Challenges Ahead

It remains to be seen if the NFT trading activity will continue on the same rising path, how this distributed ledger technology (DLT) will evolve in the coming years and whether this technology will provide the solution to the many challenges faced by intellectual property creators on how to authenticate, register and certify the ownership of their Work, how to trade their Work, but most importantly how to protect their Work from copyright infringement.

We highlight here some of the challenges that will need to be considered and addressed for the further development of NFTs:

Intellectual Property Rights and Protection

Protection of intellectual property rights of IP owners is a key concern. With more piracy cases being reported, investors and creators may be more reluctant to turn to this form of trading. It will be interesting to see if platform operators will be deemed to have legal responsibility or liability in intellectual property infringement cases.

As mentioned below, a well-balanced regulatory framework will assist the development of this industry.

Having said that, it is anticipated that the blockchain technology may be the solution used by regulatory authorities to deal with the challenges of authenticating and protecting intellectual property rights.

The European Union Intellectual Property Office (EUIPO) is already innovating by using blockchain technology to deliver real-time search engines and is developing another blockchain platform which will be a tool to assist the combat against trademark infringement. Undoubtedly, more research into how this technology can solve problems of registration, ownership and protection of intellectual property works is critical and necessary.

Enforcement of smart contracts and conflicts of laws

A legal grey area that will require further consideration relates to the enforceability of smart contracts associated with NFTs (and generally with other crypto assets) before the courts and how conflict of laws will be treated.

Conflict of laws are the rules that determine which jurisdiction will adjudicate disputes and what will be the applicable governing law. The digital nature of blockchain transactions is such that a single transaction may give rise to multiple legal issues which arise in different jurisdictions. It remains to be seen how the law will evolve to address conflict of laws concerns and ensure enforceability of these digital transactions in different jurisdictions.

Undoubtedly, the international legal framework will eventually adapt to this evolving digital transaction landscape.

NFTs extending beyond artistic or literary works

If NFT trading will extend beyond 'artistic' or 'literary' works, moving such trading into non-artistic tangible/intangible assets, such as, real estate or regulated financial instruments, then the real-life regulatory and formality requirements will need to be dealt with and possibly adjusted or revised.

By way of example, for completing a sale of immovable property a transfer of title has to take place and several real-life formalities have to be completed for such transfer of title to be valid and enforceable under the applicable law. As it stands today, the trading of NFTs which back such regulated real-life assets will require a number of real-life actions to be completed and the mere transfer of ownership on the NFT ledger will not suffice to transfer title.

However, this does not mean that blockchain technology cannot be used in the future to provide an efficient and cost-effective solution for trading and transferring title of real-life assets. The digital transformation of public authorities will need to follow suit to enable transactions to be completed on distributed ledger technology. There are still many milestones to be reached, to achieve such level of digital integration and innovation.

Investor protection

It is certain that in the coming years we should expect to see more changes in the regulatory framework and governance that will provide creator and investor protection, when trading NFTs and other cryptoassets.

An evolved and well-balanced legal framework that will not stifle innovation, is required to protect ownership rights over assets, protect against privacy and reduce the risks of fraudulent activities, cyberattacks and other criminal activity.

The European Union is already working on a set of rules that, as claimed by the European regulators, will address the gaps in the existing EU legislation and provide legal clarity on the evolving digital instruments and technologies.

A secure crypto space will allow more investors to engage in crypto trading and most importantly will enable the distributed ledger technology to evolve, become mainstream and be widely utilised across different industries.

The regulatory framework should be framed in such a way to embrace one of the fundamental principles for which blockchain was developed .... to address the challenges caused by manual and/or inefficient real-life centralised processes.

More information

The analysis relating to NFTs, and distributed ledger technology does not start or end here.

In this two-part article, we highlight some of the issues to be taken into consideration when creating, selling, and buying NFTs from the perspective of the copyright owner and the NFT investor, yet the list is non – exhaustive.

With the evolution of this technology and increased engagement by creators and investors, more and more legal issues will arise and addressed at the same time.

One thing is certain – DLT or blockchain technology is here to stay and it will be up to the regulators, think tanks and global community to embrace it and steer it in the right direction.

This is the Part II of NFTs, Copyright and Beyond article published by Aptus Legal and you can read Part I of this article by clicking here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.