SUMMARY OF THE REPORT OF THE MISSION ON NON-FUNGIBLE TOKENS (NFT) PROVIDED BY THE SUPERIOR COUNCIL FOR ARTISTIC LITERARY PROPERTY OF JULY 12, 2022
Posté le 19 August 2022 dans Intellectual property law.
A non-fungible token (or non-fungible token) is a token registered on a block chain associated with a “smart contract” (intelligent contract) which returns a file to a digital file. However, it is not a token within the meaning of the Monetary and Financial Code, nor a work of art within the meaning of the Intellectual Property Code, nor a certificate of authenticity in the absence of any third party verifier of the authenticity of the associated file or of its authorship.
The first non-fungible tokens appeared with the cryptopunks in 2017 and began to be popularized by the crypto-kitties which were constituted by a game on the ethereum blockchain which allowed to buy, collect, breed and sell crypto-kitties.
The 2020 pandemic made cryptocurrencies appear as a safe haven and marked the beginning of the craze for non-fungible tokens above all in the art market. Crypto-art, characterized by the native character of the works, appears as symptomatic of the right web.
The market is expanding rapidly. For example, the transaction volume of non-fungible tokens on the Ethereum block chain was 106 million dollars while it already reached 44 billion dollars in 2021.
Non-fungible tokens have now gone far beyond the field of art and are found in particular in the sector of video games, collectibles (the Spanish league announces a partnership with the French company SORARE in order to develop the equivalent PANINI thumbnails), the sports industry (for example, the NBA TOPSHOT platform), luxury and fashion brands who see it as a means of ensuring the authenticity and traceability of parts subject to counterfeiting, in the cultural sector, and as a title deed in the metaverse.
I – Definition of non-fungible tokens
A non-fungible token is based on so-called blockchain technology, making it possible to timestamp, store and transfer information securely without recourse to a centralizing body in order to guarantee their holder a virtual, unique and tamper-proof on a resource. It is associated with a smart contract, i.e. computer programs containing the address of the issuer, the name of the token and possibly the collection, the unique identifier of the token, possibly containing a link to a file underlying and executing automatically as soon as the previously coded conditions are recorded on the block chain. For the authors, this mechanism makes it possible to collect royalties when the condition recorded in the smart contract is met.
Non-fungible tokens benefit from several characteristics:
• Transfer of ownership;
• Authentication of the holder;
• Transparency of transfers.
Article L. 552-2 of the Monetary and Financial Code offers a fairly close definition of the non-fungible token: “for the purposes of this chapter, a token is any intangible asset representing, in digital form, one or more rights that can be issued, registered, stored or transferred by means of a shared electronic recording device making it possible to identify, directly or indirectly, the owner of the said property”.
Article L. 320-1 of the Commercial Code, resulting from the law modernizing the art market of February 28, 2022, authorizes intangible auctions and can be read as identifying a non-fungible token with intangible assets .
As currently used, a non-fungible token does not constitute a technical protection measure insofar as it does not prevent unauthorized use of a work. Thus, in the absence of any protection of the file, the digital file remains accessible everywhere and for all the holders of the link which refers to it. It can thus be copied and reused. On the other hand, it may be considered that the non-fungible token constitutes a technical information measure, provided that the metadata to which the smart contract refers are not excessively compressed.
Non-fungible tokens constitute an opportunity to create value and rarity by making it possible to individualize reproducible content whereas, in the digital universe, files are infinitely reproducible and, therefore, difficult to value. The French Ministry of Culture considers that this can create a more favorable context for creation in the digital environment.
Non-fungible tokens already make it possible to finance the creation in particular of crypto-art, traditional visual arts, heritage (for example non-fungible tokens have been proposed in order to finance the maintenance of public or private collections in particular in the Czech Republic), in the music or cinema sector where they make it possible to raise funds, in particular by offering specific experiences to buyers or by issuing tokens similar to security tokens allowing larger sums to be raised. In the audiovisual sector, non-fungible tokens could be complementary to the launch of « SOFICAs ». For example, the film “Zero contact” with Antony Hopkins offered the viewing of the film exclusively to spectators holding non-fungible tokens on VUELE. In the photography sector, platforms (notably PICTIA) offer photographers the opportunity to sell non-fungible tokens on their photographs and allow them to combine the sale with a license for commercial use rights on the internet.
II – Applicable legal rules
The non-fungible token (i.e. the creation of a smart contract registered in the block chain with a certain number of functionalities) does not contain the work and is therefore not subject to the rules of copyright. However, if during the production of the token copyright does not apply (given that it is only a purely technical element), the situation is different when the smart contract registerong the non-fungible token in the blockchain integrates a link to a unique digital file that can be exchanged and downloaded and possibly confers rights on the holder of this link and this file. Copyright applies to the single file and its uses and not to the code or the hyperlink.
In practice, it often happens that the first buyer of a token as well as the next do not hold any rights to the digital file associated with the token. In concrete terms, the acquisition of a non-fungible token gives its holder a certificate of ownership of the token, which cannot be exploited except for strictly private use (the holder effectively benefits from the private copy exception within the meaning of article L. 122-5 of the Intellectual Property Code but cannot use the token in a context that is not private). It is therefore necessary to provide in the general conditions and in the smart contract the possibility of using the file on social networks or in the metaverse.
Non-fungible tokens raise a difficulty since anyone can today make a non-fungible token a file available on the internet even if it does not belong to them and even if it is not the author. The platforms do not spontaneously verify the identity of the issuer of the non-fungible token. However, the law of February 9, 1995 relating to forgery in the arts requires the meeting of three cumulative conditions:
• The forgery includes a distinctive signature or signal referring to a specific artist;
• The works of the artist whose signature or sign used must not be in the public domain;
• Imitation works must be works of painting, sculpture, drawing, engraving and music;
• Lithographs being assimilated to engraving and photography, and applied arts not being covered.
These conditions appear difficult to apply to the non-fungible token but could apply to the associated file. One of the hypotheses in which one could consider the existence of a fake is that of a file presenting itself as an extract of music wrongly attributed or as a native digital work comprising the signature of an artist who is not the author. In which case, the penalties amount to two years imprisonment and €75,000 in fines as well as damages and the destruction of the work.
With regard to the image of a public domain asset, managers of public domains cannot prohibit the creation of non-fungible tokens representing the works they own. Nevertheless, the law of July 7, 2016 relating to freedom of creation hinders the use in a commercial context of the image of one of the national domains identified in the decree of May 2, 2017 (notably Chambord, etc.).
With regard to non-fungible token trading platforms, the provisions of Article 17 of Directive 2019/790/EU could be applied, which defines a specific liability regime for the protection of consumer rights. author against providers of online content sharing services (mainly digital platforms on which Internet users share a large amount of protected content). This article will apply if non-fungible token exchange platforms are to be considered as online content sharing service providers and if they communicate publicly or make available to the public copyrighted works or subject matter uploaded by its users.
In this case, the platforms would not be held liable if:
• they demonstrate that they have made their best efforts to obtain the authorization of the rights holders,
• that they have made their best efforts to guarantee their availability of works and other specific protected subject matter;
• and that they acted promptly upon receipt of a sufficiently reasoned notification from the rights holders to block access to the works and other protected subject matter covered by the notification or to remove them from the website and made their best efforts to prevent them from being uploaded in the future. However, certain platforms could constitute marketplaces which are expressly excluded from the aforementioned regime.
III – On the tax system
The CSPLA is not convinced by the assimilation of non-fungible tokens to digital assets, but considers that this is a relevant qualification in the short term due to the multiplicity of possible uses of tokens and the difficulty of establishing a definitive regulatory and tax framework in the presence of such a volatile and recent market.
The legal regime applicable to digital assets comes from the law of May 22, 2019 on the growth and transformation of companies (PACTE). A specific tax regime applicable to the gain from the sale of digital assets made on an occasional basis by individuals was created by article 41 of the law of December 28, 2018 on finance for 2019. This latter system only targets capital gains sale by individuals of digital assets. In any event, capital gains are based on an acquisition price taking into account the weighted average value of the portfolio of digital assets held by the individual, a tax deferment is provided for exchange transactions.
On the other hand, if the activity of buying and reselling non-fungible tokens is carried out on a regular basis (which is analyzed according to the dates of purchase and resale, the number of digital assets sold, the conditions of their acquisition, etc.), it will then be a commercial activity whose income must be declared in the category of industrial and commercial profits. However, from 2023, they will have to be declared as non-trading profits.
IV – Consumer protection
The introductory article of the Consumer Code defines the consumer as:
•A physical person ;
• Who acts for purposes outside the scope of his commercial activity.
The result is that the level of sophistication of the person is ineffective and that it is his professional activity that makes it possible to break down between a consumer and a professional. Consequently, the MontpellierONTPELLIER Court of Appeal (October 21, 2021, n°21/00224) held that the client of a crypto-currency platform is a consumer even if he had participated in the construction of block bricks chain, and despite high earnings, but which did not constitute income of a commercial nature. As a result, consumer law may apply to buyers of non-fungible tokens and in particular the rules relating to the right of withdrawal.
In addition, authors wishing to sell their works to consumers in the form of non-fungible tokens are required to transmit pre-contractual, fair, clear and transparent information on the rights and obligations of consumers in civil and tax matters, and also adequate and proportional information about the complexity of the good marketed (which risks presenting particular difficulties in terms of non-fungible tokens since it will be necessary to explain the notions of block chain and smart contract, etc.).