Must-Read Topics on IP Finance in China for 2022 - Part 2

Topic # 2: NFT Securities

When do NFT creations act as a carrier for IP? When NFT-based IPs are divided and exchanged in the market, when will these exchanged NFTs be subject to regulations for securities ​? And how will owners and users comply with these regulations?

From a legal perspective, when using NFT as a carrier for IP, artistic creation will become a kind of "self-evidenced" IP.  Take traditional paintings for example, they are physical objects that can be appraised to evaluate their authenticity.  Now in the age of the internet, copies of digital pictures are identical. Infringing copy is 100% the same as the original. In thee scenarios it is pointless to discuss how to prove which copy is genuine because it is impossible to track.

However, digital art NFTs (music, images, etc.) created through blockchain technology can be proven to be authentic or the original. Transactions are all visible and copies are impossible. In other words, the work itself is also evidence of its originality and authenticity.

IP combined with NFT can increase the liquidity of IP for three reasons.

1. The ownership can be freely divided (or duplicated to a designated number of copies).
   
2. The delivery of works is carried out entirely online. 
   
3. The underlying blockchain makes the work itself and its transaction record impossible to tamper with, which improves transaction security and increases transaction confidence.

Such effects significantly benefit and promote IP utilization because an active market can help in the IP valuation process. 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 law? A creative (but unlawful) business may carry out offshore operations to create this type of NFT-based IP and evade legal responsibilities to their own advantage.

We explored a hypothetical securitization case in our articles series "Will World's First 'Music Stock' Exchange Become Nasdaq in the Music Industry?" The explanation for this case is as follows.

• Step 1: A domestic Chinese artist exclusively licenses their music IP created in China to an overseas platform.
• Step 2: Using NFT as a media (IP carrier), this overseas platform creates the ownership of the IP into several duplicates and sells them online to music fans all over the world (including selling back to the domestic fans in China).
• Step 3: Then, as the song gains popularity, the price of each verified duplicate increases and can  even act as a stock. Holders may sell their shares on the music platform for profit.  The domestic creators also receive sales dividends from this operation.

​Technically, such an IP financial structure is now straightforward to achieve. But once transaction volumes increase, it will pose a challenge to securities authorities worldwide.

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