Hot Topic # 2: NFT's Securities Attributes
In this topic, people are interested to know when NFT is acting as a carrier of artistic creation (IP) and when such NFT-based IP is divided and exchanged in the market, when it will be subject to securities regulatory regimes, and how to comply with the law?
From a legal perspective, using NFT as the carrier, artistic creation will become a kind of "self-evidence" IP. For example, traditional paintings are physical. Whether they are genuine, experts must be asked to appraise them. Later in the digital age, a digital picture's carrier is a series of 0 and 1 codes. All copies are identical. Infringing copy is 100% the same as the original. It is pointless to discuss how to prove which copy is genuine.
However, the creation of digital art based on NFT, through the underlying Blockchain technology, the object (music or image, etc.) itself is evidentiary to authenticity. In other words, the work itself is also a piece of evidence.
The combination of IP and NFT can increase the liquidity of IP for three reasons. First, the ownership can be freely divided (or duplicated to a designated number of copies). Secondly, the delivery of works is carried out entirely online. Thirdly, the underlying technology of the Blockchain makes the work itself and its transaction record impossible to tamper with, which improves transaction security and increases transaction confidence.
Such effect is significant to IP utilization because an active market can help find IP's value. As a result, IP can be sold for a reasonable price. In addition, the underlying technology can help reduce the cost of IP operation and protection.
However, as mentioned above, it is unclear under what circumstances will such an electronic certificate be classified as a kind of securities (and then be subject to strict securities laws)? In addition, a creative (but unlawful) business may carry out offshore operations to create this type of NFT-based IP, taking undue advantage in the vacuum of the law.
For example, in our serial articles Will World's First "Music Stock" Exchange Become Nasdaq in the Music Industry? we explored a hypothetical securitization case as follow and shown in Figure 1:
Technically, such an IP financial structure is now straightforward to achieve. However, once the transaction volume increases, it will pose a challenge to securities authorities worldwide.
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