their own framework by expanding the definition of financial instruments under the German Banking Act to include certain types of crypto-assets. However, whether an NFT is a regulated crypto-asset under German law still depends on a case-by-case analysis assessing its characteristics.

Contrarily, France has taken a unique approach to regulating NFTs. The French Higher Council for Literary and Artistic Property (CSPLA) continues to assess the legal situation regarding NFTs, focusing on copyright and related rights. The CSPLA proposes considering an NFT as a title of ownership in the token registered on the blockchain, to which other legal rights can be associated depending on the terms of the smart contract. The CSPLA also points out that creating an NFT requires the agreement of the holder of the intellectual property rights in the work. It further suggests that NFTs do not legally exhaust the distribution rights of associated works and are a form of communication to the public. There are also considerations to hold NFT marketplaces accountable for protecting intellectual property rights and safeguarding consumers against counterfeit offerings.

At the regional level, the European Commission has recently passed a new regulation for Markets in Crypto-Assets (MiCA) to fill regulatory gaps and streamline approaches to these continuously emerging technologies. Current revisions of the regulation suggest that NFTs, which are unique and non-fungible, do not fall under the new rules. However, lawmakers have forecasted that NFT-specific regulations will be developed within the coming years. It is worth noting that NFTs in large series or collections, or fractional parts of an NFT, would be considered within the purview of MiCA as an argument can be made that their status as collection components can make them practically fungible to an extent. How this applies in practice remains to be seen while the regulation continues to be implemented throughout 2023 and 2024.

Conclusion

Despite the aforementioned hurdles faced with NFTs and their widespread adoption, there is undoubtedly a case to be made for their value in today’s world. The current widespread adoption of Web3 technologies, alongside continuously increasing accessibility to these markets for disenfranchised demographics, presents a valid foundation for revisiting what ownership means. Furthermore, many of the legal issues found in NFTs are reflective of a larger discourse around how we define copyright in an increasingly digitized world. As we continue to build legal scaffolding and regulatory systems to embrace these technologies, it’s key that consumers and their protection are kept at the forefront of discussion; moreover, it’s imperative that bad actors are prevented from systematically abusing these technologies for illicit purposes. Finding a balance between regulating the space and allowing it to foster is the objective that stakeholders should rally behind as we continue to develop and implement NFT usage globally.

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Disclaimer
This publication does not provide any legal advice and it is for information purposes only. You should not rely upon the material or information in this publication as a basis for making any business, legal or other decisions. Any reliance you place on such material is therefore strictly at your own risk.

Author: Hafidh Thani & Kareem Ezzeddine (Intern)