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NFTs: A Brazilian Legal Perspective – Fin Tech



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Non-fungible tokens (NFTs) emerged as a cultural response to
create technical scarcity on the internet, developing new types of
digital goods or virtual assets and, more than that, new
alternatives to transfer properties online. These virtual assets
have been drawing attention worldwide, mainly due to the high
purchase prices of the NFTs; for instance, Beeple sold the
‘Everydays – The First 5000 Days’ NFT for $69m at
Christie’s,1 positioning the artist among the top
three most valuable living artists in the world, and the cheapest
available Bored Ape Yacht Club NFT for sale, one of the most
well-known NFTs nowadays, which is listed at a record ETH 152, or
about $429,000.2

Thus, the surge in NFTs collectibles is still fairly new, but
significant amounts of money have already exchanged hands among
collectors3 amounting to over $6.2bn in sales since
2017, according to NonFungible4, which tracks historical
sales data of NFTs. Under this scenario, the objectives of this
brief article are to:

(1) suggest a definition of an NFT, considering the two
constitutive characteristics of this kind of virtual asset;

(2) present the main legal impacts stemming from the very
concept of NFTs; and

(3) indicate the regulatory scenario, both present and future,
involving NFTs according to the Brazilian legal landscape
perspective.

It should be highlighted that, as a virtual asset, NFTs are not
equivalent to the securities typically subject to regulation by
legal systems. It is precisely in this context that NFTs
emerge.

Starting with item (1), as to the definition of NFTs, for
didactic purposes, the suggested definition is to be presented by
discussing, at first, the idea of (in)fungibility and, second, that
of tokens. To put it simply, a fungible good is one that can be
replaced by another of the same kind, quality, and quantity. With
that, the idea of fungible goods is directly related to goods that
can be contracted/acquired without any prior specification of
specialty or that can be substituted by another identical good.
Similarly, one can speak of mutually interchangeable goods, as is
the case of money and cryptocurrencies themselves (eg, Dodgecoin,
Bitcoin, etc), because they are all goods that, although
corresponding to different values, can be cumulated and substituted
in different ways, without affecting their kind, quality, and
quantity.

Logically, a non-fungible asset can be considered the opposite;
in other words, the idea of a non-fungible asset is that it cannot
be replaced by another of the same kind, quantity, and quality.
This is exactly the first fundamental characteristic of NFT, that
is, it corresponds to a virtual asset that cannot be replaced by
another, without consequently affecting its quality and quantity.
Once an asset is coined on the blockchain as an NFT, the result is
that it becomes irreplaceable as a result of the non-fungibility
and consequently scarce.

The token, on the other hand, is a digital certificate, stored
in a database called ‘blockchain’. It is a digital
representation of a real asset, whose financial value depends on
what it represents and the eventual future appreciation –
this is the reason tokens may come to fit into the concept of
securities, regulated in Brazil by the Brazilian Securities and
Exchange Commission and Law No 6,385/1976. Moreover, unlike
cryptocurrencies, the token does not need its own blockchain
(unlike cryptocurrencies) and can be used for several purposes.
Therefore, the token represents a digital asset, issued by an
entity and tradable, that can be offered to investors during a
public or private offering to create and record the distribution of
tokens called Initial Coin Offering (ICO) or Initial Token Offer
(ITO). Due to the versatility of the use of tokens, the Swiss
Financial Market Supervisory Authority
(FINMA)5categorises tokens into three types, but hybrid
forms are possible. These are: (i) payment tokens; (ii) utility
tokens; and (iii) asset tokens.

Summing up the two essential characteristics related to NFT and
presented above, the suggested concept of NFT is that this kind of
virtual asset is a digital collectible, unique, scarce, durable,
and extensible, corresponding to the digitally authenticated
version of the asset – now non-fungible – through the
attribution of digital registration of ownership, since the NFT has
a unique identification code (private key) and metadata that
distinguishes one NFT from any other on the blockchain. In
addition, NFTs are secured by MetaMask, which is a secure identity
vault that provides a user interface to manage their identities
across different sites and sign blockchain transactions. Despite
that, it so happens that, like any technology, NFTs legally impact
a series of issues, of the most diverse natures, precisely because
of their disruptive nature.

With that in mind, continuing with item (2) above, the legal
impacts stemming from the very concept of NFT affect horizontally
the legal scenario, but most specifically intellectual property
(IP) and data protection. From the IP perspective, among the most
important aspects to be considered when discussing NFTs are
copyrights, considering the NFT is just a representation of the
underlying work and not the work itself. As a result, the sale of
an NFT does not provide the buyer with the copyright to the work it
signifies, rather, when someone purchases a piece of digital art in
the form of an NFT, the buyer merely obtains ownership over an
authentic copy of the art – the IP rights in the said art
remain with the creator or the artist behind the
project.6

Adding to that, another problem is that blockchain can protect
and ensure purity of the data once it is stored on it, but, if the
data in itself is something infringing – for example, in case
a given person decides to copy another artist’s work and
makes NFTs based on that original work, without prior authorisation
– enforcing copyright laws and principles on NFTs may prove
difficult.

Trademarks are also significantly affected by NFTs and this very
controversy is represented in the lawsuit filed
by Hermès against Mason Rothschild with the Southern
District Court of New York on 14 January 2022, citing multiple
causes, including trademark infringement and dilution. In this
case, Mason Rothschild has openly acknowledged that it elected to
sell its NFTs as ‘METABIRKINS’ because a Birkin handbag
is a highly valuable asset in the physical world.8

Under the data protection standpoint, data protection
legislations, including the Brazilian General Data Protection Law
(Law No 13,709/2018 or the ‘LGPD’), are based on the
assumption arising from the maxim of informational
self-determination that personal data can be corrected, modified,
or deleted whenever requested by the data subject. In contrast, the
nature of blockchain makes it impossible to unilaterally modify
data to ensure the integrity of recorded data and increase trust in
the network, in addition to the challenges of enforcing data
anonymisation and purpose limitation requirements. This means that
the use of blockchain potentially violates the LGPD in this regard,
as it makes it impossible to fulfill the rights of data
subjects.

The legal implications of the growing adoption of NFTs worldwide
justify the discussion regarding how to regulate this virtual
asset. Yet, regulation in this area faces several obstacles,
including, essentially, the difficulty of defining the legal nature
of NFTs, that is, the lack of consensus as to whether an NFT shall
be classified as a commodity or as a financial asset. Additionally,
the absence of a central authority to manage the blockchain and to
provide assurance to users, including the confirmation of
transactions and provision of redress mechanisms, also can be
argued as a difficulty to the regulatory process, as does the
global nature of the blockchain; that is, should regulators engage
in the effort to design a global regulation to avoid ‘law
shopping’ and regulatory arbitrage? Either way, the fact is
decentralisation and the possibility to easily transfer values
worldwide are the very competitive advantages of the NFT itself
and, of course, of the distributed ledger technology (DLT).

Given these challenges, moving to the objective of this article
(point (2) above), the regulatory experience observed in Brazil
very much mirrors the discussions held in the United States and in
the European Union. Yet, Brazil is still in the early stages of
regulating virtual assets. Notwithstanding, the country already has
important rules in place, as indicated further below:

  • The Copyright Law (Law No 9,610/1998) provides that the author
    owns the moral and economic rights in the work he/she created. In
    other words, considering the nature of the NFTs, the virtual
    non-fungible asset, under the Brazilian legislation, integrates the
    reproduction of the work, with a digital signature of the author
    and rules pre-programmed by the creator.

  • CVM Circular Letter No 1/2018 establishes that, in some cases,
    crypto assets can be characterised as securities, when they grant
    the owner participation, partnership, remuneration or voting rights
    in a company.

  • Circular Letter SEI No 4,081/2020 of the Special Secretariat
    for Debureaucratization, Management and Digital Government
    (Ministry of Economy) ensures that the Boards of Trade can register
    the payment of corporate capital with cryptocurrencies and crypto
    assets (eg, NFTs).

  • Brazilian Federal Revenue (RFB) Normative Instruction No
    1888/2019 provides that transactions carried out in environments
    made available by crypto exchanges domiciled in Brazil must be
    reported to the RFB by the exchanges themselves, with no value
    limit. In addition, the Normative Instruction foresees the
    mandatory provision of information regarding transactions carried
    out with crypto products to the RFB.

It is noteworthy, finally, that on 26 April 2022, the Senate
Plenary approved, in a symbolic vote, Amendment No 6, a substitute
to Law Bill N. 4,401/2021, aimed at regulating the national
cryptocurrency market in Brazil. This proposal provides guidelines
for the ‘provision of virtual assets’; regulates the
exercise of companies providing these services and brings measures
to combat money laundering and its penalties. The Bill now returns
to the House of Representatives for analysis and, if approved, will
be submitted to the President for sanction.

Beyond that, the Bill brought the definition of ‘virtual
assets’, which shall thereafter be understood as
‘digital representation of value that can be traded or
transferred by electronic means and used to make payments or for
investment purposes’. The definition does not apply to
traditional national currencies and assets previously regulated by
law. Still on this subject, among other obligations, the Law Bill
foresees an obligation to the Executive Branch to indicate a
Federal Public Administration body responsible for establishing the
financial assets that will be regulated by the future law, as well
as the need to control and segregate clients’ funds.

Ten per cent of the world’s gross domestic product (GDP) is
stored by blockchain technology, on the premise that blockchain is
a way to keep track of reliable transactions in a distributed
manner. But this technology is not all about
potentially negative impacts. Among the positive impacts of
blockchain are increased financial inclusion in emerging markets as
financial services gain critical mass on the blockchain, the
disintermediation of financial institutions, the explosion in
tradable assets as all types of exchange value can be hosted on the
blockchain, better property records in emerging markets and the
ability to turn anything into a tradable asset, and increased
transparency because the blockchain is essentially a global ledger
that stores all transactions.

Therefore, this article concludes in the sense that NFTs and,
more specifically, blockchain – due to their disruptive
nature, even though they have several positive aspects to be taken
into account – significantly affect IP rights and data
protection. This proves that the regulatory perspectives must
necessarily take into account the fundamental principles that
govern the economic order in Brazil, without slowing down the
technology, whilst simultaneously ensuring legal certainty for
investors and users of this new technology, especially in the
metaverse.

Footnotes

1. Available at:
www.theverge.com/2021/3/11/22325054/beeple-christies-nft-sale-cost-everydays-69-million.
Accessed 21 July 2022.

2. Available at:
https://decrypt.co/99065/bored-ape-yacht-club-ethereum-nfts-record-price-metaverse-launch.
Accessed 21 July 2022.

3. Available at:
www.cnbc.com/2022/06/28/cathie-wood-nfts-digital-wallets-will-become-huge-opportunities.html.
Accessed 21 July 2022.

4. Available at: https://nonfungible.com/market-tracker.
Accessed 21 July 2022.

5. Available at:
www.finma.ch/~/media/finma/dokumente/dokumentencenter/myfinma/1bewilligung/fintech/wegleitung-ico.pdf?sc_lang=en&hash=C9899ACF22747D56C800C6C41A7E28AB.
Accessed 21 July 2022.

6. Available at:
www.mondaq.com/trademark/1170416/not-for-trademarks-the-truth-about-nfts-and-ip.
Accessed 25 June 2022.

7. Available at:
www.thefashionlaw.com/hermes-names-metabirkins-creator-in-trademark-lawsuit/.
Accessed 21 July 2022.

8. Hermes International et al v Rothschild, available at:
https://unicourt.com/case/pc-db5-hermes-international-et-al-v-rothschild-1116864.
Accessed 21 July 2022.

9. SCHWAB, Klaus. ‘A quarta revolução
industrial’, São Paulo: Edipro, 2016, p.
145.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.



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