Understanding Blockchain, Cryptocurrency and Non- Fungible Token (NFT), – A Global Perspective

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Understanding Blockchain, Cryptocurrency and Non- Fungible Token (NFT), – A Global Perspective

Zameer Nathani, Mona Mody | August 2022

While we deal with the new world of Artificial Intelligence, Machine Learning, there are also transactional innovations that are expected to be embedded to our future lives with technological innovations like Blockchain, Cryptocurrency and NFT which have some presently visible legal issues and are also presently subjected to legal cases. Let us venture on these concepts, legal issues and legal cases in public domain to understand the future world we are heading towards in terms of business and legality involved for being ready to deal with the problems in a preplanned manner and strategically while addressing the issues as legal counsels.

BLOCKCHAIN

Blockchain is a technology for record an information in such a manner that makes it difficult or impossible to alter, hack, or cheat the system (data can neither be changed nor deleted). A blockchain is basically a digital ledger of transactions that is duplicated and distributed across the entire network of computer systems on the blockchain which may be located in different territories.

GLOBAL LEGAL ISSUES:

Jurisdictional issues: Being a decentralized ledger, the nodes of the blockchain can span a large number of locations across the world. Typically, it denotes that every transaction stored on the blockchain could possibly fall within each and every jurisdiction in which a node of the network is situated, resulting in an overwhelming number of rules and legislation that might apply to the blockchain network.
Governing law: Considering the existence of multiple jurisdiction, the governing laws and regulations may vary accordingly, including the basic principles of contract and rightful title. What may constitute a valid contract in one state might be a void contract in another state. In order to avoid this dilemma, the law governing the transactions must be predetermined by an internal governance system.
Privacy of data: While immutability is one of the key characteristics which makes blockchain useful, it acts as a double-edged sword. The blockchain is rendered non-compliant with data protection laws as data once stored on the ledger can neither be deleted nor altered (at least, not easily).
Compliance with financial and tax laws & regulations: Different jurisdictions have varying financial laws and regulations and therefore it is a complex and ambiguous area to be dealt with.
Antitrust considerations: The cases wherein collaboration or joint ventures between competitors is carried/initiated over blockchain platforms, it will generally involve a high risk of the exchange of sensitive information between competitors, which can result in anti-competitive trade practices including exclusionary trade practices.

GLOBAL LEGAL ISSUES:

Oracle vs. Crypto Oracle: Software giant Oracle filed a lawsuit against the blockchain startup CryptoOracle, with allegations of trademark infringement and cybersquatting, followed by the publicity of the startup on CNBC. According to the complaint, the startup used Oracle’s name to boost its reputation. The tech giant first attempted to solve the issue outside courts, but it resulted in the startup filing for CryptoOracle’s trademark.
New Jersey v. Pocketinns Inc: The state of New Jersey alleges that Pocketinns, a blockchain-driven online marketplace ecosystem, sold over $400,000 worth of unregistered securities to 217 investors. Poketinns intended to raise as much as $46 million in its token sale held in January 2018.
SEC v. Daniel Pacheco: The SEC alleges that Pacheco operated a multimillion-dollar cryptocurrency pyramid scheme, Ipro Network, attracting over $26 million from investors from 2017 to 2018. It is further alleged that the defendant misappropriated investors’ funds with the purchase of a $2.5 million home and a Rolls Royce automobile.

CRYPTOCURRENCY

A cryptocurrency, crypto-currency, or crypto is a digital currency which is designed to function as a medium of exchange through a computer network that is not dependent on any central authority, such as a government or bank, to uphold or maintain it.

GLOBAL LEGAL ISSUES:

Data Theft and Financial Fraud: One of the most pressing legal concerns surrounding cryptocurrencies are data theft and financial fraud. The blockchain’s promise of anonymity and its apparent users who are involved in illegal activities to use cryptocurrencies for their financial transactions.
Money Laundering: Many commentators have suggested that cryptocurrencies provide criminal organizations a new way to commit fraud, money laundering, and a host of other financial crimes.
Tax Implications: Cryptocurrencies are considered property and not currency for the US federal for the purpose of income tax. In the view of the above distinction, the US taxpayers cannot use cryptocurrency as a functional currency for Internal Revenue Code purposes, which is in contrast to Venezuela where the government issued cryptocurrency named ‘The Petro’ in February 2018 as their national cryptocurrency.
Legal and Regulatory Concerns for Investors: While some countries still question the legal validity of cryptocurrencies. Cryptocurrencies such States and in most other developed countries, such as the United Kingdom, Japan, and Canada.

GLOBAL LEGAL ISSUES:

New York Office of the Attorney General vs. Bitfinex: The New York OAG was investigating Bitfinex over allegations of fraud and misleading investors. Prosecutors alleged the crypto exchange and its associating stablecoin firm, Tether, for covering up a loss of US$850 million, and in doing so misled the investors. The New York County Supreme Court Judge decided not to terminate the investigation on the companies, and in response, the companies said they will appeal the decision.
SEC vs. Trendon Shavers: The operator of the Bitcoin Savings and Trust (BTCST), Shaver’s, came under the legal scrutiny of the SEC for soliciting illicit investments in bitcoin-related opportunities from several lenders. This case provided insight to the judge into how bitcoin-denominated damages can be accessed in the future, with only using the daily price of bitcoin at the time the scheme was uncovered.
The State of Florida vs. Espinoza: In August 2021, the Bitcoin Foundation filed an amicus curiae based on the case filed on Florida resident Pascal Reid, seeking to dismiss a money transmission charge. Reid and Mitchell Anber Espinoza were arrested in the sting operations where they carried out fake transactions with undercover agents and converted US$30,000 into bitcoin. Both of them were filed against money laundering charges but dismissed because bitcoin is not real money.
The Supreme Court of India vs. The Reserve Bank of India: The Supreme Court had openly criticized RBI’s handling of the cryptocurrency ban in July 2018. In its session, the court had ordered the RBI to respond within two weeks. The case ran throughout a rough period while the Indian government considered a blanket law that made cryptocurrencies illegal for Indians to use. Finance minister Nirmala Sitharaman in Union Budget 2022 announced that the central government will levy a steep tax at 30 per cent on virtual assets including cryptocurrencies.
Leumi Bank v. Bits of Gold: The Supreme Court of Israel has ruled against the Leumi bank’s block on cryptocurrency exchange Bits of Gold’s account. The block was based on grounds of regulatory concerns. This is the latest in a back-and-forth exchange between the two parties in the Israeli Supreme Court.

C. NON-FUNGIBLE TOKEN (NFT)
A non-fungible token is a financial security comprising of digital data stored in a blockchain which forms part of distributed ledger. The ownership of a NFT is recorded in the blockchain, and can be transferred by the owner, allowing NFTs to be sold and traded.

GLOBAL LEGAL ISSUES:

Money laundering: The widespread use and the value of NFT transactions of cryptocurrency inevitably raises concerns about whether these transactions are being used to circumvent anti-money laundering regulations.
Data Hosting and Information safe keeping: Saving NFTs on blockchain is recommended. It specifies the digital assets’s current location. Digital assets that refer to NFTs are kept in a different location. An NFT is connected to an asset via a link and in case this asset is somehow erased, an NFT becomes useless.
Royalties: Smart contracts written into the code of NFTs allow for the distribution of funds for the payment of royalties to the creator each time the work is resold. However, these automated resale royalty payments might not occur unless the NFT is resold through the same platform.
Intellectual Property Rights: Participation in NFT market are generally from people of all backgrounds and many are not familiar with the legal restrictions relating to copyrighted work, which leads to potential infringement liability.
Privacy and data protection laws: Some data protection laws give individuals the right to erase their data. The immutable nature of blockchain technology might make this right functionally impossible to exercise. As a result, NFTs that contain personal information might violate data protection laws.

GLOBAL LEGAL CASES:

Copyright issues, for example, have arisen where artists have had their work copied and sold as an NFT without their permission. Recently, 27-year-old digital artist Ludwig Holmen discovered that an anonymous person had defrauded more than 2,000 people in an auction presale by creating NFTs supposedly for a collection of Holmen’s photographs of digital figurines. The presale fetched $138,000 from the bidders, who received nothing but images of emoticons in exchange for their bids.
Liverpool-based art collector and computer programmer Amir Soleymani filed a High Court claim against non-fungible token (NFT) marketplace Nifty Gateway, concerning the auction terms relating to his $650,000 third place bid for digital artist Beeple’s ‘Abundance’ NFT.
The UK’s High Court has also recognised NFTs (nonfungible tokens) as “property” in a case which is likely to have far-reaching implications for disputes involving digital art. The action was brought in March this year by Lavinia Osbourne, the founder of Women in Blockchain Talks, who claimed that two digital works from the Boss Beauties collection, an NFT-based initiative designed to “create opportunities” and raise funds for females, had been stolen from her online wallet. In a judgement, the judge held that the assets were “property” and thus able to have access to legal protections—in this instance, an injunction served on accounts on Ozone Networks (which hosts the NFT marketplace OpenSea), to freeze the assets, and a Bankers Trust disclosure “compelling [OpenSea] to send information about the two account holders” who currently hold the NFTs.

About Author

Zameer Nathani

Mr. Zameer Nathani holds a Master’s Degree in Law and Certifications from World Intellectual Property Office Academy, UN. Mr. Nathani started his career with a law firm and has managed legal assignments for clients like Eureka Forbes, LG Electronics, Thermo Electron (India), Forbes Aquatech (India), FirstNaukri.com, Thompson Multimedia, Concord Shipping, Forbes Abans, Hansen Engineering (US), Dometic AB (Sweden), Johnson and Johnson, JohnsonDiversey (India), Atlantic Lubricants, ISPAT Industries, Indian Red Cross Society, TCL India, and Ginger Hotels etc. Mr. Nathani was part of Reliance – Anil Dhirubhai Ambani Group as Associate Vice President – Legal, heading legal department for all the digital businesses under Reliance Entertainment

Mona Mody

Mona Mody is currently working as Assistant Manager Legal at for UFO Moviez India Limited. Prior to this she has worked with organisations like Next Orbit Ventures Fund, Nilkamal & JP Infra. She had done her LLB from Mumbai University and also a qualified Company Secretary by ICSI.