Non-fungible tokens (NFTs) have exploded in popularity in recent years and many businesses are looking for ways to monetise them. NFTs are digital assets that use blockchain technology to certify their ownership and authenticity. They can be anything from digital art, music and video games to collectibles, virtual real estate and even tweets. However, there are several legal and regulatory considerations that need to be taken into account to unlock the full potential of NFTs. Below, we outline some of the challenges businesses in England may face when monetising NFTs and how to overcome them.
Intellectual property rights
One of the key considerations for businesses are associated intellectual property rights. It's important to note that buying an NFT does not necessarily grant the buyer unconditional ownership of any copyright, for example, in the underlying asset. Typically, buying an NFT grants the buyer a non-exclusive, non-transferable, royalty-free licence licence to use, copy, and display the underlying asset for specific purposes. The terms on which an NFT is sold can vary greatly, and it's essential to understand the rights and limitations that come with it.
Disputes have also arisen in cases where a business has attempted to sell NFT versions of real-world products without the permission of the rights holder. In Hermès v Mason Rothschild, for example, Hermès brought a claim in the US against an artist who produced NFTs (called MetaBirkins) based on the popular Birkin bags sold by Hermès. As discussed in our article on the jury's decision, Hermès was successful in its claim for trade mark infringement, trade mark dilution and cybersquatting. Brands should review their IP portfolios to ensure that they have appropriate protection in place in relation to virtual versions of their goods and services.
Businesses may also need to consider taxation implications when monetising NFTs. The applicable tax rate can differ significantly depending on whether the transactions amount to trading (usually a result of frequent organised transactions) or investment. Trading in NFTs could result in income tax of up to 45%, while investing in NFTs is likely to fall under the capital gains regime and therefore taxed at up to 20%. It's crucial for businesses to work with tax professionals to determine their tax obligations and ensure that they are compliant.
Furthermore, regulatory compliance is another critical factor that businesses must consider. A business trading NFTs in the UK may fall within the scope of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 requiring customer due diligence to be undertaken on customers and registration with the Financial Conduct Authority as a cryptoasset exchange. In some cases NFTs may carry rights to financial investments, meaning the business will be carrying on regulated activities for the purposes of the Financial Services and Markets Act 2000 (FSMA). Promotion of financial investments carried on NFTs or other cryptoassets is subject to the financial promotions regime under the FSMA (Financial Promotion) Order 2005. Where the NFT carries a fiat monetary value the NFT might comprise "e-money" and be subject to the Electronic Money Regulations 2011 and Payment Services Regulations 2017. Businesses must be aware of the regulatory requirements that apply to them and ensure their business model is designed around compliance.
Considering acquiring an NFT-based business?
The issues discussed above are only some of the key areas that a well-advised buyer would make enquiries of in the context of a proposed acquisition of a business which monetised NFTs. During a due diligence process, the buyer should engage specialists to consider whether:
- The target business has been correctly complying with any IP restrictions in place;
- The business has a licence to create the NFTs of the underlying works; and
- The buyer's proposal for the business going forward would be in accordance with the rights that the target business has.
Additionally, tax advice should be sought to confirm compliance with the applicable legislation and to ensure that the buyer is not faced with an unexpected tax bill post-acquisition. Specific enquiries should also be made to ascertain whether the target business is or should be regulated, which will, in turn, require specialist input for the transaction to proceed.
A bright future for NFTs
Despite these challenges, NFTs represent an exciting new market for businesses in England and around the world. As blockchain technology and NFTs continue to evolve and mature, we can expect to see more opportunities for businesses to monetise digital assets and engage with their customers. Staying up to date with the latest developments in the NFT market is important, enabling businesses to consider how they can use NFTs to create new revenue streams and engage with their customers in novel ways. Seeking professional advice is key to ensuring that a business successfully navigates its way through this emerging market.