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Continuing with this two-part series, we discuss the legal implications for Malaysian non-fungible tokens (NFTs) (or sellers) and buyers.
To paraphrase a famous line from Star Trek, NFT boldly goes for innovation where no one has gone. It is not only known for digital arts and in-game assets; almost any type of asset can be converted to NFT, from concert tickets to hotel suites to domain names to health records. Complete “metaberts” are being created.
It’s important to be careful, because your rights don’t seem like they are, and you may find yourself helpless when things go wrong.
Note: This is our opinion for general information. Please do not rely on legal advice.
1. NFTs cannot be used to raise funds
based on Guidelines on digital assets Issued by the Malaysian Securities Commission in 2020, it is a regulated activity for companies to issue digital tokens with the aim of raising funds.
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 as directed, and the sale of NFTs must be made only on the IEO platform and no other place.
As for NFTs that are not used for fundraising, there are open questions: can local Malaysians be promoted as a public token sale? Can the price be put in unsupported digital currencies and sold to secondary buyers? And since the Guidelines are for companies only, can individuals launch an NFT fundraiser for GoFundMe?
2. You are not the owner of the intellectual property
The ownership of the NFT and the underlying intellectual property (IP) must be distinguished.
The NFT buyer has only one hash in the blockchain with a transaction log and a hyperlink to the artwork file. It is just a tool to represent the work of art.
Basically, buying an NFT only gives the buyer ownership, but not the creator’s IP rights. The buyer also has no right to own other copies or versions of the works of art created therein.
Therefore, the buyer should ask – What is the value of a work of art without its IP? What good is an NFT for a buyer without IP in itself?
When you buy a Van Gogh, you are physically aware of it, you can do it on Instagram, charge for selfies, and borrow it to show 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 be reasonably expected to complete an entire contract that assigns an IP.
3. You may be breaking the law
When you purchase an NFT, you will be granted the right to trade, sell or gift the NFT that you own, but you will not be granted the right to reproduce, distribute, communicate and / or display the artwork that NFT represents.
You cannot do the above at will and may need to obtain permission. Displaying NFT may be prohibited if the original creator or new owner of the underlying IP changes their mind.
Basis: If you violate the IP rights of the NFT you purchased, you can sue and be held liable for damages.
4. Conflicts can value NFT
There may be more complications if the content of the NFT itself is discussed.
This can be better expressed if Alice creates a work of art with Bob’s trademark or copyright. An unexpected NFT buyer can counter Bob’s action with a material impact on the NFT value.
In some cases, the creator of the NFT may not be the sole author of the content, as there may be multiple authors, and not everyone agreed with the creation of the NFT. To top it all off, some content has separate rights to reuse, modify, distribute, market, and so on.
If you do not conduct your own investigation (DYOR) and conflicts arise, it will be similar to buying a share in RM10, which drops to RM0.10 after the audit at the end of the year.
5. DYOR is easier said than done
No one talks about how difficult it is to do the actual due diligence required before making an NFT purchase!
NFT digital certification is useful, but imperfect. The buyer relies on a “single chain of truth” (like Ethereum), but nothing prevents the creator from doing the same work on another blockchain NFT.
Sometimes there is one error in NFT that allows anyone to manage free duplicates. Or is it NFT not the only one because the same work of art is made by different creators. Without the knowledge of the buyer, the creator can change the NFTs at the last minute. There is so much falsehood NFT verification is now a Twitter service.
However, for now, NFT is all we have as proof of purchase. In Malaysia there is no record of assets for NFTs, unlike shares or properties. The creator cannot prove ownership and the buyer cannot seek title through legally accepted means.
By adding the burden, the NFT transaction can be in the hands of different agencies. Values and IP rights are different creatures in law.
Digital assets are regulated by the Securities and Exchange Commission; IP rights are managed by the Malaysian Intellectual Property Corporation (MyIPO) under the Ministry of Internal Trade and Consumer Affairs; the central bank may participate in the negotiation of digital currencies (Bank Negara AML-CFT Sector 6).
All of the above would be strange for today’s NFT market, which is still trader-driven and speculative-based art to move commodified. Most will not care about legality, but due to rapid growth, the market will be forced to mature in a short time.
In the meantime, it is our duty as lawyers to establish the risks, even if it means humiliating us to imagine all the possibilities of the NFT, to infinity and beyond. #Legal Advice No.
This article was co-written by Ed Yong, Gan Ming Chiek and Yeow Jie Han.
Ed Yong is a co-founder of Celebrus Advisory and part of the Malaysia Digital Economy Corporation (MDEC) Digital Technology Expert Network.
Gan Ming Chiek and Yeow Jie Han are partners with Gan, Lee & Tan (GLT Law), an award-winning Malaysian law firm.
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