New applications of cryptocurrency and blockchain technology called non-fungible tokens (NFTs) are a hot topic in Taiwan. But currently, there are no regulations dealing specifically with their rise and development, and the regulator does not appear to have revealed an official view on the trend.
From a local perspective, the classification of any NFT and related activities or transactions should be determined on a case-by-case basis, with reference only to existing laws and regulations.
SECURITIES AND FINANCIAL LAW
NFTs are typically structured to represent digital artworks, musical works, collectibles, sports cards, and photo albums, and their classification would depend on the structure and related assets or interests, among other factors.
In November 2021 and March 2022, Huang Tien-Mu, Chairman of the Financial Supervisory Commission (FSC), pointed out that NFTs are considered an artistic creation, so their offer for sale should not be considered a virtual currency. He also indicated that whether NFTs should be regulated in the future would depend on factors such as their implications for financial stability, among others.
Thus, it seems that if NFTs represent “artistic creation”, they should not be regulated by existing financial laws and regulations.
The authors consider that NFTs are less likely to qualify as securities or any other financial instrument under existing financial instruments regulations, as long as the NFT is linked to (or represents) a single underlying asset; and there are no multiple NFTs linked to or representing the same asset.
However, due to the possible investment character of NFTs, the applicability of financial law and securities regulation still cannot be completely ruled out.
Interestingly, in July, the FSC expressly prohibited local acquirer banks from allowing local credit cards as payment for virtual assets and therefore local acquirer banks should not accept credit card service providers. virtual assets as contracted merchants for the purposes of credit card transactions. The question then would be whether virtual assets should be interpreted as including NFTs.
The authors understand that there have been some discussions between relevant blockchain/crypto industry players and the FSC and the local bankers association in this regard. But even if the FSC was of the view that NFTs should not be covered by the ban on virtual assets – as if they merely represented, say, an artistic creation or a coupon, and did not have the nature of an investment – in practice it may not be easy for a local acquiring bank to confirm whether an NFT is in the nature of an investment.
Thus, whether a local acquiring bank will accept an NFT-related service provider as a contracted merchant for credit card transactions should always depend on the bank’s internal assessment and decision on a case-by-case basis. case.
RIGHTS, INTERESTS OF NFT HOLDERS
The ownership of NFT assets depends on the structure and the underlying asset. For example, after a transfer of an NFT representing a digital work of art to the buyer, the buyer as the owner of the NFT has access to the underlying asset. But this does not automatically mean obtaining ownership of the content of the underlying digital work.
Under the terms and conditions, the NFT buyer may only have the right to view the digital artwork and does not acquire ownership of it in any form (e.g. any electronic file of the artwork).
For any NFT designed and intended to represent a physical asset – let’s take sneakers as an example – the question may be whether the NFT transfer would amount to the transfer of the sneakers to the transferee. If so, the Taiwanese Civil Code would consider the transfer to be similar to a claim against the operator of the warehouse where the sneakers are deposited. The purchaser of an NFT may want to carefully evaluate and understand all legal rights, titles and interests in and to the NFT before making the decision, from the perspective of the NFT itself and the assets and/or interests are linked.
Creators or issuers of NFTs may wish to specify the rights the holder would acquire under the terms of the offer (or their equivalent), focusing on the accuracy of product descriptions and warranties, as well as the avoidance of over-promising .
For example, the terms should not suggest offering some form of digital ownership behind the NFT when in reality the holder simply has the right to see the asset and does not own the content. Otherwise, civil or consumer disputes or even criminal liability could arise.
In practice, it is also expected that there will be NFT marketplaces, platforms or exchanges where NFTs can be listed and traded. Like ordinary e-commerce platforms, the standard terms and conditions of these marketplaces should specify the rights and obligations of registered users or members.
Prior to initiating or permitting any NFT to be listed, Marketplace Operators shall carry out the necessary commercial and legal due diligence investigations to avoid any potential liability due to any breach of law or any claims of third parties by the creator or issuer. The agreement between the marketplace operator and the originator or issuer may need to clearly state the division of responsibilities that may arise.
An offer of NFTs and access to the underlying assets may also be exposed to technological risks such as a security breach, unauthorized intrusion by hackers, service interruption or technical malfunction of the networks concerned, which could even lead to the unavailability of the offer. NFT creators and marketplace operators may want to manage risk by incorporating reasonable disclaimers, to the extent permitted by applicable laws.
Intellectual property rights, especially copyright, can be a critical issue for NFTs if the underlying assets include works of art, photographic works, musical works and recordings. Creators or issuers of NFTs should obtain any necessary licenses or permissions from intellectual property owners before issuing an NFT.
NFT marketplace operators may need to perform relevant checks to mitigate the associated risks. It is important to ensure, in accordance with market conditions, that NFT holders own and exercise only the relevant rights and use of the NFT, and do not infringe any third-party rights, especially intellectual property rights.
METAVERSE AND NFTS
The metaverse, a term combining the prefix “meta”, meaning beyond, and “universe”, generally refers to virtual worlds or highly interactive digital spaces accessible with technologies such as augmented reality (AR) or virtual reality (VR ), and specific devices. such as VR headsets and AR glasses. NFTs are seen as a crucial part of this metaverse. For example, in traditional games, players pay to purchase in-game assets, whereas most in-game assets are simply licensed to players and can even be revoked by publishers. Some industry players believe this can be solved by tokenizing assets and creating in-game NFTs so that the concept of portable in-game assets – in-game assets that can be removed from play or transferred across multiple platforms -forms – can be made possible.
From a legal standpoint, if this is the true intention of the game publisher, the publisher may first need to change the terms applying to the game so that an NFT purchaser can actually “own” the underlying asset of the game, depending on the structure of the NFTs. Additionally, as the original game assets are subject to applicable terms and licenses granted by the publishers, an agreement between the publishers may be required to allow the game assets to be portable or transferable between different platforms or between games.
FIGHT AGAINST MONEY LAUNDERING
With respect to digital currency platform operators and transactions, the latest amendment to the Anti-Money Laundering (AML) Law introduced virtual currency platforms and business enterprises into Taiwan’s regulatory regime, under which businesses within the designated scope will be subject to the relevant rules applicable to financial institutions.
In April, the Executive Yuan (cabinet) issued the AML decision, which interpreted the scope of enterprises in virtual currency platforms and business activities. The FSC followed suit by promulgating AML regulations governing the law and the fight against the financing of terrorism for virtual currency platform companies and commercial enterprises. According to the regulations, designated operators of crypto-asset platforms and commercial enterprises are required to establish internal control and audit mechanisms, procedures for reporting suspicious transactions and know-your-customer procedures, among others. . The decision and the settlement came into effect in July 2021.
It is unclear whether NFT market participants fall within the designated scope described in the AML decision. The key question will be whether the term “virtual currency” in the ruling will also be interpreted to cover NFTs. If so, relevant market participants – in particular marketplace operators and any commercial operator providing services related to the custody of NFTs – will be required to follow the AML Regulation and perform the aforementioned obligations.
The authors believe that this will significantly increase compliance costs for affected NFT market participants. Considering that in practice trading NFTs can involve a considerable sum of money, which may to some extent justify any potential anti-money laundering obligations, industry players are well advised to follow regulatory trends closely.
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