NFT-boom: ‘We currently have the Wild West feeling from a legal point of view’

NFT. Behind these three lowercase letters, short for “non-fungible token”, hides a market that reaches more than $40 billion. For many observers, this is the future of the web, which will go hand in hand with the development of the metaverse and the democratization of cryptocurrencies. Specifically, NFTs make it possible to give value to purely virtual objects, such as works of art, by backing them with a certificate of authenticity registered on a blockchain (or chain of blocks) that is considered inviolable. To date, 3.5% of French people have already bought an NFT, according to an Ifop survey for CoinTribune.com published Wednesday. Half of 18-24 year olds are interested in it, while one in four French have heard of it.

The flip side of the coin: In the first marketplaces dedicated to NFTs, such as OpenSea or Crypto.com, numerous scams, deceptions or fakes trying to take advantage of this boom. They also benefit from a still vague legal framework and from a certain lack of knowledge of the system. the giant of streetwear, Nike, recently filed a complaint against a start-up that sold a series of NFTs with the famous comma. Matthieu Quiniou, lawyer and doctor of law, author of the book “Blockchain: the advent of disintermediation” (ISTE editions, 2019), lecturer in Information Science at Paris 8, sheds light on the questions NFTs ask in lawsuits.

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Matthew Quinio: Now that’s the real difficulty: the NFT is all and nothing at once, it’s quite a wide range of possibilities, in terms of rights and associated uses. We can associate with the smart contract (smart contract) of the NFT an image, various files, terms and conditions of sale, a certificate or nothing at all. NFTs are therefore still the subject of many questions about their nature, even though it is now of course classified in financial law.

“Brands and creators are increasingly protecting their content”

The deputy of Paris Pierre Person submitted amendments to the Financial Act for 2022 in October to better categorize these NFTs by taking into account their specificities and their underlying asset. For example, for those offering artworks, this would lead to a more attractive taxation for their holders. However, this type of development was withdrawn, considered too early. For my part, I remain convinced that we are moving towards this: different rights depending on whether one buys an NFT linked to a physical or virtual work of art, another giving the possibility to get the delivery of a good home, or one that gives access to seats behind the scenes of a concert…

Does this vagueness help pave the way for scams?

We currently have the feel of the Wild West because we find everything behind the NFTs: projects of original digital artworks, profile picture (PFP) NFTs aimed at creating communities on social networks such as monkeys Bored Ape Yacht, projects linked to marketing operations, land in the metaverse or even video game avatars… Then, finally, projects that are sometimes run by influencers, who are simply there to raise large amounts of money, and in this case can turn out badly for the buyers. You should always consider the counterparties linked to the NFT, read the general terms and conditions of use and sale – if any – to limit the risks of deception and understand what you are buying, which is not always clear, must be admitted .

The market also seems to have more to do with counterfeiting – copying a digital work (which is very simple) and selling it yourself on the internet. Last week, Nike filed a complaint for an unauthorized reproduction of one of its sneakers, in an NFT (Vault NFT), owned by the start-up StockX. Hermès is also in conflict with the artist-author of “MetaBirkins”, for NFTs inspired by his products. Will these big brands do well?

Early on, there were discussions about the limits of counterfeiting with regard to NFTs. Some argued that hyperlinking to a copyrighted image hosted in a database was not necessarily an infringement as long as there was no commercial exploitation involved. This is confirmed by case law of the Court of Justice of the European Union. But for NFTs, almost systematic monetization puts an end to this case law exception.

Thus, with some exceptions of reproductions of works authorized by Fair Use, or in France pastiche, the risk of counterfeiting is significant for NFTs acquiring branded objects, or works that do not belong to them. People who create NFTs without caring about the rights holders, without caring about the people who created the original work, expose themselves to lawsuits and risk having to pay and pay large damages.

Is this a new case?

Not really, we find this dimension since the creation of peer-to-peer (P2P) sites, which have long offered free copies of movies or music. The difference today is that when you create an NFT, you probably know where it came from (the public key of the issuer of the NFT is permanently registered on the blockchain). Moreover, unlike P2P when the person will give it, the token is sent and not duplicated. So I think NFTs will make it very easy to fight counterfeiting. First, because it is impossible to remove infringing content on the blockchain, making the penalties more severe and deterrent. Then, tomorrow, artificial intelligence tools should recognize them faster and faster.

How do brands still risk protecting themselves against this phenomenon?

Brands and creators are increasingly protecting their content by increasing the number of deposits in classes, products and services related to NFTs with the National Institute of Industrial Property (INPI). I’ve personally done it for video game companies. I know that other brands in the luxury world are starting to take that into account. Rather, for authors and artists, the challenge is to create NFTs on their previous works to demonstrate the fondness for this new NFT market.

Is the consumer risking something by buying an NFT, in its “illegal” form?

In the case of the purchase of an infringing NFT, such activity potentially qualifies as concealing counterfeiting, but in practice the risks to a consumer are quite limited and close to those associated with illegally downloading works on the Internet. In addition, the consumer has recourse against his seller. The risk is greater for the resale of infringing NFTs by a consumer, as the resale, like the sale, is an act of counterfeiting (not concealment). Under French law, the forger faces up to three years in prison and a fine of €300,000. In practice, criminal prosecutions are rare in copyright infringement cases, but in civil cases, the risk of an injunction to pay damages to a consumer who resells an NFT related to a counterfeit work cannot be excluded.

The OpenSea platform itself has removed the “MetaBirkins” it hosted. But she doesn’t seem to have everything under control. More than 80% of the free NFTs on the platform are fake, plagiarized or spam, it claims. Will the platforms be pushed to? figuring out to protect sellers and buyers?

Their role is currently ambiguous. Not all of these platforms position themselves as curators or publishers of content on the web. And yet they often host these images directly in their own databases and not in third-party decentralized databases. In their terms and conditions of sale, they make sure to limit their liability, but we cannot always deal with consumers due to mandatory rules protecting the latter and abusive provisions that cannot be enforced against consumers.

AMD (Digital Markets Act) and the DSA (Digital Services Act) could be the means of asking them for a commitment to enhanced information about what is being sold and to suppress the illegal content. Also, in certain cases – for those who fall under the status of PSAN (digital asset service provider) – they are obliged to check the identity of their identity under KYC (Know your customer) and LCB-FT rules (combating money laundering and financing of terrorism). customers and the origin of the funds. Most platforms don’t have it and are reluctant to do so as it can be a deterrent for some buyers.

This week there was a special auction at Aguttes. Not only have works been offered from the metaverse, but above all we see that NFTs sold in this way can only be backed by physical ownership. Does this symbolize the slowdown in French NFT legislation?

The Commercial Code actually prohibits auctioneers from conducting voluntary auctions (as opposed to judicial sales) involving immaterial interests. I think this is because of the tradition of this profession which is deeply rooted in the physical world. An evolution is desired by the Association of Auction Houses (the SYMEV), and to some extent the Council of Voluntary Sales (CVV), as shown by a recent report of January 2022 from the CVV on NFTs. There are ways around this problem, and Aguttes did just that, by providing a package with a physical work, a certificate, and associated permissions.

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But in France we are almost the only ones who act like this. Although our auctioneers are highly skilled in international competition, they are troubled by not being able to enter this market. For example, some auction houses conducted their NFT auctions from abroad to avoid being subject to the restrictions of the Commercial Code.


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