Following this two-part series, we talk about the legal implications for creators (or sellers) and buyers of non-fungible chips (NFT) in Malaysia.
Paraphrasing a famous Star Trek line, NFT’s innovation goes boldly where no one has gone before. Not only is it popular for digital art and gaming assets – virtually any type of asset can be converted to NFT, from concert tickets to hotel suites, domain names, and health records. Entire “metaverses” are being created.
It’s important to be careful because your rights aren’t what they seem, and you may find yourself without legal remedies when things go wrong.
Disclaimer: This is our opinion for general information purposes. Please do not rely on legal advice.
1. NFTs cannot be used to raise funds
Based on the Guidelines on digital assets issued by the Malaysian Securities Commission in 2020, the issuance of digital tokens by companies with the intention of raising funds is a regulated activity.
NFTs used for fundraising will have to go through recognized market operators, such as initial exchange offering (IEO) platforms. The issuer must meet certain eligibility requirements according to the guidelines, and the sale of NFT must only be done on the IEO platform and elsewhere.
As for NFTs that are not used for fundraising, there are open questions: Can local Malaysians be promoted as a public chip sale? Can prices be put in unapproved digital currencies and can they be resold to secondary buyers? And because the guidelines are for companies only, can individuals start an NFT fundraiser on GoFundMe?
2. You do not own the intellectual property
A distinction must be made between NFT property and the underlying intellectual property (IP) property.
The NFT buyer has only one hash in the blockchain with a transactional record and a hyperlink to the artwork file. It is just a tool to represent the work of art.
Essentially, the purchase of an NFT only grants the property to the buyer, but not the intellectual property rights of the developer. Buyer also has no ownership rights over other copies or versions of the artwork created out there.
Therefore, the buyer must ask himself: what is the use of the work of art without its IP? What is intrinsically worth an NFT for the buyer without IP?
When you buy a Van Gogh, you own it physically, you can Instagram it, charge for selfies and loans to exhibit it at the Orsay Museum in Paris. But when you buy an NFT created by XYZ Labs, you can’t do all these things.
A bit of logic also helps: NFT is made up of a few lines of computer code. It cannot reasonably be expected to constitute a full contract assigning IP.
3. Maybe you are breaking the law
When you purchase an NFT, you will be given the right to trade, sell or give away the NFT you own, but you will not be given the right to reproduce, distribute, communicate and / or display the artwork represented by the NFT .
You cannot do the above at will and you may need to obtain permission first. You may even be banned from displaying NFT if the original creator or new owner of the underlying IP changes their mind.
Conclusion: If you infringe the intellectual property rights of the NFT you have purchased, you can sue and be held liable for damages.
4. Disputes could devalue the NFT
There may be more complications if the content of the NFT is questioned.
This can best be exemplified if Alice creates a work of art that contains the trademark or copyright of Bob. The unsuspecting buyer of NFT could face Bob’s action, with a material impact on the value of NFT.
In some cases, the creator of the NFT may not be the sole author of content, as there may be several co-authors, and not everyone agreed with the creation of the NFT. To make matters worse, some content has separate rights to reuse, modify, distribute, market, and so on.
If you don’t do your own research (DYOR) and disputes arise, it will be like buying a stock at 10 RM which falls to 0.10 RM after your year-end audit.
5. DYOR is easier said than done
No one talks about how difficult it is to do due diligence before making an NFT purchase!
NFT is a useful but imperfect digital certificate. The buyer relies on “a single chain of truth” (like Ethereum), but nothing prevents the developer from doing NFT the same job on another blockchain.
Sometimes there is one error to NFT which allows anyone to mint duplicates for free. Or is it the NFT not unique in its kind since the work of art itself is coined by several creators. Without the buyer knowing, the developer could bait and switch NFT at the last minute. There are so many fakes that NFT verification is now a service on Twitter.
However, for now, NFT is all we have as proof of purchase. There is no asset record for NFT in Malaysia, unlike stocks or properties. The developer cannot simply prove ownership and the buyer cannot search for the title through legally recognized means.
In addition to the charge, the NFT transaction may be the responsibility of different agencies. Intellectual property values and rights are different creatures in law.
Digital assets are regulated by the Securities and Exchange Commission; Intellectual property rights are administered by the Malaysian Intellectual Property Corporation (MyIPO) under the Ministry of Internal Trade and Consumer Affairs; the digital currency business may involve the central bank (Bank Negara AML-CFT Sector 6).
All of the above would seem strange to the current NFT market, which is still rather trader-focused and driven by speculation to move commodified art. Most will not bother with the legal issue, but due to its rapid growth, the market will be forced to mature in a short time.
In the meantime, it is our duty as lawyers to expose the risks even if it humiliates us to imagine all the possibilities of NFT, to infinity and beyond. #NotLegalAdvice.
This article is co-written by Ed Yong, Gan Ming Chiek and Yeow Jie Han.
Ed Yong is the co-founder of Celebrus Advisory and part of the Digital Technology Expert Network of Malaysia Digital Economy Corporation (MDEC).
Gan Ming Chiek and Yeow Jie Han are partners in Gan, Lee & Tan (GLT Law), an award-winning law firm in Malaysia.