New applications of cryptocurrency and blockchain technology, known as non-fungible tokens (NFTs), are a hot topic in Taiwan. However, there are currently no regulations specifically addressing their rise and development, and the regulator does not appear to have disclosed any official opinion on the trend.
From a local perspective, the classification of 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 FINANCE 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 associated assets or interests, among other things.
In November 2021 and March 2022, Huang Tien-Mu, Chairman of the Financial Supervisory Commission (FSC), noted that NFTs are considered an art creation and therefore their offering for sale should not be considered virtual currency. He also pointed out that future regulation of NFTs would depend on factors such as their impact on financial stability, among others.
So it seems that if NFTs constitute “art creation”, they should not be regulated by existing financial laws and regulations.
The authors find it less likely that NFTs will be considered securities or other financial instruments falling under existing financial instruments regulation as long as the NFT is linked to (or represents) a single underlying asset; and no multiple NFTs are associated with or represent the same asset.
Due to the possible investment character of NFTs, the applicability of financial law and securities law regulations cannot be completely ruled out.
Interestingly, in July, the FSC specifically prohibited local acquiring banks from accepting local credit cards as a means of payment for virtual assets, and accordingly local acquiring banks should not accept virtual asset service providers as merchants for credit card transactions. The question that arises then would be whether virtual assets should be interpreted as including NFTs.
The authors know that there has been some discussion in this regard between relevant stakeholders in the blockchain/crypto industry and the FSC and the local bankers association. But even if the FSC believes that NFTs should not fall under the virtual assets ban – as if, for example, they simply represent works of art or vouchers and do not have the character of an investment – in practice this may not be easy for a local acquirer Bank to confirm whether an NFT has the character of an investment.
Therefore, whether a local acquiring bank will accept an NFT-related service provider as a merchant for credit card transactions should still depend on the bank’s internal assessment and decision on a case-by-case basis.
RIGHTS AND INTERESTS OF NFT HOLDERS
Ownership of NFT assets depends on the structure and underlying asset. For example, after a transfer of an NFT representing a digital work of art to the buyer, the buyer, as the NFT owner, has access to the underlying asset. However, this does not mean that you automatically obtain ownership of the content of the underlying digital artwork.
Depending on the terms and conditions, the NFT buyer may only be entitled to view the digital artwork and not acquire ownership in any form (e.g. electronic files of the artwork).
For any NFT designed and intended to represent a physical asset—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, Taiwan’s civil code would treat the transfer as a claim against the warehouse operator where the sneakers are deposited. The purchaser of an NFT may wish to carefully consider 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 associated therewith.
NFT creators or issuers may want to specify the rights the holder would acquire in the offer terms (or equivalent terms), with an emphasis on accuracy of product descriptions and warranties, and avoiding over-promising.
For example, the terms should not imply that some form of digital ownership is offered behind the NFT when in fact the holder only has the right to view the asset and does not own the content. Failure to do so could result in civil or consumer disputes, or even criminal liability.
In practice, it is also expected that there will be NFT marketplaces, platforms or exchanges where NFTs can be listed and traded. Similar to ordinary e-commerce platforms, the standard terms for these marketplaces should set out the rights and duties of registered users or members.
Before launching or approving the listing of an NFT, marketplace operators must conduct the necessary commercial and legal due diligence to avoid potential liability due to breaches of law or third-party claims by the creator or issuer. The agreement between the marketplace operator and the builder or issuer may need to clearly state the sharing of any liabilities that may arise.
An offering of NFTs and access to underlying assets may also be subject to technological risks such as security breaches, unauthorized intrusion by hackers, service interruptions or technical malfunctions of relevant networks, which may even result in the unavailability of the offering. NFT creators and marketplace operators may wish to address the risks by including appropriate disclaimers where permitted by applicable law.
IP rights, particularly copyright, can be a critical issue for NFTs when the underlying assets are artworks, photographic works, musical works and recordings. NFT creators or issuers would need to obtain the necessary licenses or approvals from the IP owners before issuing NFT.
Operators of NFT marketplaces may be required to conduct appropriate audits to mitigate the risks involved. It is important to ensure under marketplace conditions that NFT holders only own and exercise relevant rights and use of the NFT and do not infringe any third party rights, particularly IP rights.
METAVERSE AND NFTS
The metaverse, a term combining the prefix “meta” meaning “beyond” and “universe,” generally refers to highly interactive virtual worlds or digital spaces that can be accessed using technologies such as augmented reality (AR) or virtual Reality (VR) and certain devices such as VR headsets and AR glasses. NFTs are perceived as a crucial element of this metaverse. For example, in traditional games, players pay to purchase in-game assets, while most in-game assets are only licensed to players and can even be revoked by publishers. Some industry players believe this can be addressed by tokenizing the assets and creating gaming NFTs so that the concept of portable game assets – in-game assets that can be removed from the game or carried across multiple platforms – can be made possible.
From a legal perspective, if this is the game publisher’s real intention, the publisher may first need to change the terms governing the game in order for an NFT buyer to truly “own” the underlying game assets, depending on the structure of the NFTs. Because the original Game Assets are subject to applicable terms and licenses granted by the publishers, an agreement between publishers may be required in order for the Game Assets to be portable or transferrable between different platforms or between games.
ANTI MONEY LAUNDERING
Regarding digital currency platform operators and transactions, the recently amended Anti-Money Laundering (AML) Law has included virtual currency platforms and trading companies in Taiwan’s regulatory regime, according to which companies that fall within the designated scope are subject to relevant applicable regulations financial institutions.
In April, the Executive Yuan (cabinet) issued the AML ruling, which laid out the scope of companies in virtual currency platforms and trading operations. The FSC followed suit by promulgating AML regulations to regulate the law and counter terrorist financing for virtual currency platform companies and trading companies. According to the regulations, designated operators of crypto asset platforms and trading companies are obliged to set up internal control and verification mechanisms, reporting procedures for suspicious transactions and know-your-customer procedures, among other things. Both the judgment and the regulations came into force in July 2021.
It is unclear whether NFT market participants fall within the scope described in the AML ruling. The key question will be whether the term “virtual currency” will also be construed under the ruling to include NFTs. If yes, then relevant market participants – in particular marketplace operators and all entrepreneurs offering NFT custody services – are obliged to follow the AML regulations and fulfill the obligations mentioned above.
The authors believe that this will significantly increase compliance costs for relevant NFT market participants. Given that trading in NFTs can, in practice, involve an enormous amount of money, which to some extent may justify potential AML obligations, industry stakeholders would be well advised to closely monitor regulatory trends.