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Hodine O. Williams | The legal issues surrounding non-fungible tokens | Commentary

Hodine O. Williams | The legal issues surrounding non-fungible tokens | Commentary
Written by Publishing Team

Have you heard the term NFT and become daunted like most people, particularly those who are technologically challenged? Well, get used to it and embrace the fact that this new phenomenon and ‘game changer’ is here to stay.

The rise of NFTs has been meteoric. Millions, perhaps billions of dollars have been spent on them in the last two years. The Indian Express, on February 2, 2020, reported that the top five most expensive NFTs sold up to that time were: ‘CryptoPunk#3100’ for $7.67 million, ‘CryptoPunk#7523’ for $11.75 million, ‘Beeple’s Human One’ for $28.98 million, ‘Everydays: the First 5000 Days’ for $69.3 million, representing the most expensive NFT ever sold to a single buyer.

‘Pak’s Merge’ which required the pooling of funds from over 30,000 persons and sold for a whopping $91.8 million.

All of these are digital artworks which might reasonably cause persons to hold the view that this is the future of art trade.

A point to note, though, is that Artnet.com (a leading online art news and marketplace) reported that more than half of NFT purchases are below US$200.

WHAT THEN IS AN NFT?

Non-Fungible Tokens (NFTs) are unique cryptographic tokens stored on a decentralized blockchain.They are digital units of value that have the ability to establish ownership of digital and tangible things such as digital images and fine arts. These ‘tokens’ are stored on what are referred to in the cyberworld as blockchains. These are electronic ledgers held by numerous computers globally.

Unlike a centralized system such as the RGD, which is the centralized ‘owner’ of all records of births, the ledgers on a blockchain (the same information) are held on individual computers permanently recording every activity on the ledger (including time-stamps) . Unlike traditional centralized systems, NFTs are unalterable and incapable of being deleted or counterfeited. Therefore, the NFT is an immutable and indisputable record of authenticity and ownership of the token.

WHAT ARE THE LEGAL ISSUES SURROUNDING NFTs?

It’s not that they are plenty but NFTs are novel. As such, how they are created, traded, distributed and ultimately owned give rise to legal issues which have not been addressed by existing regulatory frameworks. One such legal issue is the potential for such transactions to evade anti-money laundering regulation. This is evident when we examine the construct of NFTs as against existing anti-money laundering regulations.

MONEY LAUNDERING

The blockchain technology which underpins NFTs is also at the foundation of cryptocurrencies such as bitcoin which have gained alarming prominence in recent years. These cryptocurrencies are decentralised and unregulated.

To date, several NFTs have been purchased on this platform and for considerable sums of money. The decentralised and unregulated platform arguably makes it attractive for criminals who may take advantage of the lack of regulation.

Although, anti-money laundering regulation has become quite robust, we must ask if criminals are utilizing digital assets to launder money, and finance crime and terrorism and remain entirely outside of the reach of such regulatory frameworks.

The United Kingdom, for instance, implemented specific laws that necessitated that anyone who engages in art trade in excess of €10,000 must carry out Client Due Diligence (CDD) among a host of other obligations to verify a purchaser’s identity and their source of funds in funds advance of any transaction. Such specific measures may extend the reach of the anti-money laundering regime to potentially cover tokens such as NFTs.

Additionally, NFT transactions are transnational in nature; therefore, persons can engage in transactions with persons outside of the jurisdiction. So, what happens when an individual in Jamaica sells NFTs? Currently, there is no design framework which regulates such transactions.

In light of the ease with which this transaction may be completed, the issue is now, how to treat with criminals seeking to use NFTs to avoid anti-money laundering laws?

The growth of NTF has increased at an alarming pace, which is cause for concern. The regulatory framework has not kept apace with such digital assets. A plethora of possible legal issues can arise and are not limited to those mentioned above.

Issues such as privacy, contract formation, data protection, taxation, cross-border transactions, jurisdiction, international finance, land purchase, etcetera, are likely to become real concerns if NFTs make it beyond a temporary fad.

The Government, though, will have to move quickly to keep pace with these developments internationally.

Hodine O. Williams is a crown counsel in the Cybercrimes & Digital Forensics Unit of the Office of the Director of Public Prosecutions. Email feedback to columns@gleanerjm.com, hodine.williams@dpp.gov.jm

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Publishing Team