NFT, cyber law and crypto advantages in 8 points.

The first turmoil for NFTs has exploded among artists, sports clubs and gamers. Let's try to understand the usefulness of non fungible tokens, between theoretical and practical aspects, and what precautions to adopt in their particular market.

NFT, certificate of ownership?

The adamantine tenor of object

At first glance, thenft can be framed as a unilateral declaration by an apparent holder with multilateral certification by the blockchain ^[1]L’NFT, traducibile come contromarca non fungibile, è un codice digitale prodotto a partire da un bene digitale che viene inserito in un ambiente di verifica reciproca interoperativo, definito … Continue reading.

The creator of the token in the process of minting ^[2]Il minting è una operazione che preclude la formazione di un ulteriore NFT sullo stesso identico bene, ciò conferisce all’NFT la caratteristica della scarsità. Infatti, è il mint di un NFT … Continue readingclaims to own the related underlying asset collegato ^[3]asset, in turn, digital native or analogue from which digital copy is extracted and is this declaration that gets crystallized in the cryptoblocks, which confer a certain date.

The coinage attributes other essential characteristics to the gear, which is characterized by non-fungibility, as it cannot be replaced by goods of the same species, therefore unique. It is alienable because it can be exchanged, liquid because it is identified in the amount, immutable over time and in cyberspace and programmable, that is, replicable according the coding standard.

The NFT is also an instrument with intrinsic security because only the private key in the possession of the holder (initially, of the person who coined it) allows it to be available ^[4]Il conio dell’NFT genera due chiavi, una pubblica ed una privata. Con la chiave pubblica, chiunque può risalire al nome del creatore associato all’nft, mentre solo chi è in possesso … Continue reading. The certainty of the object does not also extend to ascertaining the identity of who coined the token, a phase of subjective determination that goes beyond the capabilities of the NFT itself.

We can, therefore, speak of improper certificate of ownership if we consider that in the decentralized system no authority has a priori power endowed with sovereignty and officiality on an intrinsic level, nor of self-certification given the absence of an authority that provides for a regime in derogation to that of certification.

NFT and underlying asset

What we have seen so far allows us to understand that the NFT does not correspond to the underlying asset. In particular, the token must be understood as the representation in the digital ecosystem of that data synthesized asset whose rights are not automatically transferred to the NFT, having to, from time to time, verify the correlation between the two.

Nor should the circumstance that the related asset be intangible be confused. In fact, let's say that an artist's photograph is tokenized, there will always be two distinct and separate assets, the photograph (whether native .jpeg, or other format) and the nft.

The same applies to collectible cards, called collectibles in short, when at minting it is possible to set how many copies of the NFT to produced. This will result in three classes of assets: the underlying card (unique), the original NFT (single) and copies of the NFT (in a predefined variable number).

If, again, the analogue work from which a nft has been minted is no longer valid, for example the securitization of a financial instrument or the destruction of a painting, the token will not in any case become the synthesized good.

At the same time, the creation of an NFT does not constitute an automatic limit to the circulation of the underlying asset,be it physical or digital. In fact, once the NFT has been coined it leaves standing the burden - opportunity for conservation and custody of the connected asset, be it in the form of a file subject to a certificate, even more if a physical one, being not loaded in the blockchain ^[5]In particolare, è interesse e prudenza del titolare conservare il bene sottostante, che sarà caricato su internet, ad esempio su una pagina di sito web (URL) o ad un link IPFS, a cui gli avventori … Continue reading.

Difference between token and coin

The term crypto of recent use is understood in the sense of cryptocurrency and not cryptography, although this latter science constitutes the pillar of the standards of coding.

A cryptocurrency coin, such as Ether included in the Ethereum network Ethereum, was born with the function of currency, a pure alternative to fiat money ^[6]fiat money. As a currency, it is subject to the supervision of the competent national authorities, such as Consob in Italy, ESMA in the EU and the Security Exchange Commission in the United States and its possession is the subject of a complaint in the tax return.

A cryptotoken, on the other hand, is an asset also inserted in a block network but whose characteristics, in particular its non-fungibility, leave it an identification tool for the underlying asset which, possibly, can be exchanged (nft against asset) or sold (nft against currency) therefore leaving its treatment very varied.

A lexical curiosity, while the computational calculation of cryptocurrencies is called extraction or mining, that of cryptotokens is called coining or minting, perhaps a reflection of the hyper-speed of this technological sector.

The cost limit

Economic costs

After the first general smattering of the legal tenor of the NFT, it is essential to address its economic aspect. The use of the NFT, in fact, is not free and must be subject to weighting of costs.

First of all, it must be acknowledged that almost the entire token world is valued and traded in cryptocurrencies.

The digital token or the token gradually used have their own value in current currency, but this does not overcome the current problem of the spendability in the real economy of these coins and products, probably due to the considerable volatility that still characterizes them.

The platform fees should also be considered, i.e. the top-up costs applied by the websites that serve as aggregation basins for the tokens and the related underlying assets. And they are by no means modest.

Depending on the platform, the commissions vary from an already exorbitant 2.5%, up to as much as 15% for a first sale and 3% for subsequent ones.

The alternative to the platform is the free creation of an NFT, to be considered if you want to do without the showcase and the services offered by the platform.

A separate discussion applies to the network fees, called gwei, which essentially guarantee the functioning of the network itself and are recognized to the miners of the cryptocurrency used ^[7]Il gwei consiste nella moltiplicazione del gas (costo tecnico) e si aggira nell’ordine del 0,03%, misura che resta comunque assai approssimativa perché varia in ragione dei tempi di esecuzione … Continue reading.

Finally, the company costs for qualified personnel required for the structured use of the nft must also be taken into account.

Environmental costs

The use of blockchain systems requires an expenditure of electricity such that even the United Nations have opened the discussion on theirenvironmental impact ^[8]UN environment programme – Blockchain Technology and Environmental Sustainability by allocating funds for the research of eco-sustainable coding standards with low incisiveness ^[9]in particolare, rileva la dispendiosità energetica della fase di prova del lavoro, detta proof of work (PoW). .

The short-term solution is, therefore, left to the market itself or, better, to the choices of individuals in the use of one or the other means considered more ecological.

In practice, however, it is plausible to extend the application of existing international regulations to crypto-instruments, for example, through the combined use of CO2 credits, and of verification systems zero impact, i.e. the so-called carbon neutral blockchain.

The attribution of ownership

So far we have observed that the NFT constitutes and acts as an (improper) certificate of objective compliance of the synthesized asset which, thanks to the blockchain system, is valid as a time stamp.

However, the verification of identity (who) and ownership (who in relation to what) goes beyond the NFT system, with the exception of a fundamental point, the name declared by the apparent owner.

Starting from this data, whenever it is required to verify the identity of the owner (seller, transferor or licensor), the contractual counterparty (buyer, transferee or licensee) or national legislation, it is necessary to ascertain who the person is. Who declared himself the owner and the quality declared at the time of minting. That is, both the subjective entity and the subjective attribution must be verified.

These two aspects concur on the basis of the type of good being purchased, taking into account the uses and commercial practice. In fact, none of us, buying a television in a shop would ask the cashier for name and surname, but upon delivery of the sales tax document, we receive a lot of information, including the company name, the "name" of the selling company, the identification VAT number, which, in turn, refers to the public register at the competent Chamber of Commerce where personal data, corporate purpose, significant and accounting events are collected.

If you buy a movable asset, the rule of possession is valid title, so ownership is presumed in the hands of whoever physically owns the property ^[10]Article 1153 (Italian) Civil code. Therefore, if you act on your own, the ownership of the underlying asset remains presumed under two conditions, good faith and a title abstractly suitable for the transfer of ownership.

Otherwise, if you are acting on behalf of others, for example a company or a third party, the typical disciplines of the mandate with or without representation are applied, respectively in the name and on behalf of others ^[11]art. 1704 c.c. and in your own name and on behalf of others ^[12]art. 1705 c.c..

In the case of the purchase of a nft relating to a registered movable property or a immovable property, the rules for the circulation of such goods remain to be applied, by means of a public deed or an authenticated private agreement (in terms of translation effects and public disclosure). However, there are cases in which the dematerialization (upstream) and securitization (downstream) of the connected asset could allow its circulation, subject to the adjustment of the public registers that may mature over time.

Just consider the step-by-step role played by electronic mail and, subsequently, by certified mail. In the first case, the force in daily use has been progressively acknowledged and protected over time by the jurisprudence or by the case law, in the second case, however, many legislative novels have intervened, to attribute a precise notification effectiveness with certification by using a hash code.

Therefore, given that the NFT is currently used for the purchase of a given movable asset, it is assumed that the apparent owner, to whom a unique identification number is associated, is actually such. In particular, to avoid purchases from uncertain sources, it is also preferable to choose owners from platforms that contain conditions of use inherent, on the one hand, the assumption of responsibility in order to the declaration of ownership (or other legitimate title) in the minting stage, on the other hand, the indication of identifying elements of the owner, such as the name and surname, an identification photograph, etc.

Pay attention, one of the factors that distinguishes the token market is the absolute potential anonymity of those who buy and sell, intrinsic to the value string, where in the digital environment only matters the certainty of the numerical value and not of the subject.

For this reason, we always keep in mind that the dissemination of personal data remains next to the blockchain, and is a voluntary and entirely possible act. Always considering respect for privacy, particular attention must be paid to the possession and management of personal data.

In this regard, it is enough to remember that at the beginning the first crypto-wallets were devoid of identity, following the possession of the storage device, called cold storage, while with its spread it has become common practice to provide identification data with online wallet, the so called hot storage.

Identity assessment tools

In the NFT landscape, we have seen that subjective identification and attribution can be compensated for by auxiliary tools provided by the platforms, through specific regulatory tools.

In the future, fiduciary attribution systems could develop based on the uploading of one's own identity document, similar to what happens in the banking system, i.e. the know your customer regulation ^[13]Anti-money laundering (AMLD V) – Directive (EU) 2018/843. This system could broaden the audience of users, who would perceive it as a more reliable tool.

Another system, alternatively, could be constituted by double verification, which requires confirmation via token and via email or mobile phone number or even with a digital signature.

Negotiability and smart contracts

After minting, an NFT can be freely exchanged. Typically the foundation of the exchange is mutual trust.

In civil law legal systems, such as the Italian one, good faith and contractual correctness are required by law. Otherwise, in common law systems such as the United States, where most of the trading platforms are located, good faith and fairness must be made explicit in the contract.

Therefore, automatic execution contractual clauses can be added to the hash inserted in the block chain, with smart contracts, which are not an intrinsic part of the NFT but which govern various aspects, such as the transfer of ownership, license, use, copying and related prices.

The circulation rights of the NFT do not correspond to those of the underlying asset. Therefore, it is necessary to check what you are purchasing, the underlying asset and / or the NFT, and it is often the platform itself that facilitates everything by indicating, for example, the license categories and first and subsequent sale rights.

It would also be advisable to check the owner's possible renunciation of the possibility of creating another NFT on a different chain of blocks. Considering, in fact, that the various digital ecosystems still do not communicate with each other, isolation does not allow to identify a "multi-block" market, but as many as there are blockchain systems, each of which is as reliable as it is distributed, used and capitalized.

Negotiation clauses

Among the negotiating clauses, those of greatest interest concern the transfer of economic exploitation rights.

In fact, while sales for personal and non-commercial use of the NFT are widespread, the most interesting are those smart contracts which provide the transfer of the economic exploitation rights of the underlying work.

Looking towards the horizon, the advantage of the NFT is not only that of satisfying the need for a global and instantaneous diffusion of the asset, but also of predicting exactly which rights to sell, which tools for reproduction to use and in which territory (even the universe!) and how long.

An NFT and an associated smart contract, in an increasingly computerized context, can lead to the correct tracking of each use and reproduction, essentially limiting what is not recovered, called Black box money.

In the future it is conceivable that, if a given work will be reproduced with the NFT side by side by a device connected in the network to various blockchains, it would be possible to define an automatic and universal tracking system from minting to collection of royalties.

Artworks as forerunners

The circulation of works of art has its own practice and a special discipline ^[14]Legislative Decree no.42 / 2004, Code of cultural heritage on which the NFT seems to adapt almost perfectly.

In a prolific context such as that of technological innovation, the certification function of the token can take on great value.

Infatti, nel commercio di dette opere, la prima esigenza da soddisfare è l’attribution of the authenticity di una data opera ad un certo artista. L’autenticità può essere attestata dall’artista stesso tramite il riconoscimento ovvero, se non più in vita, con l’adozione di procedimenti di expertise ^[15]art. 64, Code of cultural heritage by qualified individuals.

The second requirement consists in the attribution of origin, that is, the verification of the lawful transfer of ownership.

The usefulness of the NFT is immediately understandable, which can act as a perpetual certification of authenticity and source because, by binding to the underlying work, it traces the changes of ownership up to the one of origin, or up to the first tokenized.

The result therefore consists in the reclamation of a good part of the illicit phenomena of counterfeiting and money laundering ^[16]art. 178, Code of cultural heritage, to guarantee the quality of the purchase and the work itself.

Photography

The certification function can also be used in the photography sector.

Let us think of artistic and simple photographs ^[17]artt. 32 bis e 92 L. n. 633/1941, Legge sul diritto d’autore.

The minting of an NFT to which a smart contract is combined would make it possible to take advantage of both the benefit of certification and the collection of the proceeds deriving from their economic exploitation.

In fact, it is with the same smart contract that both the duration of the exploitation constraint and the territorial extension can be set.

Thus, it is possible to effectively protect simple photographs for twenty years from their production and artistic ones for seventy years after the artist's death.

Music

Musical works can be the object of nft through the encoding of the audio file.

Considering that both composition rights (e.g., lyrics and melody) and those for sound recording (e.g., the Master) must be regulated^[18]art. 71-speties, Copyright Law, it becomes crucial to define the amount of the roylaties due.

All of this must be integrated with a smart contract that governs the regime for the transfer or licensing of copyrights, thus managed by publishing companies, and those on audio recordings, by record labels.

A practical application could be given by a streaming music app which, linked the musical works to an NFT, directly activates the rights connected to the token and the smart contract when using them. The result would therefore be the automated distribution of royalties to the publisher, the label and the author using the information provided by the blockchain structure itself.

Such a system would essentially become a second track with respect to national databases and guarantee the resale right, being able to graduate the rights of the first sale and second sale (and subsequent ones).

Cinematography

Also in the field of cinematography ^[19]art. 32, Copyright Law the complex sequence of images and sounds can be encoded in a hash registered in the blockchain.

The nft for this type of works can be assisted by a smart contract that regulates the rights of exploitation up to seventy years from the death of the last of the individuals identified. ^[20]il direttore artistico, gli autori della sceneggiatura, ivi compreso l’autore del dialogo, e l’autore della musica specificamente creata per essere utilizzata nell’opera … Continue reading.

In all likelihood, the figure of the producer will be entitled to the NFT governing the exploitation and collection regime, similarly to what is indicated in the music streaming sector.

Stock exchange and finance

NFTs in finance already have their own name: De.Fi.

Acronym for distributed finance, decentralized finance, this token encodes a financial product, such as a cryptocurrency loan.

The particular utility of De.Fi. is the solution of double spending ^[21]double spending, a phenomenon whereby the deception of a token produced by a centralized and undistributed system can be manipulated to be illegally reproduced.

The financial token therefore remains distinct and parallel to the traditional financial system, being able to constitute a widespread and verifiable space on a global scale. Furthermore, it is conceivable in the future the use of De.Fi. such as tracking tools for dematerialized securities, associated assets with the related equity and voting rights.

Gaming

As seen for the loot box, several objects are continuously exchanged in video games.

The NFTs, here friendly called nifty, fit into this process allowing the univocal attribution of a copy of the original NFT, created by the publisher (or by the developer) of the game.

The initial creator defines how many copies of the NFT to make, which gaming collectors will purchase.

NFTs could usher in a revolution in this area. Going a little further, in fact, they could allow the insertion of the unique hash into the game and allow the player to use that precise object, item or skin.

It should be considered that, to date, manufacturers rarely allow the exchange of items between players, especially outside the store or the game itself. However, opening up to NFTs could represent a new source of revenue with the provision of reusable NFTs against the payment of a quota established upstream.

NFT protection

The purchase and sale of NFTs on the internet theoretically would allow reference to the typical cases of competent court and applicable law of national or international private law, taking into account the location of the parties.

However, it is obvious that the scarcity of information on the identity of the parties does not make this task easy in practice.

Since these are, by their nature, purchases on the internet, in particular perfected on web sites, the place of jurisdiction is the place where the order confirmation is received, that is, the buyer's residence, domicile or home.

If, however, the buyer's acceptance must be delivered to the seller via email, therefore outside the window of the web site, the place of jurisdiction will be that of the seller's residence, domicile or home.

Attention, because in the event of a contract stipulated on the platforms, the application of the first criterion is very likely, while outside of them, for example via email and IPFS, it is necessary to verify which of the two hypotheses to apply.

In the case of a sale between a professional seller and a consumer buyer, the place of jurisdiction will be that of the residence, domicile or home of the latter.

As for the applicable law, it should be borne in mind that in practice the platforms, mostly US, make express reference to the legislation of the United States, in particular the Digital Millennium Copyright Act, that is the special legislation on copyright.

Finally, it must be considered that, in addition to the NFT, each category of underlying asset may correspond to the various disciplines and special protections such as, in fact, that on copyright ^[22]see Copyright Law, cultural heritage law ^[23]see Code of cultural heritage, industrial law (relating, among others, to trademarks, patents and industrial designs)^[24]Legislative Decree no.30/2005, banking law ^[25]Legislative Decree no.385/1993 and financial market law ^[26]Legislative Decree no.58/1998.

NFT, tax profiles

So far we have observed that NFTs can be seen both in their function as improper certificates and as assets.

Furthermore, NFTs have their own negotiating value but do not act as a medium of exchange, therefore they are distinguished from coin not taking the form of currency, thus being able to peacefully exclude the applicability of the taxability on personal income for foreign currency ^[27]art.67 /c.1 lett. c-ter) and /c.1-ter TUIR Presidential Decree no.917 / 1986 and virtual currency ^[28]art. 1 /c.2 lett.qq) Legislative Decree no.231/2007.

Again, if NFTs are stored in a widespread way, even on a global scale, it goes without saying that these assets are not peacefully located also outside national borders. In fact, the capillarity of the distribution of data on IT devices does not allow the identification of their location, therefore being able to consider the prevailing character of territoriality, in turn arguably compensable in tax matters by the foreign location, being the case of a fiction of law.

To this we add that the circulation of a token originally assumes a non-commercial connotation, as it is a good suited to satisfy a need of life, for example enjoying an artwork or watching a movie. In other cases, to be distinguished from time to time, the sale of an NFT can take on investment nature due to the prevalence of the use of capital ^[29] <span id = "footnote_plugin_tooltip_text_1036_1_29" class = "footnote_tooltip" , pursuant to art. 44, letter h TUIR , while it can exclude the qualification of the relationship having a random nature, i.e. as a speculative instrument ^[30] art. 67 TUIR .

In such a broad context, it is therefore necessary to question the concrete use of the NFT, since the declaration regime to be filled is not applicable to the related transfer activities for fiscal monitoring purposes ^[31] art. 4 DL n.167 / 1990 .

Conclusions

In conclusion, the use of NFTs seems to have just begun to move in its footsteps. Perhaps with a gradual approach hand in hand with technological integration, some executive processes can be streamlined with this automatic tool, as long as it is made more digestible for the general public.

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Avvocato Giovanni Paolo Sperti