Written evidence submitted by Professor Dinusha Mendis, Bournemouth University

Non-Fungible Tokens and the Blockchain

Written evidence submitted by Dinusha Mendis, on behalf of Bournemouth University, to the Department for Digital, Culture, Media and Sport (DCMS) call for evidence into Non-Fungible Tokens (NFTs) and the Blockchain. 

This evidence is being submitted to highlight the gaps in regulation in relation to NFTs, the potential harms to vulnerable people as a result of NFT speculation and the privacy and security concerns surrounding the blockchain for British investors.

Ownership of NFTs and the value in creating them gives rise to many intellectual property (IP) questions; these are specifically addressed. Furthermore, the evidence presents solutions to the issues noted which the Committee may wish to recommend the Government address.

Dinusha Mendis is Professor of Intellectual Property & Innovation Law and Director of the Centre for Intellectual Property Policy and Management (CIPPM) at Bournemouth University.

Dinusha is an internationally recognised author in relation to new technologies and IP law and has carried out commissioned research for both the UK Government and the European Commission. She has authored articles on NFTs and IP law, has tokenised a Zine titled ‘Demystifying NFTs: From technology to intellectual property’ as an NFT (on OpenSea) and is a member of the Metaverse Governance Team at the World Economic Forum. You can find out more about Dinusha here.

Dinusha is available at the Committee’s disposal, if further clarification is needed on the submission or any of the points raised. Dinusha is happy to clarify such issues either in writing or orally.

Executive Summary

• The light-touch NFT regulation is not sufficient as seen by the increasing rise in scamming, piracy and counterfeiting of NFTs, leading to a loss of income for person and Government.
• One of the reasons for this is the lack of legal understanding, surrounding intellectual property rights and data, when an NFT is purchased. It has created a surge of litigation in the US. There is the opportunity to take small actions to prevent this happening in the UK.
• Implementing a mandatory awareness statement that must be acknowledged at point of minting (publishing on the blockchain) as well as sale would raise consumer awareness of the authenticity of the item being sold and purchased preventing confusion in relation to piracy/counterfeiting and ownership of the NFT including the underlying work (i.e., artwork, music etc.)
• The scamming of NFTs results in a significant financial loss to the UK (in the millions). From a property law perspective including NFTs as a ‘third type’ of personal property, would better protect businesses and consumers from these losses and provide a clear recourse to compensation.   
• It is unclear whether Article 17 (Right to be Forgotten) of General Data Protection Regulation (GDPR) will apply to the blockchain. Clarity is needed to understand whether pirated/counterfeited transactions which are permanently on the blockchain, can either be ‘forgotten’ or ‘unlinked’ if it cannot be completely erased and whether it should be instigated through a Court order. Even if the unlinking process is clarified, unlinking data from the blockchain may not be practical, is counterintuitive to the immutability of the blockchain and could be very costly. Furthermore, in the case of public blockchains, it will be almost impossible to identify a ‘central data controller’ responsible for compliance due to its decentralised nature thereby leaving open the question as to who should deal with the unlinking of the data.
• Collective management organisations (CMOs) such as Design and Artists Copyright Society (DACS) and Artists Collecting Society (ACS) should embrace the opportunity to incorporate blockchain technology into their day-to-day practice to allow for a more streamlined and effective way of dealing with crypto art. This will allow visual artists to be paid directly (which is not possible at present as all transactions have to be directed through a CMO) and will remove much of the administrative burden and costs which CMOs face.
• There is clarity in the sale of NFTs in the sense of whether they can be subject to the ‘exhaustion doctrine’ and can be treated as second hand good. This can easily be incorporated into the current Government review of the exhaustion doctrine under the copyright framework to ensure that.

Q1. Is the UK’s light-touch NFT regulation sufficient?

1. No, the light-touch NFT regulation is not sufficient. The current position has led to:

• Increased scamming, piracy and counterfeiting due to a lack of understanding of the intellectual property (IP) rights relating to NFTs as well as weak terms and conditions in marketplaces facilitating the buying and selling of NFTs;
• Confusion regarding whether the Right to be Forgotten (article 17, GDPR) applies to the blockchain;
• Potentially missing the opportunity to incorporate the blockchain into visual arts, as has been done in the USA. This is important to ensure that UK remains a leader in the visual arts;
• Lack of clarity regarding the distribution of NFTs and what it means for second-hand goods; and
• Lack of accountability within marketplaces facilitating the buying and selling of NFTs.

Therefore, at present, the UK’s regulation and also guidance which could apply to NFTs, is not entirely sufficient for the reasons summarised above and detailed below.

2. Much work has been carried out by the Government (and its associated bodies) in relation to the UK’s regulatory approach to crypto-assets from a financial perspective[1]. Also, the UK Jurisdiction Taskforce Report of 2019 set out actions to maintain the UK’s international reputation as a safe and transparent place to do business in financial services; ensure high regulatory standards in financial markets; protect consumers; guard against threats to financial stability and so on.[2]

3. However, to date, steps have not been taken specifically in relation to NFTs to protect against threats such as scamming, piracy and counterfeiting from the point of view of intellectual property (IP) laws and the lack of action could lead to a stream of litigation as has been the case in USA. As set out below, the Government can prepare for and encourage changes which can be brought in through small tweaks to the law.

• The Government should strongly consider recognising NFTs as a third type of personal property, as called for by the Law Commission of England & Wales. This will allow individuals and businesses to be better protected whilst determining a clear recourse to compensation in circumstances where consumers have been scammed. Such scams are damaging for the UK economy and can run to millions of pounds, as seen in recent cases from 2019 to 2022.

• Raise awareness in relation to the ownership of NFTs from the perspective of IP law, so that buyers and sellers understand that they do not have the right to reproduce, adapt, and distribute etc. the underlying work under copyright law, unless stipulated in the terms and conditions. This lack of understanding has led to cases in the USA and unless steps are taken in the UK, the litigation will soon move here also.
• Raising awareness amongst consumers is a difficult task. However, in this instance there is a simple solution. The awareness could be raised by implementing a mandatory acknowledgement tick box at the point of minting (i.e., publishing) and purchase (for example, in marketplaces such as OpenSea), clearly requesting sellers to take responsibility for selling authentic and original works (not those that are pirated or counterfeited) and stipulating that purchasers’ do not have the right to reproduce the underlying work etc.
  This pro-active approach which focuses on informed awareness is  currently seen when carrying out transactions via online banking or visiting a website containing cookies. It makes both the seller and purchaser pause before confirming the financial transaction.
  Furthermore, by separating the tick box and statement out into its own step within the sale and purchasing process, without other items on the webpage to distract, it brings the information directly to the consumer’s attention. Whereas simply having a section on ‘Intellectual Property’ under the lengthy Terms of Use, is insufficient (as many consumers do not read the Terms). This tick box is a proactive action which sellers and purchasers make at the point of sale and purchase, and it is a cheap and easy policy solution which may prevent litigation.

• Embracing the blockchain for the benefit of the art market provides a straightforward mechanism for artists to authenticate their work by providing the buyers with a certificate of authenticity. It can reduce the administrative burden on collective management organisations (CMOs) such DACS and ACS. The Committee may wish to recommend that CMOs such as DACS and ACS take forward the initiative to incorporate blockchain technology into their day-to-day practice to allow for a more streamlined and effective way of dealing with NFT art as has already been done in USA.[3] This will allow artists to be paid directly, rather than directing all transactions through a CMO. This will remove much of the administrative burden and costs which CMOs face.

• It is unclear from the present case law[4], whether NFTs will ‘exhaust’ the distribution right and whether they can be considered as second-hand goods after the first sale. NFTs, due to their TokenID, are akin to physical goods, in the sense that an individual(s) cannot keep the asset and sell it at the same time. Whilst it is possible to keep a copy of the NFT on one’s computer, once the NFT is sold, the copy has no value. This is very different to other digital assets such as MP3 files etc. Therefore, I recommend that the Government reviews the ‘exhaustion doctrine’ under the copyright framework, which is already under review following Brexit, to ensure that there is clarity in the sale of NFTs.
• Marketplaces which facilitate the buying and selling of NFTs should strengthen their terms and conditions because they are currently not robust and do not provide enough protection for consumers. This, alongside a lack of awareness of their rights, causes many users to fall victim to fraud, piracy and counterfeiting. Furthermore, Article 17 of EU’s DSM Directive, which came into force in 2019 (although not adopted by the UK) does not place liability on marketplaces.
  Irrespective of whether UK adopts Article 17 or not, following Brexit, it is imperative that consumers using these marketplaces are better protected. In conjunction with how these marketplaces can raise awareness about IP ownership as outlined above, an acknowledgement tick-box can be adopted, which will lead consumers to make a proactive and informed decision at the point of sale. This can be accomplished by reading a few important statements (summarised from the marketplaces terms and conditions) to acknowledge that consumers understand about ownership of NFTs (based on IP law), data protection, piracy and counterfeiting and risk of being scammed, before progressing to make the purchase.

Q2. What are the potential harms to vulnerable people of NFT speculation?

4. There are a number of harms that NFTs may present. Whilst the harms arising from investment, advertising and finance have been well-documented[5], the risks associated from a lack of understanding of Intellectual Property (IP) laws have not been addressed.

• For example, when someone buys an NFT, they do not automatically own the copyright to the underlying work (i.e., artwork, music etc.) which has been misunderstood by some NFT purchasers.[6] Put simply, a NFT holder does not automatically gain permission to make copies of the work, distribute it or adapt it, amongst others. These rights are reserved for the copyright holder.
• The only mechanism for such rights to be transferred will depend on the terms and conditions attached to the work. Many do not understand this and believe that buying an NFT gives them the rights to the underlying work. This lack of understanding of IP laws and law generally has led to a surge of litigation, mainly emanating from the USA[7].
• Such litigation will eventually reach the UK, leading to a detrimental impact on businesses and consumers alike, unless steps are taken to raise more awareness. The awareness-raising can be done either by a Governmental body such as the UK Intellectual Property Office or could also be carried out by a non-governmental body. 

5. Another risk for individuals and the economy affecting both public and private sectors is the scamming of NFTs, leading to consumers and businesses losing millions of pounds. Once again, there has been much focus on this issue from the perspective of the financial sector[8] – but less so, from a property law point of view.

• Yet, since 2019, a series of decisions from the High Court in England & Wales has recognised crypto-assets and NFTs as a type of personal property.[9] 
• In July 2022, the Law Commission of England & Wales called for reform of property law in recognising crypto-assets including NFTs as a ‘third type’ of personal property, distinct to things in possession and things in action.[10] 

I would strongly recommend that the Government implements this reform to recognise a third type of property law (distinct to things in possession and things in action) as set out by the Law Commission, so that consumers and businesses in the UK are better protected and have clear recourse to compensation.   

Q3. Do Blockchains offer security to British investors?

6. The current law as it exists, does not offer sufficient security to British investors for the reasons outlined below.

• The blockchain is a permanent record of every transaction but it cannot know whether the digital asset/underlying work is ‘original’ (i.e., that it has not been pirated or counterfeited). This means that someone can reproduce another person’s work and upload it to the blockchain, leaving a permanent record of the transaction. This scenario poses security as well privacy concerns for British investors. It is also unclear whether Article 17 (Right to be Forgotten) of General Data Protection Regulation (GDPR) will apply to the blockchain in such circumstances.
• The Right to be Forgotten, introduces a right for individuals to have their personal data erased where it has been processed unlawfully. A request for it to be actioned, can be done verbally or in writing. Although “there is a general belief that that blockchain technology uses anonymous data … that is not really the case”[11] and this legal uncertainty can be "a reason not to use the blockchain”[12] even though the technology presents many benefits. At the same time, cases such as Google Spain[13] demonstrated that data can be ‘forgotten’ or ‘unlinked’ even though it cannot be completely erased.
• Even if ‘forgetting’ were possible through a Court order, it may not be practical. It is counterintuitive to the immutability of the blockchain and would be very costly. Furthermore, in the case of public blockchains open for anyone to join, it is almost impossible to identify a ‘central data controller’ responsible for compliance due to its decentralised nature, which leaves it unclear as to who should deal with the unlinking of the data. This leaves Article 17 and its applicability to blockchain technology unresolved in many aspects and the application of privacy law is of concern.
• Furthermore, the current ‘notice-and-take-down’ procedure which applies to all other products and creative works, cannot apply in the case of blockchains as it is not possible for an item to be ‘taken down’ or indeed ‘erased’ as set out above.
• The Committee might wish to suggest to the Law Commission of England & Wales or the UK Intellectual Property Office that they address this grey area and recommend a way forward to prevent litigation and legal loopholes.

Recommendations for Action

• Implement a mandatory awareness statement at point of minting and purchase to raise consumer understanding and prevent piracy and counterfeiting – reducing future litigation.
• Adopt NFTs as a ‘third type’ of personal property to protect businesses and consumers and provide a clear recourse to compensation.   
• Call for clarity to confirm whether Article 17 of General Data Protection Regulation (GDPR) will apply to the blockchain to prevent costly litigation and business losses.
• Recommend that collective management organisations (CMOs) such as DACS and ACS incorporate blockchain technology into their daily business to streamline artists’ payments and reduce administrative burden.
• Incorporate NFTs into the current Government review of the ‘exhaustion doctrine’ under the copyright framework to ensure that there is clarity in the sale of NFTs.

References

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