Procuratorial Daily: The Legal Attributes and Risk Governance of "NFT" in the Background of the Digital Economy

Source: Procuratorate Daily - Theoretical Edition

Editor's note

Multiply by "numbers" and lead the future wisely. With the global popularity of digital economy-related technologies and concepts such as "blockchain" and "metaverse", NFT (Non-Fungible Token, literally translated as "non-homogeneous certificate" or "non-homogeneous equity certificate") ", whose essence is a digital asset certificate recorded on the blockchain) and other emerging application scenarios have become the focus of market attention. As a new application of blockchain technology, NFT has certain development potential. It is also because it is an emerging field, and the relevant legal norms and regulatory rules are not yet perfect. While it has high popularity, it is very likely to cause financial risks, management risks, network security risks, etc., especially the legal risks. Prosecutors are paying close attention. This issue of "Viewpoints and Topics" focuses on the theme of NFT's legal attributes and risk governance, and invites experts, scholars and personnel from practical departments to conduct multi-angle discussions, so stay tuned.

Core Views

Wang Xiafang

For the new business forms brought about by the development of information technology, the procuratorial organs must be good at accurately grasping the boundaries between innovation and development and crimes, and must not only protect "true innovation" in accordance with the law, but also be able to promptly discover and accurately punish those who commit crimes in the name of innovation "Pseudo-innovation" to avoid the phenomenon of "bad money drives out good money".

Sun Shan

There are four types of subjects involved in the NFT transaction of digital works: copyright owner, creator, platform and buyer. Among them, the identity of the copyright owner and the creator may overlap, which is also the most ideal state to maintain the transaction. However, when the identities of the copyright owner and the creator do not overlap, the copyright compliance governance of the platform is particularly important.

Ruan Shenyu

From the perspective of property rights, consumers do not enjoy the ownership of the NFT digital assets they purchase in the sense of civil law, and consumers cannot prohibit others from accessing, copying or disseminating the digital assets mapped by NFT. What consumers enjoy is only an exclusive right to prohibit others from tampering with the ownership of the NFT recorded on the blockchain.

As an application form of NFT, digital collections have the attributes of virtual assets, such as blind and disorderly development, it is easy to cause multiple risks

Strengthen risk research and judgment to accurately punish crimes

Wang Xiafang

Digital collections refer to the unique digital certificates generated by specific works, works of art and publications supported by blockchain technology. On the basis of protecting their digital copyrights, real and credible digital distribution, purchase, collection and collection are realized. Use, its core value lies in the assetization of digital content. As an emerging industry, the prospects of digital collections in protecting intellectual property rights, promoting the development of cultural and creative undertakings, and enriching the digital economy are widely optimistic. The "Opinions on Promoting the Implementation of the National Cultural Digitalization Strategy" issued by the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council in May 2022 pointed out that it is necessary to "promote the transformation of cultural stock resources into production factors" and support legal entities and individual citizens to carry out cultural activities in accordance with laws and regulations. Data transactions have clarified the general direction of encouraging the development and innovation of cultural and digital related industries. However, it should also be noted that the entire industry is still in the early stages of development, and the industry norms and regulatory system are not yet sound. As an application form of NFT, digital collections themselves have virtual asset attributes. Blind and disorderly development can easily lead to illegal fundraising, Multiple risks such as fraud and malicious hype must be paid attention to urgently.

** The disorderly development of the industry has a financial tendency. ** In April 2022, the "Initiative on Preventing NFT-related Financial Risks" (hereinafter referred to as the "Initiative") jointly issued by the Internet Finance Association of China, the China Banking Association, and the Securities Association of China mentioned that "no centralized Transactions (centralized bidding, electronic matching, anonymous transactions, etc.), continuous listing transactions, standardized contract transactions and other services, and the establishment of trading venues in disguised violations of regulations.” In view of this, some leading digital collection platforms explicitly prohibit secondary transfers, or only support free transfers under restricted conditions. There are also platforms that open secondary transactions directly or in disguise. The bidding mechanism, short-term trading and illegal setting of exchanges on some consignment platforms are similar to the electronic matching and continuous listing transactions stipulated in the "Initiative". keep accumulating. In addition, the "Proposal" specifically mentioned in "resolutely curbing the tendency of NFT financial securitization" that "do not weaken the non-homogeneous characteristics of NFT through methods such as division of ownership or batch creation, and carry out token issuance financing (ICO) in disguise", while At present, the model of "multiple releases for one copy" of digital collections is relatively common, and the scale of a picture can easily reach tens of thousands of copies, which makes NFT, which has the characteristics of non-reproducibility, indivisibility and uniqueness, no longer unique and affects its non-homogeneity. properties.

**Inflated prices hide the "thunderstorm" crisis. **From relevant news reports, we can understand that many digital collection platforms use marketing methods such as "airdrop", "blind box", "limited sale" and "synthesis" to create market appearances that demand exceeds supply. The lack of uniformity has made some collections that lack cultural imprints and artistic beauty, and even infringe copyrights, to be enthusiastically "sought after", and there is a trend that everything can be NFT. Under the disorderly hype in the secondary market, some collections have been hyped from the sale price of a few yuan to tens of thousands, or even hundreds of thousands of yuan, in a short period of time. There is no reasonable pricing mechanism and sufficient value support behind the inflated prices, and it is easy to deviate from the basic value law, leading to the accelerated formation of market bubbles.

** "Concept" hype can easily become a criminal tool. **The first is that there is a risk of fraud in "false chaining". The digital collection platform is built based on the system of "digital publication + blockchain". The value of blockchain technology lies in confirming the rights and ensuring that the unique digital certificate of the collection is not tampered with. It is the fundamental technical guarantee for the value of digital collection rights. If The digital collection platform falsifies the record information of the blockchain, fabricates the fact of "on-chain", and makes illegal profits through false issuance and price speculation. At least it is suspected of false propaganda, and at worst it may constitute a crime of fraud. The second is that there is a risk of pyramid schemes in "rebates for attracting newcomers". According to the transaction characteristics of the blockchain smart contract, the content of the smart contract can be set to pay a certain percentage of commission to the creator or the merchant for each transaction. In addition, digital collections are often bundled with concepts such as metaverse and blockchain to attract new users. Marketing models such as rewards and dynamic rights and interests can easily evolve into illegal pyramid schemes that use the number of development personnel as remuneration or rebates. The third is that there is a risk of illegal fundraising in "committed income". The platform induces consumers to purchase digital collections for investment purposes by means of static income, equity empowerment, premium repurchases, and physical cashback. Suspected of the crime of illegally absorbing public deposits and fund-raising fraud.

The technical characteristics of digital collections, the possible legal risks in issuance and transfer, have attracted the close attention of the procuratorate. All types of financial activities must be brought under supervision in accordance with the law, adhere to both punishment and governance, and actively crack down on and prevent related crimes.

** The first is to precisely crack down on criminal activities committed under the guise of new technologies and new formats. ** For the new business forms brought about by the development of information technology, the procuratorial organs must be good at accurately grasping the boundaries between innovation and development and crimes. They must not only protect "true innovation" in accordance with the law, but also be able to promptly discover and accurately punish those who commit crimes in the name of innovation. Real "pseudo-innovation" to avoid the phenomenon of "bad money driving out good money". For fraud crimes committed with digital collections as a gimmick, illegal fundraising crimes committed with the promise of high profits, and illegal pyramid schemes using digital collections, the procuratorial organs must crack down on them in a timely manner in accordance with the law, effectively safeguard the interests of the masses, and accurately delineate the industry " Red Line".

**The second is to actively perform duties in accordance with the law, and insist on equal emphasis on punishment and governance. **Comprehensively use procuratorial functions, actively cooperate with administrative agencies to carry out traceability governance and comprehensive governance, guide administrative agencies to make full use of existing legal regulations and industry norms, bring financial activities under the guise of new formats into supervision, and prevent and resolve financial risks. Give full play to the functions and roles of procuratorial organs in preventing crime and promoting social governance, actively put forward relevant procuratorial suggestions, guide the industry to strengthen its own compliance construction, effectively take root in cultural and artistic connotations, continuously enrich high-quality application scenarios, and explore digital collections to empower entities path of economic development.

**The third is to strengthen risk research and judgment and law popularization. **Cooperate with relevant regulatory authorities to strengthen risk research and judgment, deeply analyze the current regulatory risks and industry hidden dangers in the field of digital collections, study the financial and social risks that may be involved in the development of emerging technologies, and provide decision-making advice for financial risk prevention and the improvement of the regulatory system. In response to the phenomenon of ordinary consumers blindly chasing hot spots, the procuratorial organs should strengthen publicity, guide consumers to rationally understand the price risks, financial risks, and policy risks that exist in current digital collections, and be good at identifying illegal financial activities under the guise of NFTs and metaverses , Don't be superstitious about the so-called "high yield", "stable profit without loss", "appreciation and preservation of value" and other gimmicks, avoid falling into "drumming and spreading flowers" financial scams, and effectively safeguard the safety of your own property.

(The authors are the Director of the Fourth Procuratorate Department of the People's Procuratorate of Zhejiang Province and the Director of the Third Procuratorate Department of the Yuhang District People's Procuratorate of Hangzhou City)

Digital works NFT trading platform is responsible for copyright protection

Sun Shan

In the era of digital economy, various digital assets including digital works have become an important form of wealth for people. In recent years, digital works NFT transactions have developed rapidly at home and abroad, and the copyright compliance governance of trading platforms has attracted more and more attention. There are four types of subjects involved in the NFT transaction of digital works: copyright owner, creator, platform and buyer. Among them, the identity of the copyright owner and the creator may overlap, which is also the most ideal state to maintain the transaction. However, when the identities of the copyright owner and the creator do not overlap, the copyright compliance governance of the platform is particularly important.

**The legitimacy of the right source of the work itself is the decisive factor for the healthy and orderly development of digital work NFT transactions. **One of the main problems in the NFT transaction of digital works is that the validity of the copyright on the works has not been verified before the digital works are cast on the chain. This may cause buyers to have doubts about the legality of the transaction, thereby affecting the stability and reliability of digital works NFT transactions. At the same time, if the miner does not obtain the permission of the copyright owner of the minted work, then the NFT transaction of digital works will constitute infringement, and the platform may also be liable for negligent management.

Guaranteeing the validity of the rights of miners and platforms can alleviate buyers' anxiety about the legality of transactions. At present, the commonly used right validity guarantee mode in digital works NFT transactions is to sign an agreement between the creator and the platform. The creator needs to provide relevant copyright certification documents before the digital work is uploaded to the chain to prove the copyright status of the digital work and the legitimacy of the source of rights. The platform also needs to review the documents provided by the minter to ensure their authenticity and legitimacy. However, this mode of guaranteeing the validity of rights is highly dependent on the integrity of the founder and the auditing ability of the platform, and this dependence has many hidden dangers. First, there may be a risk of forgery in the copyright attribution certificate provided by the foundry. Second, there is a clear discrepancy between the number of works and the review capabilities of the platform. Third, the platform needs to review the ownership certification documents provided by the foundry, which will inevitably consume a lot of time and human resources, which will affect the efficiency of transactions.

In order to solve the problem of the validity of rights, it is necessary to comprehensively use legal means and technical measures to strengthen the copyright compliance governance of the digital works NFT trading platform. First, in the future legislation, it may be stipulated that the alliance chain platform should fulfill the necessary supervision obligations, be responsible for the real-name authentication of platform users' personal information and the obligation to provide user information when necessary. The setting of regulatory obligations can not only enhance the enthusiasm of the platform to perform its duties, but also fully protect the legitimate rights and interests of copyright owners and buyers. Second, in addition to the self-audit by the platform, it can be considered that the relevant department is in charge of the relevant management platform as a third-party organization to intervene in it and be responsible for the corresponding audit work. If no rights defects are found after the audit, it can be regarded as a preliminary proof of the validity of the rights . Compared with the review capability of a single platform, the relevant management platform has more advantages in solving the problem of information asymmetry, and its professionalism, independence and authority are beyond doubt. Third, combined with the industry status quo of my country's alliance chain and the application of content analysis, intelligent monitoring and other infringement identification technologies, the infringement information can be found and corrected in a timely manner. NFT transactions of digital works are one of the application scenarios of blockchain technology. Blockchain technology can ensure the transparency, immutability and security of NFT transactions, but this guarantee is limited to information changes after the chain is uploaded. my country's digital works NFT trading platform is dominated by the alliance chain, which gives us the opportunity to complete the correction of wrong information on the blockchain at a lower cost, which is also the comparative advantage of the alliance chain over the public chain.

** Prohibition of transactions in encrypted currency is an important guarantee for restoring the normal market price of digital works and resolving potential legal risks. ** Judging from the current situation, the abnormally high prices of digital works are inseparable from the blind speculation in the market and the use of cryptocurrency transactions. The price of cryptocurrencies fluctuates greatly, which will affect the market stability of NFT transactions of digital works. Moreover, there are many problems in completing the NFT transaction of digital works in the form of encrypted currency. First, the price of cryptocurrency itself fluctuates greatly. Using cryptocurrency as a pricing standard will amplify changes in the market price of digital works, causing unnecessary pursuit and panic. The digital works market is an emerging market, and the price fluctuations and market changes are relatively violent and difficult to predict. Once encrypted currency is used for transactions, the price changes of the two will have a superimposed effect. Second, cryptocurrencies are not legal tenders, and the costs of acquiring cryptocurrencies are significantly different for various entities. It is far less difficult to manipulate market prices of digital works in the form of cryptocurrencies than legal tenders. In particular, those practitioners who entered the field of cryptocurrency in the early stage not only possess a large amount of cryptocurrency, but also have professional knowledge, experience and other asymmetric information. Buyers in information processing disadvantaged positions. Third, transactions using cryptocurrencies carry risks of money laundering, fraud, and illicit financial flows. The anonymity and decentralization of cryptocurrencies make supervision difficult, and some criminals choose to use this transaction method for fraud, illegal fund flow and money laundering. If the digital works NFT trading platform allows transactions in encrypted currency, the probability of this risk will increase, thereby posing a threat to financial security and social stability. Fourth, the legality of cryptocurrencies has not been confirmed in our country, and the use of cryptocurrencies for transactions may violate relevant laws and regulations, which may lead to legal disputes. Based on the above reasons, digital works NFT trading platforms should be strictly prohibited from trading in encrypted currency at the legislative level, and legal currency trading is the only legal trading mode.

**The "royalty" sharing mechanism is not justified at the legislative level. **In the NFT transaction of digital works, the "royalty" sharing mechanism has become an industry practice in domestic and foreign industrial practices. According to the current practice, creators of digital works can usually get a certain percentage of the transaction amount in each transaction of the work, based on the terms in the smart contract. However, from the perspective of actual operation, the "royalty" sharing mechanism has some shortcomings, especially the lack of legitimacy at the legislative level. From the perspective of legal regulations, the "royalty" in the NFT transaction of digital works is not the same concept as the royalty in our country's law. According to the provisions of the National Copyright Administration's "Measures for Payment of Remuneration for Using Literary Works", royalties in the usual sense are the remuneration paid by the publisher of the work to the copyright owner, and there is no need to pay royalties when reselling the work, which is in line with the exhaustion of the first sale right. Principle requirements. The "royalty" in the NFT transaction of digital works is paid by the buyer of the work carrier to the creator of the digital work who may not be the real copyright owner. The premise of the payment is resale, which violates the principle of exhaustion of the first sale right. From the perspective of comparative law, this "royalty" is closer to the resale right, which is not regulated in our country's legislation and lacks legal basis. The creation of the smart contract of the resale right is a legal peripheral right, which seriously damages the balance and fairness of the transaction. Therefore, the "royalty" sharing mechanism embedded in the smart contract has no legal effect, and the platform should remove such terms from the smart contract.

[The author is a researcher at the Chongqing Intellectual Property Protection Collaborative Innovation Center of Southwest University of Political Science and Law, a key research base for humanities and social sciences in Chongqing. This article is the phased research results of the 2022 Chongqing Municipal Education Commission Humanities and Social Sciences Research Base Project "Copyright Law Response to Short Video Industry Infringement Governance" (Project No.: 22SKJD023)]

The right attributes of NFT digital assets

Ruan Shenyu

With the development of society, market and technology, new types of property rights may be formed in practice. NFT digital assets are a new type of property rights. The so-called NFT digital assets refer to the collection of non-fungible tokens (Non-Fungible Token, NFT for short) recorded on the blockchain and the digital assets or physical assets mapped to them. On the one hand, NFT links assets outside the chain through the uniform resource locator, and on the other hand, through the mapping table between the token number (Token ID) and the account address, it indicates which account address a certain token belongs to. The original intention of NFT developers is to use NFT as a digital equity certificate that cannot be tampered with, traceable, and distributed.

The question is, when a consumer purchases an NFT digital asset, what kind of property rights does he obtain? One point of view is that consumers have obtained the ownership of NFT digital assets. This point of view is open to debate. In everyday parlance, ownership can have a very broad meaning. But in the civil law world, the meaning of ownership is narrow and definite. Article 240 of the Civil Code of my country stipulates that the owner has the right to possess, use, benefit from and dispose of his real or movable property according to law. According to this regulation, it cannot simply be considered that consumers have ownership of the NFT digital assets they purchase, because: first, NFT digital assets are information, not movable or real property; Willingness to "direct control" over real or movable property (Article 114, Paragraph 2 of the Civil Code), but the transfer of NFT digital assets requires unspecified "miners" to "mine". The so-called "mining" means that a computer is connected to a specific blockchain network, and then listens to the transaction broadcast, verifies and assembles the candidate block, and finds a random number that matches the value of the target area to make the candidate block valid. When other computer nodes accept the candidate block, the computer node that packaged the candidate block can get a profit (block reward), and the candidate block will also be permanently recorded on the blockchain ledger. It can be seen that the transfer of NFT requires the assistance of "miners", so it is different from the direct control of the owner without the assistance of others.

In fact, if new types of property rights such as NFT digital assets are to be protected by law, in addition to subsuming them under existing legal property rights (such as ownership), the following two paths can also be taken: First, in the legislative theory This new type of property right is clearly stipulated in the above. For example, Articles 3 to 10 of the "Liechtenstein Token and Trusted Technology Services Act" stipulate the civil basis of Token. However, my country's current law currently does not have express regulations on NFT digital assets. Second, discuss whether NFT digital assets conform to the general structure of property rights in terms of interpretation. Article 113 of the Civil Code of our country stipulates that "the property rights of civil subjects are equally protected by the law", indicating that all kinds of property rights are equally protected by the laws of our country. , creditor's rights, various intellectual property rights, equity and other investment interests, as well as data and network virtual property. According to these regulations, if the legal status enjoyed by consumers on NFT digital assets meets the general structure of property rights, they should be equally protected by law.

What, then, is the general structure of property rights? The author believes that as far as an external object (including things and information, etc.) is concerned, the obligee has the right to require others not to use (or use in a certain way) the external object, and can dispose of the object according to his own wishes. If there is no right to claim the right, then the obligee has the property right to the external object. In other words, property rights should be exclusive and assignable. According to this standard, NFT digital assets are naturally transferable technically. Of course, in terms of legal policy, some legal systems clearly stipulate that consumers have the right to dispose of NFT digital assets, and some legal systems restrict or even temporarily prohibit the transaction of NFT digital assets for risk prevention and control reasons; however, consumption Investors can still transfer NFT digital assets through gifts and other methods. Therefore, these legal and policy positions will not change the characteristics of the transferability of NFT digital assets. The question that needs further discussion is whether consumers enjoy exclusivity to NFT digital assets? Regarding this issue, NFT and the digital assets mapped to it should be distinguished and judged separately. Specifically:

**On the one hand, consumers enjoy de facto exclusivity to NFT, which is sufficient to justify consumers' property rights to NFT. **Specifically: First, when consumers own an NFT, they actually control the semantic information recorded on the blockchain ledger through the key. Second, the technical architecture of the blockchain determines that other subjects have an obligation not to tamper with the semantic information recorded in the account address (public key) of the key holder without the consent of the key holder. This is because, in the blockchain system, only when the holder uses the private key to digitally sign the transaction instruction issued by it, and the "miner" passes the verification, the transaction instruction will be recorded in the ledger. This is the technical architecture and general consensus for the existence of the blockchain. It is this technical architecture and general consensus that imposes an obligation on unspecified persons, that is, in principle, the account address corresponding to the NFT must not be tampered with without consent, giving the holder an exclusive legal status for the NFT.

** On the other hand, consumers do not naturally enjoy exclusivity to the digital assets mapped by NFT. **This is because the digital assets mapped by NFT are usually stored in an operator's database rather than on the blockchain. The technical architecture of NFT only prohibits unspecified third parties from tampering with the NFT recorded on the blockchain, but there is no way to restrict operators or other third parties from tampering, deleting or destroying digital assets stored in the database; People also cannot prohibit unspecified third parties from accessing, copying or disseminating digital assets mapped by NFT. When a third party copies the digital asset mapped by NFT without authorization, only the copyright owner of the digital asset has the right to request the third party to delete the relevant work, but the holder who purchased the NFT digital asset does not enjoy this right. Therefore, although the technical structure of NFT gives the holder an exclusive property right to the NFT, this exclusivity does not naturally "transmit" to the holder's digital assets mapped to the NFT.

It can be seen that from the perspective of property rights, consumers do not enjoy the ownership of the NFT digital assets they purchase in the sense of civil law, and consumers cannot prohibit others from accessing, copying or disseminating the digital assets mapped by NFT. What consumers enjoy is only an exclusive right to prohibit others from tampering with the ownership of the NFT recorded on the blockchain. As Demsetz stated, the value of the rights determines the value of the items exchanged. The biggest risk faced by NFT digital assets is that NFT is stored on an immutable blockchain, but the digital assets mapped by NFT have the risk of being tampered with, deleted or destroyed. At this time, even if consumers enjoy the exclusive rights on NFT rights, the value of this right will be very limited.

(The author is a lecturer at the School of Law of Renmin University of China and a doctor of law)