Non-Fungible Tokens (NFTs) are digital assets that have been around since 2014 but have boomed in recent years. They are becoming a more popular manner to buy and sell digital artwork.
If you are wondering about creating, buying or selling NFTs, or even what the hype over NFTs is all about, read on to find out more. This article will cover:
- What are NFTs?
- What’s the hype over NFTs?
- The legality of creating, buying or selling such tokens in Singapore
- The importance of checking whether the vendor of the NFT actually has the right to sell the work
- What rights and avenues of recourse do NFT buyers have?
What are NFTs?
NFTs are unique cryptographic tokens that exist on a blockchain. Such “tokens” can be given specific information linking them to digital artworks, like the artist’s signature or the web address of original digital artwork or asset.
The term “non-fungible” means that no two NFTs are the same, as each NFT has a unique identification code and metadata differentiating it from other NFTs. In contrast, “fungible” items, like cash or Bitcoin, are indistinguishable and can be exchanged with one another.
NFTs thus help to represent the authenticity and ownership of the original digital asset, which is what makes NFTs unique. In this way, you can think of an NFT as a unique signature or a virtual certificate of authenticity signifying who owns the original asset, even though the digital asset itself can still be copied.
For instance, while people may be able to view and copy the digital artwork off the internet, they cannot claim ownership of the work. On the other hand, a person with an NFT linked to the digital artwork can prove the artwork’s originality and their own ownership to the work, and can therefore claim to be the unique owner of the artwork. He/she can also sell it as a unique work of art.
NFTs are commonly bought with cryptocurrency on the blockchain, although some platforms allow dollars to be used. The blockchain acts as a permanent public ledger, recording the ownership and transaction history of NFTs.
Each blockchain has its own NFT token standard, compatible wallet services and marketplaces, with different processes on creating NFTs. For instance, OpenSea is a popular Ethereum-based NFT marketplace allowing users to create NFTs by uploading their artwork and attaching their digital signatures for free.
NFTs can represent almost any kind of real or digital object. Such digital objects include art, music, videos, GIFs, tweets and more. These NFTs can also be sold to others. In March 2021, for example, Twitter co-founder, Jack Dorsey, sold his first-ever tweet as an NFT for US$2,915,835.47. The winning auction bidder obtained a unique digital certificate of the tweet that has been signed and verified by Dorsey as the tweet’s creator.
What’s the Hype Over NFTs?
NFTs can help artists monetise their digital art. It is not hard to see why NFTs are brewing a storm in the art world. Compared to physical artworks like physical paintings, digital art can be easily replicated and redistributed, which is why many artists suffer from losses relating to piracy. Therefore, NFTs serve to mitigate the losses arising from piracy by serving as a way for artists to monetise the authenticity of the original digital artwork.
As an example, the artist Beeple (whose real name is Mike Winkelmann) sold his digital work titled “Everydays – the First 5000 Days” to a Singapore-based investor for US$69.3 million (S$93 million) with fees in March 2021. A Brooklyn-based artist, Blake Jamieson, has reportedly also made over US$46,000 in approximately six weeks selling NFTs of his artwork on multiple platforms.
The tokenisation of digital asset ownership has also expanded into in-game items and other digital collectibles. A Twitter user by the name of Flying Falcon spent cryptocurrency worth US$1.5 million for NFTs representing nine plots of land on the gaming platform Axie Infinity. In the sports world, three NBA video highlights have been sold in the form of NFTs for more than US$30,000 on the blockchain-based platform NBA Top Shot.
For NFT buyers, the value lies in the uniqueness of the NFTs, with some people analogising buying NFTs to owning digital collectible items. The marketplace for NFTs is also flourishing because of the possibility of cashing out NFTs in the future.
Under Singapore Law, is it legal to Create, Buy or Sell NFTs?
The legality of creating, buying and selling NFTs are a grey area in Singapore, although Singaporean artists like Speak Cryptic have already sold NFT artworks. NFTs are not regulated by the Monetary Authority of Singapore (MAS) since they are not considered legal tender in Singapore, unlike currency notes and coins issued by the MAS.
In January 2020, the Payment Services Act (PSA) was enacted to regulate cryptocurrency service providers and “digital payment tokens”. However, NFTs may fall under the scope of “limited purpose digital payment tokens”, which are exempted from regulation under the PSA, as they are non-fungible and can be exchanged for only specific goods.
NFTs also do not seem to be an accepted mode of payment for goods and services, which means they would not fall within the purview of “digital payment tokens” under the PSA. The regulations under the PSA thus do not seem to govern NFTs.
Even if the NFTs can be regulated by the PSA, the regulations may come mainly in the form of detecting money laundering and terrorism financing risks. This is due to the fact that cryptocurrency transactions are cross-border, quick and anonymous. Thus, it remains unclear as to the extent of regulation of NFTs and its nascent market in Singapore.
Does the Vendor of the NFT Actually have the Right to Sell the Work?
A problem with buying NFTs is that generally anyone can create NFTs for anything just to sell these NFTs on the marketplace, since all that is needed is a crypto wallet and possibly some “gas fees” to put the asset on the blockchain. Some NFT platforms do not require owner verification before an NFT can be listed.
On the other hand, some NFTs platforms may require verification of the vendor, but may not have protections in place to check that the vendor is the actual owner of the work or has the right (or “good title”) to sell it.
This opens up room for scams. It has been reported that artists have seen their work on NFTs that they did not mint themselves. The rule of caveat emptor (“let the buyer beware”) thus comes into the play, and NFTs buyers are advised to do their own research to ascertain the veracity of the vendor’s title to the work before buying the NFT to it. Otherwise, buyers could fall prey to scams, possibly buying NFTs that are associated with broken links or fake NFTs.
What Rights and Avenues of Recourse Do NFT Buyers have?
What do NFT buyers actually own?
When a buyer buys an NFT, he or she holds the right to claim ownership of the NFT itself as a unique token and to exclude others from claiming ownership of the said NFT. The buyer will also have to look at the terms governing the NFTs, which may be found in “smart contracts”. Smart contracts can be embedded into the NFTs on the blockchain to indicate how much the artist will get from primary and secondary sales of NFTs.
Nonetheless, unless there are terms stating otherwise, the buyer is generally not entitled to the intellectual property rights (such as copyright) of the underlying digital artwork, nor the actual ownership of the underlying digital artwork. In most cases, the original content creator retains the copyright and ownership of the digital asset.
The creator may, however, choose to transfer the entire ownership of the copyright to the NFT buyer, and this transfer must be in writing and signed if it is governed by Singapore copyright law. The creator may also license the digital asset to the NFT buyer, giving the buyer the right to use it for a stated amount of time and for a fee or royalty.
As NFT holders have ownership over the unique tokens, they can also choose to resell the NFT, although the secondary market for NFTs currently seems to be focused on high-value artists. Most smart contracts attached to NFTs allow content creators to receive a percentage of the sales whenever the NFT is sold to a new owner, by including terms stipulating who gets paid and what amount.
Despite this, the creator may have the rights over the usage of the work to protect the creator’s brand image, or may even prevent the buyer from copying and profiting off the work.
Does the NFT buyer have any recourse if the NFT creator/vendor doesn’t transfer the NFT to the buyer?
Some platforms may require the NFT buyer to not transfer payment to the vendor until the NFT is transferred to the buyer on the blockchain, which would prevent this problem from even arising.
Alternatively, if there is a binding traditional written contract between the NFT creator/vendor and the buyer, the buyer may also enforce his or her contractual legal rights against the vendor through the local courts by suing for breach of contract. Nevertheless, the buyer should keep in mind that the vendor may be hard to locate, or may not be located in Singapore, which makes the litigation process more complex.
If either option is unavailable, it is likely the buyer would have no recourse under Singapore law given the uncertainty over how Singapore law and regulations would apply to the world of blockchain transactions.
What Happens If the Digital Artwork Linked to the NFT is Destroyed?
NFTs include information on where the buyer can find the underlying digital asset, but this does not automatically mean that the buyer possesses the actual asset. It is entirely possible for the underlying original digital artwork to be deleted, or for the server hosting it to permanently go down, causing the buyer to lose the work that he/she had paid for.
As the buyer, you may not have control over this unless you can buy the entire domain or pay to keep the artwork online. To combat this, some NFTs have an InterPlanetary File System that uses multiple hosts rather than a single domain owner. However, this system still has flaws and requires maintenance of the NFTs by buyers.
One solution is for the buyer and the vendor to have a binding traditional written contract, upon which the buyer can enforce his or her contractual legal rights for breach of contract against the vendor via traditional contract law rules. Where the situation is not covered under the contract, for instance if the vendor is not legally responsible for the NFT being destroyed and the buyer is unable to locate the digital asset, the buyer may be in a risky situation and left with no legal recourse.
NFTs will likely continue to grow in importance and popularity in the coming years, especially with companies viewing them as a way to profit and for brand expansion and artists using them as a way to monetise their digital artwork.
These digital tokens offer creatives a way to monetise their digital creations. Alternatively, as a potential NFT buyer, you can buy NFTs. Whether you should buy NFTs, however, is up to your discretion and risk appetite. This is given that there is a risk of fraud such as where the vendor may not have good title to the work. NFT prices are also not regulated by the MAS and may be inflated, since they hinge on perceived value and are not backed by the government (unlike fiat currency).
You should also be mindful of the possible legal issues that could arise if you choose to buy NFTs, such as potentially not owning the copyright to their underlying artworks and having no legal recourse if you and your vendor fail to make a binding written contract.
If you require legal advice about NFTs, you may wish to consult a fintech lawyer who is experienced in handling legal issues surrounding digital asset exchanges, blockchain platforms, tokenisation and other crypto-related matters.