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PAIL® Solicitors are NFT specialist lawyers focused on blockchain projects. For a consultation with us use the above form or call peter on 020 7305-7491 or email petert@pailsolicitors.co.uk.

How have other UK laws supported the trade of NFTs and dealt with related disputes?

While there is an inadequacy of clear laws governing NFTs and other emerging tech-based innovations, the UK government has ensured that emerging issues are duly administered through the available laws. Being a learning process, the FCA and the UK courts are also looking to courts outside their jurisdiction to determine various legal issues relating to NFTs. This is evidenced by the interest in the continued application of the Howey standards to define the legal status of tokens under corporate and property law. 

HOWEVER, the UK court clarified UK case law in the cases of AA v Persons Unknown [2019] EWHC 3556 (Comm) and National Provisional Bank v Ainsworth on whether Crypto-assets, including NFTs, qualify as property. The court held that these digital tokens had gained the status of property. They are definable, identifiable by third parties, capable of assumption by third parties, and have some degree of permanence.

With respect to statute laws and regulations broadly whether buying and selling an NFT is regulated activity depends on whether it is classified by the authorities as an eMoney or Securities Token. 

Under the Financial Services and Markets Act (FSMA) 2000, all financial activities within the UK must be regulated by the Financial Conduct Authority, and to be regulated, the FCA or the Prudential Regulation Authority (PRA) must authorise your business (including not for profit and sole traders). 

NFTs fall within the regulatory category of Crypto Assets. As of January 2020, all Crypto Assets activity falls under The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 as amended by The Money Laundering and Terrorist Financing (Amendment) Regulations 2019.

The pertinent legal framework includes but is not limited to: UK Financial Conduct Authority (FCA) - PS19/22 FCA Guidance on Cryptoassets Feedback and Final Guidance to CP 19/3; UK Perimeter Guidance chapter (PERG 2); UK Financial Services and Markets Act 2000 (FSMA) (Regulated Activities) Order 2001; EU Markets in Financial Instruments Regulations 2018; UK Cryptoasset Taskforce Report; and  UK Her Majesty's Revenue and Customs (HMRC) – Crypto-assets Manual.

In addition to the above, there are a plethora of related laws dealing with issues such as privacy and data protection, terrorist financing and anti-money laundering laws, consumer protection, intellectual property rights, and the rights of children dealing in NFTs, as provided for under the Children's Online Privacy Protection Act (COPPA). When it comes to dispute resolution, most Marketplaces direct that any arising disputes should be dealt with through arbitration. A good example is the NBA Top Shot Marketplace which has an arbitration clause in its terms and conditions.

Despite the existence of these laws and dispute resolution mechanisms, businesses and individuals are bound to encounter risks such as:

1. Fake traders who are out to exploit the unknowing individual

2. Scammers and hackers who use security loopholes and set up viruses that drain digital wallets

3. Legitimate buyers and sellers who are unaware that their NFT project is potentially illegal because a large number of people are engaging in the same unlawful practice on well-known marketplaces

Most notably, as of 06 January 2021, there is a total ban on the sale of crypto-based derivatives and exchange-traded notes to consumers in the UK. The changes were proposed back in October 2020 by the FCA. A derivative is any complex type of trading of an underlying asset, including futures contracts, forwards, options, and swaps. Any NFT linked to smart derivative contracts is prohibited from being sold to consumers. Therefore any NFTs being sold on Opensea or any other marketplace related to arbitraging fluctuating prices or different types of derivative activity would be unlawful.

Action

These risks in NFTs make it essential to seek specialist legal advice when dealing with NFTs, Smart Contracts and Smart Derivative Contracts. PAIL Solicitors have an enhanced understanding of the law, digital I.P., digital technologies and digital media. We can support you by increasing your knowledge of the market space and the legal implications of trading in NFTs, actively facilitating your transactions, and helping you in dispute resolution relating to your rights as an NFT dealer.