Blockchain technology has revolutionized the IT world. Based on the decentralized ledger and smart contracts, it is continuing to conquer ever more digitally-driven industries – from logistics and healthcare to IoT and public administration. Alongside transforming the old domains, this innovative know-how has ushered totally new ones – crypto currency and NFT.
The concept of Non-Fungible Tokens (that's what NFT stands for) has only reached the age of infancy, being not more than five years old. But during its short period of existence, the NFT market has manifested an exorbitant surge, hitting the dizzying $25 billion last year. Being an appealing business niche, the NFT realm is a magnet attracting not only investors and entrepreneurs but droves of frauds as well. What legal mechanisms operate there?
Regulatory and Compliance Problems NFT Marketplaces Face
Currently, NFTs aren’t covered by any national or international laws and regulations. Why? There can be two explanations for this legal gap.
First of all, the NFT field is a novel area that legislators haven’t yet tapped. This is symptomatic of all budding activities that are left legally uncertain for quite a time through the inertia of governmental institutions and international organizations.
Second of all, the questionable legal status of NFTs is related to the character of this phenomenon itself. The notion of non-fungible or unique tokens embraces a huge number of objects and digital assets of all sorts, including artworks, collectibles, original music, limited-edition apparel, tickets/coupons, tweets, domain names, in-game items, etc. Naturally, such a broad diversity makes it hard for lawmakers to treat them as a group of uniform entities subject to one code.
● Intellectual property rights. When someone buys an NFT, they don’t acquire the underlying work of art itself. That is why copyright related to the latter doesn’t change hands after the purchase. The NFT buyer still needs a license to be able to reproduce the original work, and if they do it without such a permit, the creator of the artwork will sue them. Moreover, the marketplace where you bought it can delete the NFT “moment” from its application or even remove your user account without informing you in advance.
● Privacy and data protection. Each person has a right to erase their private information. The immutability of blockchain prevents it since it may appear impossible to prove that this data belongs to an individual with an undisclosed identity. Thus, NFTs containing personal information are at odds with data protection laws.
● Taxation. When you come up with a token, it is tax-free. But if you buy, sell, or invest in NFTs, you are subject to various taxation regulations. Theoretically. The problem is that one can’t determine for sure where NFTs are situated to apply to them some national tax code.
● Security. As a rule, an NFT and the digital item it represents are stored separately, being connected by a link. The blockchain where NFT is kept is totally secure, but the digital asset is far from it. When it, for some reason, disappears (say, after a cyber attack or data leakage from a compromised server), the NFT is void.
● Property law. Since NFTs aren’t assets themselves but unique copies of them, it is impossible to determine what legal framework regulates the capability to sell them. Again, the NFT’s location is a poser.
● Succession planning. What happens to NFTs after their owner's death? If they are included in the will, they pass on to heirs. And if not? Or if a personal password allowing access to them is unknown to executors? In these cases, valuable assets can be lost forever. The entire NFT succession system needs the introduction of digital legacy initiatives that would leverage cloud storage platforms and multi-sig wallets where the NFT key can be safely kept.
● Money laundering. Given the rapidly growing value of NFT transactions, a fair share of which involve cryptocurrency, one can assume that they may be exploited to dodge anti-money laundering (AML) regulations. The latter, together with Know Your Customer (KYC) policies, form a set of guidelines businesses must implement to prevent illegal practices.
Do NFT marketplaces have to comply with corresponding regulations?
At the moment, they aren’t obliged to. However, it is a highly recommended option for law-abiding enterprises since it will help them to earn the trust of their customers, cash-out proceeds, mitigate fraud, and prepare in advance for future regulations that lawmakers are likely to adopt any time soon. AML/KYC compliance software will be a good crutch in making such efforts more efficient.
Addressing AML/KYC Issues: The KYCAID Way
How do solutions offered by KYCAID facilitate AML/KYC compliance efforts of NFT marketplaces? They excel in document checking, liveness verification, proof of address to confirm where sellers and buyers reside, and AML screening.
As a result, NFT marketplaces can:
● Ensure sellers' verifications. Our software enables marketplaces to minimize fraud by effectively checking all parties to transactions and the deals themselves. It is also instrumental in identifying individuals behind shell organizations
● Confirm the NFT ownership. Employing our solution, you can identify the person at the registration stage, automatically check his/her ownership of the digital asset when it is deposited, and confirm the delivery of the purchased NFT to the buyer.
● Perform large buyers’ verification. Our software is honed to monitor the participation of galleries, intermediaries, marketplaces, and other prominent art market actors in auctions. This function allows players in the NFT domain to detect suspicious activities and transactions and issues risk recommendations to the solution users.
Legally, the contemporary NFT realm is a grey zone that is not directly governed by any national or global legislative acts. That is why NFT marketplaces encounter multiple law-related issues – from intellectual property rights and data protection to taxation and AML/KYC compliance. The latter can be significantly streamlined and facilitated by harnessing high-end AML/KYC solutions that will help actors in the niche to mitigate fraud and prevent money-laundering practices, thus winning the trust and earning a solid reputation among stakeholders.