NFTs: a Brazilian legal perspective

Cecília Coutinho
Veirano Advogados, São Paulo
cecilia.silva@veirano.com.br

Valdir Rocha
Veirano Advogados, Rio de Janeiro
valdir.rocha@veirano.com.br

Non-fungible tokens (NFTs) emerged as a cultural response to create technical scarcity on the internet, developing new types of digital goods or virtual assets and, more than that, new alternatives to transfer properties online. These virtual assets have been drawing attention worldwide, mainly due to the high purchase prices of the NFTs; for instance, Beeple sold the ‘Everydays – The First 5000 Days’ NFT for $69m at Christie’s,^[1] positioning the artist among the top three most valuable living artists in the world, and the cheapest available Bored Ape Yacht Club NFT for sale, one of the most well-known NFTs nowadays, which is listed at a record ETH 152, or about $429,000.^[2]

Thus, the surge in NFTs collectibles is still fairly new, but significant amounts of money have already exchanged hands among collectors^[3] amounting to over $6.2bn in sales since 2017, according to NonFungible^[4], which tracks historical sales data of NFTs. Under this scenario, the objectives of this brief article are to:

(1)     suggest a definition of an NFT, considering the two constitutive characteristics of this kind of virtual asset;

(2)     present the main legal impacts stemming from the very concept of NFTs; and

(3)     indicate the regulatory scenario, both present and future, involving NFTs according to the Brazilian legal landscape perspective.

It should be highlighted that, as a virtual asset, NFTs are not equivalent to the securities typically subject to regulation by legal systems. It is precisely in this context that NFTs emerge.

Starting with item (1), as to the definition of NFTs, for didactic purposes, the suggested definition is to be presented by discussing, at first, the idea of (in)fungibility and, second, that of tokens. To put it simply, a fungible good is one that can be replaced by another of the same kind, quality, and quantity. With that, the idea of fungible goods is directly related to goods that can be contracted/acquired without any prior specification of specialty or that can be substituted by another identical good. Similarly, one can speak of mutually interchangeable goods, as is the case of money and cryptocurrencies themselves (eg, Dodgecoin, Bitcoin, etc), because they are all goods that, although corresponding to different values, can be cumulated and substituted in different ways, without affecting their kind, quality, and quantity.

Logically, a non-fungible asset can be considered the opposite; in other words, the idea of a non-fungible asset is that it cannot be replaced by another of the same kind, quantity, and quality. This is exactly the first fundamental characteristic of NFT, that is, it corresponds to a virtual asset that cannot be replaced by another, without consequently affecting its quality and quantity. Once an asset is coined on the blockchain as an NFT, the result is that it becomes irreplaceable as a result of the non-fungibility and consequently scarce.

The token, on the other hand, is a digital certificate, stored in a database called ‘blockchain’. It is a digital representation of a real asset, whose financial value depends on what it represents and the eventual future appreciation – this is the reason tokens may come to fit into the concept of securities, regulated in Brazil by the Brazilian Securities and Exchange Commission and Law No 6,385/1976. Moreover, unlike cryptocurrencies, the token does not need its own blockchain (unlike cryptocurrencies) and can be used for several purposes. Therefore, the token represents a digital asset, issued by an entity and tradable, that can be offered to investors during a public or private offering to create and record the distribution of tokens called Initial Coin Offering (ICO) or Initial Token Offer (ITO). Due to the versatility of the use of tokens, the Swiss Financial Market Supervisory Authority (FINMA)^[5] categorises tokens into three types, but hybrid forms are possible. These are: (i) payment tokens; (ii) utility tokens; and (iii) asset tokens.

Summing up the two essential characteristics related to NFT and presented above, the suggested concept of NFT is that this kind of virtual asset is a digital collectible, unique, scarce, durable, and extensible, corresponding to the digitally authenticated version of the asset – now non-fungible – through the attribution of digital registration of ownership, since the NFT has a unique identification code (private key) and metadata that distinguishes one NFT from any other on the blockchain. In addition, NFTs are secured by MetaMask, which is a secure identity vault that provides a user interface to manage their identities across different sites and sign blockchain transactions. Despite that, it so happens that, like any technology, NFTs legally impact a series of issues, of the most diverse natures, precisely because of their disruptive nature.

With that in mind, continuing with item (2) above, the legal impacts stemming from the very concept of NFT affect horizontally the legal scenario, but most specifically intellectual property (IP) and data protection. From the IP perspective, among the most important aspects to be considered when discussing NFTs are copyrights, considering the NFT is just a representation of the underlying work and not the work itself. As a result, the sale of an NFT does not provide the buyer with the copyright to the work it signifies, rather, when someone purchases a piece of digital art in the form of an NFT, the buyer merely obtains ownership over an authentic copy of the art – the IP rights in the said art remain with the creator or the artist behind the project.^[6]

Adding to that, another problem is that blockchain can protect and ensure purity of the data once it is stored on it, but, if the data in itself is something infringing – for example, in case a given person decides to copy another artist’s work and makes NFTs based on that original work, without prior authorisation – enforcing copyright laws and principles on NFTs may prove difficult.

Trademarks are also significantly affected by NFTs and this very controversy is represented in the lawsuit^[7] filed by Hermès against Mason Rothschild with the Southern District Court of New York on 14 January 2022, citing multiple causes, including trademark infringement and dilution. In this case, Mason Rothschild has openly acknowledged that it elected to sell its NFTs as ‘METABIRKINS’ because a Birkin handbag is a highly valuable asset in the physical world.^[8]

Under the data protection standpoint, data protection legislations, including the Brazilian General Data Protection Law (Law No 13,709/2018 or the ‘LGPD’), are based on the assumption arising from the maxim of informational self-determination that personal data can be corrected, modified, or deleted whenever requested by the data subject. In contrast, the nature of blockchain makes it impossible to unilaterally modify data to ensure the integrity of recorded data and increase trust in the network, in addition to the challenges of enforcing data anonymisation and purpose limitation requirements. This means that the use of blockchain potentially violates the LGPD in this regard, as it makes it impossible to fulfill the rights of data subjects.

The legal implications of the growing adoption of NFTs worldwide justify the discussion regarding how to regulate this virtual asset. Yet, regulation in this area faces several obstacles, including, essentially, the difficulty of defining the legal nature of NFTs, that is, the lack of consensus as to whether an NFT shall be classified as a commodity or as a financial asset. Additionally, the absence of a central authority to manage the blockchain and to provide assurance to users, including the confirmation of transactions and provision of redress mechanisms, also can be argued as a difficulty to the regulatory process, as does the global nature of the blockchain; that is, should regulators engage in the effort to design a global regulation to avoid ‘law shopping’ and regulatory arbitrage? Either way, the fact is decentralisation and the possibility to easily transfer values worldwide are the very competitive advantages of the NFT itself and, of course, of the distributed ledger technology (DLT).

Given these challenges, moving to the objective of this article (point (2) above), the regulatory experience observed in Brazil very much mirrors the discussions held in the United States and in the European Union. Yet, Brazil is still in the early stages of regulating virtual assets. Notwithstanding, the country already has important rules in place, as indicated further below:

• The Copyright Law (Law No 9,610/1998) provides that the author owns the moral and economic rights in the work he/she created. In other words, considering the nature of the NFTs, the virtual non-fungible asset, under the Brazilian legislation, integrates the reproduction of the work, with a digital signature of the author and rules pre-programmed by the creator.
• CVM Circular Letter No 1/2018 establishes that, in some cases, crypto assets can be characterised as securities, when they grant the owner participation, partnership, remuneration or voting rights in a company.
• Circular Letter SEI No 4,081/2020 of the Special Secretariat for Debureaucratization, Management and Digital Government (Ministry of Economy) ensures that the Boards of Trade can register the payment of corporate capital with cryptocurrencies and crypto assets (eg, NFTs).
• Brazilian Federal Revenue (RFB) Normative Instruction No 1888/2019 provides that transactions carried out in environments made available by crypto exchanges domiciled in Brazil must be reported to the RFB by the exchanges themselves, with no value limit. In addition, the Normative Instruction foresees the mandatory provision of information regarding transactions carried out with crypto products to the RFB.

It is noteworthy, finally, that on 26 April 2022, the Senate Plenary approved, in a symbolic vote, Amendment No 6, a substitute to Law Bill N. 4,401/2021, aimed at regulating the national cryptocurrency market in Brazil. This proposal provides guidelines for the ‘provision of virtual assets’; regulates the exercise of companies providing these services and brings measures to combat money laundering and its penalties. The Bill now returns to the House of Representatives for analysis and, if approved, will be submitted to the President for sanction.

Beyond that, the Bill brought the definition of ‘virtual assets’, which shall thereafter be understood as ‘digital representation of value that can be traded or transferred by electronic means and used to make payments or for investment purposes’. The definition does not apply to traditional national currencies and assets previously regulated by law. Still on this subject, among other obligations, the Law Bill foresees an obligation to the Executive Branch to indicate a Federal Public Administration body responsible for establishing the financial assets that will be regulated by the future law, as well as the need to control and segregate clients' funds.

Ten per cent of the world's gross domestic product (GDP) is stored by blockchain technology, on the premise that blockchain is a way to keep track of reliable transactions in a distributed manner.^[9] But this technology is not all about potentially negative impacts. Among the positive impacts of blockchain are increased financial inclusion in emerging markets as financial services gain critical mass on the blockchain, the disintermediation of financial institutions, the explosion in tradable assets as all types of exchange value can be hosted on the blockchain, better property records in emerging markets and the ability to turn anything into a tradable asset, and increased transparency because the blockchain is essentially a global ledger that stores all transactions.

Therefore, this article concludes in the sense that NFTs and, more specifically, blockchain – due to their disruptive nature, even though they have several positive aspects to be taken into account – significantly affect IP rights and data protection. This proves that the regulatory perspectives must necessarily take into account the fundamental principles that govern the economic order in Brazil, without slowing down the technology, whilst simultaneously ensuring legal certainty for investors and users of this new technology, especially in the metaverse.

Notes

[1]       Available at: www.theverge.com/2021/3/11/22325054/beeple-christies-nft-sale-cost-everydays-69-million. Accessed 21 July 2022.

[2]       Available at: https://decrypt.co/99065/bored-ape-yacht-club-ethereum-nfts-record-price-metaverse-launch. Accessed 21 July 2022.

[3]       Available at: www.cnbc.com/2022/06/28/cathie-wood-nfts-digital-wallets-will-become-huge-opportunities.html. Accessed 21 July 2022.

[4]       Available at: https://nonfungible.com/market-tracker. Accessed 21 July 2022.

[5]       Available at: www.finma.ch/~/media/finma/dokumente/dokumentencenter/myfinma/1bewilligung/fintech/wegleitung-ico.pdf?sc_lang=en&hash=C9899ACF22747D56C800C6C41A7E28AB. Accessed 21 July 2022.

[6]       Available at: www.mondaq.com/trademark/1170416/not-for-trademarks-the-truth-about-nfts-and-ip. Accessed 25 June 2022.

[7]       Available at: www.thefashionlaw.com/hermes-names-metabirkins-creator-in-trademark-lawsuit/. Accessed 21 July 2022.

[8]       Hermes International et al v Rothschild, available at: https://unicourt.com/case/pc-db5-hermes-international-et-al-v-rothschild-1116864. Accessed 21 July 2022.

[9]       SCHWAB, Klaus. ‘A quarta revolução industrial’, São Paulo: Edipro, 2016, p. 145.