Realistically, whether you are an investor, a creator, an influencer, or even an entertainment company, you’ll definitely find this article helpful as we explore some of the legal aspects of NFTs.
We shall examine the following subheadings;
- NFTs- What Are They?
- The Rise of NFTs.
- Intellectual Property Rights in NFTs.
- Data Protection Laws.
- Recognizing Crypto Currencies and Other Digital Assets as financial assets in Nigeria.
- Conclusion.
NFTS- WHAT ARE THEY?
NFT stands for non-fungible token. Non-fungible means non-interchangeable. Unlike the way one US Dollar is exchangeable for another US Dollar or one Bitcoin is the same as another Bitcoin, each NFT and its corresponding token that holds the record of value is unique.
An NFT is a digital collectible asset such as a piece of art or a trading card (or something even more at home on the internet such as a meme or a tweet) that provides a record of its ownership and authenticity and thus allows it to be sold and collected. Because they model the scarcity and uniqueness of traditional art works, they are also quickly becoming an investment vehicle. For instance, the Twitter founder’s first entry on his social media network on March 21, 2006 at 2:50 PM was sold for over $2 Million. That entry was simply a tweet saying “just setting up my twttr”. Yes, that tweet was sold for $2 Million.
An NFT can be in the form of an artwork, a song, a video, a meme etc, and they are stored and traded on the Blockchain. Hence, NFTs are stored digitally and regarded as a digital asset like crypto currencies. Very unlike the day to day physical trading of arts, NFT trading is carried out on places called NFT Marketplace, created and recognized digitally for such purpose.
THE RISE OF NFTS
Prior to the use of NFTs, digital creators often faced limitations on their revenue because many copies of their works can easily be made and distributed throughout the internet without loss of quality. However, with NFTs and the ERC-721 token standard, this creates a generation of unique and finite tokenized versions of the digital creative works.
Utilizing technology, NFT creators can now set both the sales price and the number of replicas of their digital creative work that can be in existence, hence creating scarcity.
This tokenized protection of assets increases the attraction of digital creative assets and spurs its creation. No wonder NFTs boomed in the past two years as most of the world was confined to their homes during the Covid-19 pandemic, and the internet became their only avenue for creation, investment and entertainment.
This nascent sphere of digital asset has met with huge sales. In the second quarter of 2021, NFT sales surged to $25.1 Billion as compared to $13.7 Million in the first half of 2020. Impressive? Yes!
Well in 2022, the NFT market generated $24.7 Billion, a minor fall from the realized figure in 2021. And by the end of 2023, NFT trade volume is projected to reach $22.69 Billion, according to the latest Balthazar NFT Marketplace update.
It is interest stimulating because a vast population of Nigeria know a thing or two about crypto currencies and other digital assets. In fact, a survey conducted by Finder in 2021 revealed that Nigeria ranked 6th amongst 20 countries in the world that have adopted Non-Fungible Tokens (“NFTs”).
The influx of Billions of Dollars into NFTs begs the question; what are the legal implications to consider? Does the Nigeria Law recognize these legal implications?
INTELLECTUAL PROPERTY RIGHTS IN NFTS
Not surprisingly, you may have been involved in buying, creating or marketing of NFTs or perhaps you look forward to being involved. Whatever your position, it’s imperative to bring to our attention that, many purchasers of NFTs are unfamiliar with the legal restrictions relating to copyrighted work. This leads to potential infringement liability. In Nigeria, the Copyright Act Cap. 28 Laws of the Federation of Nigeria, 2004, principally to protects copyrights in Nigeria, but due to the novel and unique nature of NFTs and tokenization, its provisions can be argued to be insufficient for this purpose as the blockchain was not envisaged at the time of its enactment.
There is need for education in this aspect of Intellectual property right because, a common misconception of an NFT purchaser is that he has purchased the underlying art that is associated with the NFT. Meanwhile, in reality when you buy an NFT, you are only buying one particular version of the digital work itself, a copy of the original so to speak, and a collection of codes known as metadata. This metadata is saved on the Blockchain and contains information about where the original work is located and who owns that particular original version of the work. In essence, you do not entirely own the digital work purchased only a version of it.
This is very unlike when you buy a pair of NIKE shoe for instance, you own both shoes in the pair and no one shares the right foot or left foot with you. But would you have the right to make multiple copies of the branded shoe? Absolutely NOT! Why? That would be an infringement on their copyright and trademark possibly.
In the same vein, when you buy a version of an NFT, say BAYC (an NFT collection of animated Apes), you have no right in heaven nor on earth to unlawfully make copies of it nor sell and profit from those copies. Neither do you, the purchaser have the right to display it publicly and reap profits from it.
Henceforward, only the original creator has the exclusive right to copy, distribute, modify, publicly perform, and publicly display the art.
Therefore, the NFT purchaser typically only receives the token and the right to use the copyrighted art associated with the NFT for personal use.
Therefore, the NFT creator should equally be mindful of the license terms of a marketplace to avoid situations where the creator unknowingly gives more rights to a purchaser than intended.
To avoid legal liabilities, the NFT purchaser is advised not to buy into artistic works that are already an infringement on the copyright of another.
DATA PROTECTION LAWS
In Nigeria as in some other jurisdictions, there are laws set in place to protect data.
In Hong Kong for example, the Hong Kong Personal Data (Privacy) Ordinance gives individuals the right to remove or correct their personal data.
In Nigeria, the National Information Technology Development Agency (NITDA) issued the Nigeria Data Protection Regulation (NDPR) in 2019 which was the principal regulation and framework for data protection in Nigeria, until the recent passing of the Nigerian Data Protection Act, 2023.
However, because Blockchain and data utility are a nascent area in the legal system in Nigeria, there has been no many use cases.
It is imperative that we be put in the know that, with the recent influx of Nigerians into NFT and Blockchain technology, more opportunities will emerge in the future for the need to have legal backing in utilizing these technologies.
Not just Nigeria only, Parliaments and lawmakers around the globe are finding solutions to embed NFTs into a modern legal framework. Privacy laws must be obeyed even by latest technology. Therefore, NFTs that contain personal information may violate Nigeria’s current data protection law viz: Nigeria Data Protection Act, 2023.
RECOGNIZING CRYTO CURRENCIES AND OTHER DIGITAL ASSETS AS FINANCIAL ASSETS IN NIGERIA
Despite the rapid growth and obvious adoption of crypto currencies by a good number of Nigerians, the Central Bank of Nigeria sometime in February 2021, placed a restriction on crypto currency transactions in the nation by banks and also placed pecuniary sanctions accordingly, a decision it said was due to lack of proper regulation and the currency being prone to financial crimes. Recall also that sometime in 2021, the Federal Government placed a ban on twitter operation in Nigeria and of course, thankfully, the ban was lifted after seven months on January 13, 2022.
It is not in doubt that restrictions on crypto currency transactions and the ban of Twitter in Nigeria crippled foreign direct investment in the Fin‑tech industry and adversely impacted a lot of young Nigerians earning a living from the sector.
While the Twitter ban is no more, rigid restrictions on crypto currencies in Nigeria still persist. This begs the question: will Nigeria ever recognize crypto currencies and other digital assets as financial assets in the country?
What does it mean to recognize a currency as a financial asset in a country?
Financial assets are non-physical assets that have contractual value. For example, CDS, Stocks, Cash, Bonds e.t.c. A financial asset is thus a liquid asset. Unlike land, property, commodities, or other tangible physical assets, financial assets do not necessarily have inherent physical worth or even a physical form.
Notably, what is recognized as a financial asset in Nigeria may not be recognized as such in the U.S.A In essence, each legal jurisdiction determines what amounts to financial assets.
The Central Bank of Nigeria (CBN) however declared that its decision to restrict crypto currency transactions in Nigeria by banks and the accruable sanctions for default thereto, was due to lack of proper regulation and proneness to financial crimes. Thus, the CBN might reverse its decision if “proper” regulations are laid down and relevant agencies empowered by the enabling law to enforce those regulations.
Has Nigeria taken any step on making regulations to govern crypto currencies and digital assets?
The writer answers in the affirmative. This is because, undaunted by the CBN’s prohibition, the Securities and Exchange Commission (SEC) finally published new regulations titled “Rules on Issuance, Offering Platforms and Custody of Digital Assets” (the “Rules”) on 11th May, 2022. The Rules is enriched with 5 different yet distinct parts viz;
PART A – Rules on Issuance of Digital Assets as Securities.
PART B – Rules on Registration Requirements for Digital Assets Offering Platforms (DAOPs).
PART C – Rules on Registration Requirements for Digital Asset Custodians (DACs).
PART D– Rules on Virtual Assets Service Providers (VASPs).
PART E– Rules on Digital Assets Exchange (DAX).
This nascent yet timely innovation by the SEC is highly commendable and if enforced accordingly will stem a new order of according crypto currencies and other digital assets like NFTs more recognition and adoption in Nigeria.
The writer believes that the recent galvanized push of the e-Naira as a Central Bank Digital Currency (CBDC) by the Federal Government and its seemingly adoption and use by Nigerians is one of the ticketed moves to recognize crypto currencies and digital assets as financial assets in Nigeria. The e-Naira in its entirety is a digital asset. Therefore, if e-Naira became acceptable as legal tender, one would expect other digital assets to share the same fate eventually.
Notably, a report by Nigerian-based masthead Punch Newspapers on December 18, 2022 following an interview with House of Representatives Committee on Capital Markets’ Chairman, Babangida Ibrahim stated that if the Investments and Securities Act 2007 (Amendment) Bill is signed into law it would allow Securities and Exchange Commission (SEC) to “recognize crypto currency and other digital funds as capital for investment.” This of course will be appreciated by many Nigerians and foreign investors alike.
CONCLUSION
Despite the legal issues involved with NFTs canvassed above, NFTs will continue to strongly influence a transition to a more digital world. It is clear that NFTs are here to stay.
While digital creators are reaping benefits from their work since their work can imbue physical properties like scarcity, uniqueness, and proof of ownership, investors, influencers and entertainment companies are benefiting from the intrinsic value because of their cultural significance. It’s a win-win on both ends.
As the NFT market continues to bubble with significant infrastructure, resulting in crypto adoption, so do the legal and regulatory issues.
The recent regulatory dance moves by the Securities and Exchange Commission can only mean one thing: that crypto currencies and other digital assets like NFTs aren’t illegal in Nigeria. In fact, in the unreported case of CBN GOVERNOR V. RISE VEST TECHNOLOGIES LTD &ORS (Suit No. FHC/ABJ/CS/822/2021, were the Court posited that the CBN failed to provide any law showing that it is illegal to deal in crypto currency in Nigeria, adding that the CBN circular referenced as BSD/DIR/PUB/LAB/014/001 of February 5, 2021, is not a law.
Justice Taiwo O. Taiwo in his judgment held that the CBN could not rely on a mere circular to freeze the bank accounts of a company using its accounts to trade in crypto currency.
Arguably, the CBN might reverse its decision on ban of local banks partaking in crypto currencies transactions if there are “proper” regulations and relevant agencies empowered by the enabling law to enforce those regulations.
The ball is therefore in the court of the Legislature to make legislation in addition to the “SEC Rules” to regulate digital assets on the blockchain in Nigeria, or the CBN can be creative and follow the lead of the Securities and Exchange Commission in recognizing digital assets as tradable commodities, making regulation to that effect and also, the Federal Inland Revenue Service (FIRS) who have through the Finance Act, 2023 been empowered to collect 10% tax on income made from crypto currencies and other digital assets like NFTs. This will create room for the financial industry in Nigeria to grow at a more rapid pace, and keep up with global trends just as countries like El Salvador with a much smaller economy and of course, our neighboring country, Central African Republic have recognized the crypto currency – Bitcoin, as legal tender in their respective jurisdictions.
REFRENCES
- Rules on Issuance, Offering Platforms and Custody of Digital Assets, 2022.
- https://cointelegraph.com/news/nigeria-set-to-pass-bill-recognizing-bitcoin-and-cryptocurrencies
- https://punchng.com/fgs-ban-on-crypto-twitter-crippled-nigerias-fdi-report/
- The unreported case of CBN Governor v. Rise West Technologies Ltd & Ors (Suit No. FHC/ABJ/CS/822/2021).
- https://www.investopedia.com/terms/f/financialasset.asp
SAMUEL IYOBOSA EBUGHE, ESQ
