The primary feature of Non-Fungible Tokens (NFTs) is their uniqueness and their ability to represent any digital asset on a blockchain. This characteristic ensures that NFTs are verifiable and hold economic value. While these features are very appealing and can lead to exciting applications, many view them with skepticism, including legal experts. This article explores some of the legal and regulatory issues related to NFTs.
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Like any emerging technology, NFTs come with their own set of legal challenges and limitations that must be carefully and professionally addressed as this technology rapidly grows. These issues relate to the legal nature of NFTs, raising questions such as: What is the existential nature of an NFT? Another key issue concerns the ability to buy and sell NFTs (i.e., their contract of sale). Additionally, problems in this domain extend to other areas of law. Both issuers and buyers of NFTs need to be protected under the law to ensure that their rights are not violated.
For issuers, it is crucial to consider that minting an NFT may require entering into a contract with a specialized entity or individual, and the type and format of this contract are highly significant. On the other hand, buyers must be fully informed about the transactions they are engaging in. Therefore, legislation must be crafted to ensure that all parties are aware of the existing legal challenges and move towards complying with established laws. Furthermore, specific regulations with strong enforcement guarantees should be issued to organize activities in this field and safeguard the rights of all stakeholders.
What is an NFT?
In 2014, Kevin McCoy created the first NFT, named Quantum. The primary feature of NFTs is their uniqueness, along with their ability to represent any digital asset on a blockchain, enabling them to be showcased and economically valued. Each NFT is equivalent to a smart contract that is copied and distributed across all blockchain servers. Another characteristic of NFTs is that they are indivisible and cannot be exchanged for other similar tokens, as the assets they represent are, as their name suggests, non-fungible and unique.
This distinguishes NFTs from fungible tokens like cryptocurrencies, which: 1) Are interchangeable. 2) Share similar features with other cryptocurrencies. 3) Have the same market value. 4) Are divisible. In contrast, an NFT is a unique virtual item that cannot be replicated or replaced with another token of its kind.
The emergence of NFTs has had a significant impact, particularly in the art world. This technology has made it easier for artists to publish their creations and has improved transparency regarding the authenticity of works. NFTs have gained importance in selling digital art, music tracks, tweets, and GIFs. Essentially, almost any creative work—be it a painting or a song—can be directly embedded in a token and transformed into an NFT.
Some NFTs aim to replace certificates of authenticity for paintings or sculptures, while others digitally embed rights to physical or digital artworks. NFTs allow all transactions to be monitored without fear of inaccurate information, particularly because blockchain technology guarantees this information.
Therefore, this type of tool is very attractive and practical, even though many view it with uncertainty and judge it accordingly.
As with any new technology, NFTs face legal issues that must be addressed as the tool and its market grow. Uncertainty surrounding the rules and regulations related to NFTs raises numerous questions, which will undoubtedly be explored over time by researchers and courts. These questions will eventually be resolved through judicial rulings and the establishment of rules and regulations in this area.
Among all these uncertainties, intellectual property protection takes precedence, as ensuring the quality and, especially, the authenticity of works is vital. Another significant challenge lies in identifying the legal nature of NFTs and, consequently, providing legal protections for NFT buyers. Innovation in this area inevitably faces a lack of regulation, coupled with a lack of technical and legal knowledge among participants.
To better understand NFTs, it is essential first to become familiar with the characteristics of this new technology.
Key Features of NFTs: Uniqueness and Indivisibility
Purchases made using NFTs are subject to very specific regulations that differ significantly from those for tangible goods. When an NFT purchase occurs, the subject of the transfer is not the asset itself—which may remain with its creator or previous owner—but rather the token representing the asset. Simply put, the buyer of an NFT does not acquire the physical or digital asset itself but instead gains ownership rights over it. If the artwork is digital, the purchased asset is embedded within the smart contract.
NFTs introduce effective concepts of authenticity and digital ownership to the digital world, especially within blockchain systems. Using an NFT provides proof of rights to a digitally reproduced asset—whether it is a work of art or otherwise—and demonstrates its authenticity and uniqueness.
NFT (Non-Fungible Token) is a unique digital asset that cannot be replicated or exchanged for another token. This distinctive feature is akin to when you purchase a physical item in the real world, giving you all rights and interests in that item; in other words, you become the owner of both the physical object and its benefits. In essence, NFTs allow their holders to possess a digital (or virtual) representation of a unique object that is clearly linked to their wallet or user account in the virtual space, thereby making them its owner. Consequently, only a specific individual can be considered the owner of the asset, and although the asset is accessible to anyone, proof of ownership is guaranteed by an NFT.
If we were to deduce the feature of uniqueness, it is important to mention that alongside the uniqueness of NFTs, their indivisibility is another appealing characteristic of this technology. In fact, an NFT cannot be copied or serve as a version of another NFT. Artists can create a limited number of NFTs, thereby increasing the value of digital assets. The artificial scarcity contributes to the uniqueness of the NFT as determined by its code or issuance details.
Regarding the authenticity of these NFTs, it is unclear to what extent intellectual property laws can be enforced.
Intellectual property rights refer to the achievements and innovations of human intellect. This includes patents, literary and artistic works, trademarks, industrial designs, and intangible assets created using human thought.
According to the World Intellectual Property Organization (WIPO), intellectual property is divided into two main categories:
Industrial Property: Includes patents, trademarks, industrial designs, and geographical indications.
Copyright: Covers literary works (such as novels, poetry, and plays), films, music, and artistic works (such as maps, paintings, photographs, and sculptures), as well as architectural designs. Related rights include artists’ performance rights and broadcasting rights.
NFTs are closely tied to copyright law. The existing legal frameworks on authors’ rights and related rights provide high levels of protection for creators. This legal protection enables them to earn financial benefits from their artistic works. For example, European Union laws aim to protect artists’ freedom to decide how to monetize their works.
This is also evident in the context of selling and utilizing the capabilities of NFT technology. Therefore, precise and strict regulations must be enacted to protect publishers and buyers, ensuring that their intellectual property rights are upheld and that they do not incur losses or damages.
Legal Nature of NFTs
This section examines the legal aspects of NFTs from the perspective of Iranian law. Due to the absence of specific regulations in emerging fields like cryptocurrencies, blockchain, and NFTs in Iran, it is necessary to analyze and compare these areas using existing laws. The first prominent issue surrounding NFTs is their purchase and sale.
To accurately understand legal concepts, it is crucial to analyze each term individually. Thus, we will first break down the term “Non-Fungible Token” (NFT) and study its implications in Iranian law.
Step 1; Understanding “Non-Fungible”: As previously mentioned, NFTs are indivisible. This characteristic is evident in the term “Non-Fungible.” The word “Fungible,” when used as an adjective, refers to anything valuable that can be exchanged for something else of equal value, either in whole or in part. For example, currency is fungible because it holds value and can be divided into smaller units. Cryptocurrencies, like Bitcoin or Tether, also fall under this definition of fungibility.
In legal terminology, assets are classified into two main categories: fungible and non-fungible goods. Fungible goods are those with numerous interchangeable examples, such as grains or other common commodities. According to Article 950 of the Iranian Civil Code, fungible goods are items that can be substituted by another of the same kind in common practice. Non-fungible goods, on the other hand, are unique items that cannot be replaced by another, such as a handwritten manuscript or a one-of-a-kind painting.
The distinction between fungible and non-fungible goods is determined by customary practice. However, parties may agree to treat a fungible item as non-fungible or vice versa. Generally, consumable goods are fungible, while the rest are usually non-fungible. Based on this distinction, fungible assets correspond to divisible resources like money or cryptocurrency.
Step 2; Exploring “Non-Fungible”: The term “Non-Fungible” means something that cannot be exchanged or substituted. From a legal and conceptual standpoint, it refers to an asset that cannot be traded for or divided into smaller parts. Legally, this concept aligns with non-fungible goods. For example, a unique artwork like Leonardo da Vinci’s Mona Lisa is irreplaceable, even if a perfect replica is created.
Step 3; Defining “Token”: The term “Token” has multiple meanings. One definition describes a token as a document, tool, or medium containing a specific monetary value, usable in physical or online transactions, such as a gift card.
Another definition describes a token as a set of data used in place of other data to protect sensitive information from unauthorized access. Unlike the previous definition, a token, in this sense, is not a tangible object but data safeguarding other data. For instance, a military soldier may be assigned a number to conceal their identity or rank, accessible only to authorized individuals.
In the context of NFTs, the second definition applies. An NFT is a unique set of data linked to a digital asset, which can be bought and sold.
NFTs are referred to as “non-fungible” because they cannot be replaced, substituted, or divided into smaller units. Like non-fungible goods, NFTs are unique. For example, a one-of-a-kind painting cannot be divided or exchanged for an identical piece.
An NFT is a blockchain-encrypted asset representing a digital work. When someone purchases an NFT, they are buying a blockchain-encrypted digital artwork.
The asset owner can release the work without encryption, but to protect intellectual property rights, they may choose to encrypt it using modern technologies, limiting access to authorized individuals.
Based on Iranian law, NFTs can be considered non-fungible goods. This classification may assist in legislating for this domain.
The Islamic legal principle of “Yad” (possession) is applicable to NFTs. This principle establishes that possession of an item signifies ownership. Recognized across Islamic jurisprudence, it is a key factor in determining ownership and could serve as a foundational rule for NFT legislation in Iran, protecting intellectual property rights.
One of the other issues that should be considered when examining the rights associated with NFTs is the topic of criminal law, particularly a closer look at the crimes that may occur in this field. It must be acknowledged that public order in any society must be maintained under all circumstances, and any factor that could undermine this public order or raise concerns that it may be disrupted should be carefully monitored and addressed.
In general, the realm of digital assets may create attractive conditions for criminals, and this is not out of the question. However, this should not be a reason to ignore the issue; understanding emerging technologies and applying a professional perspective to the matter of legislation can help prevent crimes related to these areas.
What is clear is that to legislate in the field of NFTs and address the existing challenges of this technology, it is essential to make the utmost use of the legal principles and rules present in the Iranian legal system. If we aim to establish laws for NFTs in Iran, we must also consider restrictions on the production of works that are to be converted into NFTs. The works produced should not contain immoral, offensive content or promote racial, gender, or ethnic discrimination; otherwise, any transaction carried out might be declared void due to its illegitimate purpose or fall under the existing penal laws of the Islamic Penal Code of Iran.
Regarding the existing laws concerning the conclusion of sales contracts for NFTs, it cannot be classified as a sale. (In Iranian law, according to Article 338 of the Civil Code, a sale is defined as the transfer of ownership of a property in exchange for a specified consideration). To describe this article and somewhat translate it, we can say that a sale contract is one in which a person transfers a property to another person in exchange for another property (typically money), such that the owner of the property (the seller) transfers ownership of their item in return for the money or property they receive to the other party (the buyer), who in turn pays their money or property to the seller in exchange for receiving the item.
The sale contract comes into effect as soon as the will of the two parties, namely the seller and the buyer, is expressed and becomes legally effective. The term sale linguistically means buying and selling, and in legal terminology, it refers to an offer and acceptance that indicates the transfer of property in exchange for a specified and determined consideration. In light of this, it should be stated that the buying and selling of NFTs do not fall under the contract of sale because they do not meet the conditions of such a contract, as it cannot be said that NFTs are tangible assets; therefore, they do not fall under the sale contract and transactions in this area can be considered according to Article 10 of the Civil Code. Article 10 states that “private contracts are valid with respect to those who have concluded them, provided that they do not contradict explicit laws”; furthermore, it should be detailed in the contract concluded between the parties what rights are transferred as a result of the transfer and specify other relevant details.
There are numerous legal issues regarding the examination of NFTs; it can be said that everything related to the buying and selling of a commodity under Iranian law could also apply to the buying and selling of NFTs, or that any crime within the Penal Code of Iran regarding property, ownership, and the rights of individuals may also manifest in this domain.
Conclusion
Legislators should collaborate with experts in crypto-assets and legal scholars to develop effective regulations. Leveraging existing legal frameworks and establishing specialized institutions can lead to enforceable, robust laws for the NFT space in Iran.
