The application value of NFT and legal risk response
The year 2021 is called the first year of the Metaverse by many scholars. An open future world that integrates virtual and real, can expand and extend infinitely, giving the public infinite space for imagination. Although the specific definition of the metaverse is still inconclusive, the core key technology that the metaverse relies on, NFT (Non-fungible Token, that is, non-fungible token) has blossomed everywhere, and has even affected our lives. The Shanghai Municipal Commission of Economy and Informatization proposed in the “14th Five-Year Plan for the Development of Shanghai Electronic Information Industry” released on December 30, 2021, to strengthen the forward-looking research and development of the underlying core technology basic capabilities of the Metaverse, and to promote the deepening of perception and interaction. New terminal development and systematic virtual content construction to explore industry applications. From a practical point of view, in June 2021, Alipay will release two limited NFT skins for the payment code of “Dunhuang Feitian, Nine-color Deer” on the “Ant Chain Fan Granule” applet, and will officially launch the “Whale Detective” platform in 2021. A total of more than 40 sets of digital collections have been issued, with sales exceeding 40 million; Xinhua News Agency will issue limited collections through NFT technology at 20:00 on December 24, 2021. This series of collections will cast selected 2021 photojournalism reports. It is China’s first “news digital collection”. The NFT is supported by the underlying technology of the blockchain provided by Tencent Cloud Zhixin Chain.
Through NFT technology, people realize the “confirmation” of data and network virtual property on the basis of not relying on any centralized organization, and solve the problem of the identity of the legal owner of virtual property, so that digital goods or virtual property can be like reality. Like commodities in the world, the property rights are clear and the transactions are realized, which can be said to bring great vitality to the digital economy. At the same time, the NFT field is also full of extreme evaluations such as illegal crimes and Ponzi schemes. The polarized evaluations stem from the uncertainty of the legal nature of NFTs and the vagueness of governance rules. This paper intends to put forward the vision of future digital governance rules and judicial response through the interpretation of the concept of NFT and the analysis of challenges and risks in practice.
1.The concept and application value of NFT
(1) The concept of NFT
NFT, that is, a non-fungible token, is also called a non-fungible token. The most significant feature of NFT is that there are no two identical NFTs in the network, and each NFT is unique. Based on this feature, NFT can be used to represent a unique digital data in digital economic activities, which can be either a digital photo, a video, a document, or an avatar. In order to better analyze the concept of NFT, it is necessary to explain its relationship with blockchain, homogenized token and smart contract.
NFT and blockchain: Tong said that the blockchain is a chain composed of one block after another, and each block stores certain information. This chain is stored in all servers and protected by encryption. The blockchain system only recognizes the earliest confirmed transaction in the system, and makes most people in the entire network recognize this transaction. NFT relies on blockchain technology to mark digital assets through blockchain technology to ensure that this digital asset is unique and recognized by the entire network. After NFT obtains the identity identification through blockchain technology, the transfer can be completed through on-chain transactions, and the transaction information is recorded in the blockchain ledger and supports traceability. It can be said that blockchain technology is the basic technology of NFT.
NFT and Homogenized Tokens: Typical homogeneous tokens include Bitcoin, Ethereum, Litecoin, Dogecoin, etc., which are characterized by no difference between tokens, which can be interchanged, split and traded. NFT is generated with the transaction needs of blockchain platform projects. Its essence is a non-fungible token, which is not interchangeable, non-dividable, unique and different from each other. NFT supports transactions and circulation through homogenized tokens.
NFT and smart contracts: Smart contracts are the key link between digital assets and blockchain. Only through smart contracts can NFTs be generated on the blockchain platform, and subsequent transactions of NFTs must also rely on the smart contract code designed on the NFT platform. Before the generation of NFTs, trading digital assets mainly relied on centralized third-party trading platforms. For example, consumers subscribe to company A for software licenses, purchase electronic audio and video albums, etc., or pay the money directly to company A, or transfer the money through third-party transaction websites and payment platforms. After the generation of NFT, all digital assets that can be linked with NFT, relying on smart contracts, have the possibility of direct transactions between buyers and sellers, and mutual trust between the two parties.
(2) The development history of NFT
In June 2017, the first NFT project “Crypto-Punks” appeared on Ethereum, developed by American studio Larva Labs. Users of this application can receive pixel avatars and enter the on-chain market, and pass Ethereum digital wallet exchange avatar. Subsequently, Canadian studio Dapper Labs developed the blockchain game CryptoKitties on Ethereum, which allows players to buy, collect, breed and sell virtual cats. It is one of the earliest attempts to use blockchain technology for entertainment and leisure. one. From 2018 to 2019, NFT entered a stable period and began to expand into the field of digital art collection. In 2021, the American visual artist Beeple’s collection of works “Every-days” will be encrypted and put on the chain in the form of NFT, and finally sold at the Christie’s Art Auction House for US$69.3 million, setting a new record for digital art auctions. The ownership confirmation discussion has advanced to its latest level so far.
(3) The impact of NFT
The key to the digital economy is transactions, and the core content of transactions is digital assets. Whenever there is a transaction, disputes will arise. Traditional transaction disputes often affect the efficiency and quality of dispute resolution due to difficulties in finding out facts. The generation of NFT technology is of great significance to the confirmation and transaction of digital assets in the future digital space:
First, the confirmation and protection costs of digital asset rights are significantly reduced. Taking online copyright as an example, the time node of traditional copyright rights is generally generated after the work is completed. In practice, because the owner of the work is infringed, it is difficult to prove the time node of the completion of the work, and it is easy to have facts with other people who hold the work. clear controversy. On the other hand, even if the copyright owner has completed the copyright registration, it is not difficult to infringe the copyright by means of copying, counterfeiting, etc., and the cost of rights protection is relatively high, resulting in more common infringements in the field of intellectual property rights. After the NFT is generated, online text works, art works, musical works, architectural works, photographic works, audio-visual works, etc. can be first cast as NFTs on the NFT platform. Once the project is generated, based on the characteristics of the blockchain distributed ledger technology, this fact is accepted by all nodes of the blockchain, and the possibility of the content being tampered is extremely low. When this form becomes the consensus of market participants, it will inevitably greatly reduce disputes over copyright ownership, and form a public right protection principle similar to property rights.
Second, the transaction costs of the digital economy have been significantly reduced. Traditional digital assets have great difficulties in utilization and transfer due to the inability to generate a unique proof of rights and interests. The right holder often needs to enter into a written contract with the authorized person to effectively protect its subsequent rights, and the corresponding authorization cost is also high. Through the NFT platform, on the one hand, the original owner of the work can be quickly determined. This confirmation does not rely on any third party (centralized platform), but is based on the NFT information record; on the other hand, it is necessary to authorize others to use it. When reprinting, the right holder only needs to agree on the transfer, authorized income, scope of application, etc. in the corresponding smart contract. When reprinting, the authorized person accepts the content of the smart contract by default, and automatically completes authorization, settlement, etc., The licensing costs for copyright owners are almost negligible. To a certain extent, individuals and enterprises have found low-cost means of value conversion for digital resources that were otherwise difficult to monetize.
2.Risks and challenges in the process of NFT application
After the emergence of NFT, it plays an important role in the prosperity and development of the digital economy, but virtual currencies (homogeneous tokens) such as Bitcoin and Ethereum, because of their strong financial attributes, pose a huge threat to the country’s financial sovereignty and financial order. , The rise of virtual currency is full of money laundering, dark web transactions, evasion of foreign exchange controls, fraud, gambling and a series of problems, resulting in ten departments including the People’s Bank of China issuing regulations to directly prohibit all transactions related to virtual currency. The technology of NFT is in the same line as the homogenized token, and NFT has already experienced problems such as “following the trend”, “serious deviation between price and value”, and “illegal accumulation of funds” in the existing market field. If NFT is not included in the track of the rule of law, It is very likely to repeat the mistakes of virtual currency. From the current point of view, NFT has the following risks and challenges in the application process.
(1) The legal attributes of NFT are unknown
There are many categories of NFT itself, and its legal nature is difficult to effectively define. Some scholars even pointed out that the unknown property attribute has become the biggest obstacle to the development of the blockchain digital asset market. At present, there are two main opinions on the legal nature of NFTs in the legal practice and theoretical circles. “Currency Theory” believes that NFT is a kind of token, which is essentially a special type of virtual currency; “Virtual Property Theory”: Article 127 of the Civil Code of the People’s Republic of China stipulates that the legal Where there are provisions for the protection of virtual property, such provisions shall be followed. Judging from the characteristics of NFT, it conforms to the qualitative nature of virtual network properties, but due to the lack of clear regulations in a single line of law, the nature of NFT is still in a fuzzy area.
(2) Risk of wrong confirmation of rights
In May 2022, the Hangzhou Internet Court adjudicated a case related to the infringement of NFT digital works. A user cast and released the “Fat Tiger Vaccination” NFT digital work on the “Metaverse” platform operated by a technology company in Hangzhou, priced at 899 yuan. The original author of the NFT digital work actually published the illustration work on Weibo. Whether or not the NFT platform should be liable for compensation in this case is for the time being, but the situation that others cast NFT on the NFT platform before the actual copyright owner exists objectively. If such behavior cannot be regulated, it will also bring about the healthy development of NFT. Negative Effects.
(3) Financial management and control risks
NFTs are often traded in virtual currencies (or digital tokens). Due to the disintermediation and anonymity of virtual currencies, there are financial risks such as money laundering through virtual currency transactions. Not only that, for homogenized token projects, it is still possible to recover stolen assets through a hard fork as a last resort, but for NFTs, a hard fork will lead to major differences in the identification of the ownership of the same subject, and even means A certain NFT will be permanently burdened with this title defect, which is detrimental to the most critical attribute of NFT – unique ownership proof. When NFT carries complex operations such as pledge and investment through smart contracts, it is more difficult to solve the problem through hard forks, which further aggravates its hidden worries in financial security.
3.Risk Governance Paths in the NFT Field
Risk governance in the NFT field is a highly professional work. Through strict approval and platform responsibilities for platform establishment, the transaction model from the primary market to the secondary market will be gradually promoted, and the ability to respond to NFT-related disputes will be accelerated, which will help to quickly apply the core technical principles of NFT to the development of the digital economy. , to better meet the arrival of the digital economy and digital society.
(1) Clarify the legal nature of NFT from the legislative level
NFT establishes equity certificates based on blockchain, which is inherently disposable and exclusive; for NFT projects of electronic audio-visual works and electronic art works, it has obvious economic value; in digital cyberspace, NFT projects use pictures, three-dimensional Models, audio and video exist, especially NFT products based on virtual reality technology, which are more like things that can be seen and touched in the real world. It can be said that NFT satisfies the definition of things in traditional civil law, and a separate law for data and virtual network property should be issued in time to regulate and protect it.
(2) Strictly operate the NFT platform
Since the birth of the NFT project, NFT platforms have sprung up in various fields, especially in the field of digital collections. In terms of trading, the existing large platforms prohibit the trading of NFTs in the secondary market, but this approach does not prevent some small platforms from carrying out the free exchange of NFTs in the secondary market. Such platforms often attract the public who do not have a deep understanding of the project to participate in it with new concepts, and through the manipulation of the dealers, the price of some NFTs seriously deviates from the value, resulting in a lot of speculation and speculation, which seriously disrupts the market order. Once the platform deletes the library, Running away will bring a series of social risks. Based on the above risk considerations, NFT projects should be strictly regulated and restricted.
On the one hand, the establishment of NFT platforms should be strictly reviewed. NFT is based on blockchain technology. In 2021, when ten departments including the People’s Bank of China issued the “Notice on Preventing the Risk of Virtual Currency Speculation“, the departments that jointly issued the document involved the People’s Bank of China, the China Banking Regulatory Commission, the China Securities Regulatory Commission, and the State Administration of Foreign Exchange in the field of financial supervision. ; The Central Network Information Office, the Ministry of Industry and Information Technology, and the Ministry of Public Security, which are involved in the field of network security; the State Administration for Market Regulation, which is involved in the field of market supervision; and two judicial organs, the Supreme People’s Court and the Supreme People’s Procuratorate, are included. It is foreseeable that NFTs, which are in line with the homogenized token technology, also need to be reviewed with corresponding financial supervision, network security, and market supervision. Self-established NFT platforms should be resolutely cracked down to prevent the disorder of small platforms from causing the entire industry to be cleaned up.
On the other hand, secondary market transactions should be strictly restricted. NFT has strong investment attributes, but it is different from securities and equity. Securities products have a mature market supervision and management mechanism, and are strictly managed by competent authorities such as the China Banking and Insurance Regulatory Commission. However, NFT platforms often do not have financial licenses, and NFT projects are very likely to cause market speculation. Therefore, at this stage, before the regulatory agency has established a regulatory mechanism for NFT platforms, users should be prohibited from trading NFTs purchased from NFT platforms in the secondary market. In practice, the NFT platform itself should technically prohibit the purchaser from re-transferring; for transactions that bypass the platform, the people’s court should include the relevant contracts in the category of invalid contracts.
(3) Strengthening the underlying network security technology
In the face of non-fungible tokens and other innovative technologies involving the financial field and the digital economy, the most fundamental thing is to improve regulatory technology (RegTech) and transform the supervision model from manual to automated supervision. Based on the technical characteristics of the blockchain, NFT transactions may generate irreversible and globally disseminated instantaneous risks. The time requirement for risk monitoring and response is much shorter than that of ordinary financial activities. Regulators need to actively use regulatory technology to pre-set Automated risk prevention and control mechanisms. RegTech can promote the development of real-time regulatory tools to identify risks and shorten the time to investigate violations, simulate the development of the system, and even make emergency preliminary treatment of risks according to preset procedures. sharp weapon.
(IV) Accelerate digital empowerment to modernize trial capabilities
NFT is minted based on the blockchain platform and relies on smart contracts to complete transactions. According to smart