One of the most important trends in digital sales is currently cryptocurrencies and crypto-based assets. Non-fungible (unique) assets called NFTs, have also started to increasingly make a name for themselves all over the world with significant sales and even record high transactions. These blockchain-based assets are described as non-fungible assets. Non-fungible asset is an item that cannot be measured or substituted with another object and stands in its entirety as a unique object. Therefore, by NFT, we understand an item which is like no other. The reason for its uniqueness is that it is digitally protected with metadata fragments it contains. The different aspect of NFT’s from blockchain-protected currencies is that the currencies can be used as a substitute for each other, while NFT’s are “the only” ones. In other words, although every unit of coin in Tether is a substitute for each other, it is not possible to substitute a digital asset created as an NFT.
When creating NFTs, compulsory and optional information are added to the original NFT code. Token ID is one of the most essential information and is created at the first moment when the digital unit value with the original chain structure called “token” is produced. Secondly, the address of the contract must be contained in the NFT metadata. This information, which is referred to as “contract address”, is the address of the blockchain that can be tracked by everyone. Also important is the wallet address of the NFT’s originator. It shows the origin of the NFT and whether it is actually manufactured by the beneficiary. Another aspect is the addition of the digital signature to the metadata, which provides the connection between physical works and their digital copies.
Although the uses of NFT are very diverse, globally, they are generally accepted in the art world. Through NFT’s, it has become possible for an artist to sell his/her physical or digital work in the digital world. However, it is not possible to limit NFTs exclusively to works of art. If any physical or digital assets have a unique/non-fungible nature, they can be made as NFTs and launched in the market.
What are the areas that the NFTs touch from a legal point of view?
The information contained in NFTs, whether they are launched in the market or not, whether they have a copyright qualification or not, are the aspects that must be to be taken into account in their legal analysis.
First of all, although the information NFTs contain is technical information in general, the law on the protection of personal data would come into play if they expose the identity of their developer or owner or make them identifiable. Being “identifiable” is a legal term and not all kinds of data are qualified as the data regarding the identity of a real person. What should be taken into account here is whether or not the identity, communication, finance and customer transaction data of real persons are obtained during the buying/selling transactions or the membership procedures on the platforms where NFTs are sold. Such information has to be obtained essentially within the scope of anti-money laundering legislation. Therefore, there are rules in both legal areas (protection of personal data, anti-money laundering) that the party carrying out the sales transactions is obliged to comply with.
The NFTs are known to be closely related to intellectual property law because they contain copyright. The term “Work” under article 1/B of the Law no. 5846 on Intellectual and Artistic Works is defined as all kinds of products stemming from the ideas and art that bear the characteristics of the owner and are considered as works of knowledge and literature, music, fine arts or cinema. The NFTs would thus be able to benefit from the protections provided by intellectual property law as they are considered works in this context.
Another point to note is that the NFT purchaser does not actually obtain the copyright of the work, but rather only the ownership of the asset digitized by the NFT. The practical consequence of this is actually the contract between the two parties formed by two reciprocal and consentaneous declarations of intent within the law of obligations. This contract can be composed of contracts called smart contracts created using blockchain infrastructure. Smart contracts can include special provisions with their own irrevocable structure. In fact, giving the creator of the work digitized by the NFT a share of the sale with every value increase can also be regulated by smart contracts. In this case, the protection of rights, the fulfillment of the acts and the control of whether the wills are formed in a healthy way can become the areas that can legally be challenged most.
What are the aspects that NFT issuers should pay attention to?
The NFT emerges as a final work and is an item that can be traded. As a result of this, it can be sold and transferred through a platform as is usually the case in practice.
First of all, there should be no doubt that the asset on which the NFT is based contains copyright, and if so, that the copyright owner has provided necessary authorization. This issue is mandatory in order not to face problems in terms of copyright protection.
The contracts that constitute the legal infrastructure of the transactions between the platform and the user are also points to focus on for those mediating the sale of the NFTs. The scope of the sale and the clear identification of reciprocal acts are made via these agreements and these agreements are taken into account first in case of any dispute. As such, the obligations of the user and the platform must thoroughly be specified in these agreements.
In cases where personal data is collected by the Platform, necessary clarifications must be made and explicit consent must be obtained for the processing of some data received from the purchaser. Additionally, a structure must be designed in accordance with AML/KYC procedures and measures must be taken to prevent the financing of terrorism.
In addition to having security measures in place for those who issue NFTs and mediate their sale, wallets for sales transactions and transfers must be specified. Furthermore, since the responsibility for the transactions of the NFT buyer lies with the platform, it is the NFT vendor’s obligation to make the relevant warnings and necessary guidance for the user to act with utmost care.
All these aspects pose legal risks to the parties involved in NFT transactions and mediating transfers and sale transactions. It is important to design processes covering all aspects, both in terms of compliance with the country’s legislation and in terms of protecting the rights of the parties. The legal framework created with maximum security should be carefully designed and implemented through appropriate solutions. It is also no longer a secret that NFT sales will gain momentum with the development of the metaverse world. It is inevitable to receive professional support when the legal design to be made taking into account the unique structure of the Metaverse world will also change. We are committed to providing the most competent support with our expert staff and counsels in this field.