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The Singapore Law Gazette

Application of Blockchain-enabled Technology: Regulating Non-fungible Tokens (NFTs) in Singapore

Twelve-year old Benyamin Ahmed recently launched two NFTs and made close to half a million dollars. He is not the only one to benefit from NFTs. The surging popularity of NFTs means that a greater understanding of NFTs would be required and regulators would need to deal with this new asset class in order to safeguard the interests of both buyers and sellers of NFTs. Legal advisors would need to be well-equipped to advise their clients and protect their interests accordingly. This article is an attempt to shed some light on NFTs and discuss some potential regulatory issues surrounding NFTs.

Introduction

NFTs are non-fungible tokens that use predominantly the Ethereum blockchain technology to identify the ownership of digital assets which could be music, videos, images, collectibles, or any other digital files such as in-game equipment or characters.1‘Non-fungible tokens (NFT)’ Ethereum.org <https://ethereum.org/en/nft/> (accessed 26 October 2021). Each token is evidence of ownership of an asset, usually a digital asset, although they are marketed as capable of granting ownership of real world assets as well.2‘Non-fungible tokens (NFT)’ Ethereum.org <https://ethereum.org/en/nft/> (accessed 26 October 2021). The ownership of an NFT is evidenced by an “immutable, cryptographically-secured record on the blockchain” that is meant to be taken as proof by others in the cryptosphere that one is the owner of that underlying asset, which is similar to “a digital certificate of title or stamp of authenticity”.3Louise Williamson and Lauren Rapeport, ‘Non-fungible tokens: at the UK legal and tax frontier’ (31 March 2021) Withersworldwide <https://www.withersworldwide.com/en-gb/nfts-at-the-uk-legal-and-tax-frontier> accessed 25 October 2021. This ownership record can be found on the blockchain, while the digital asset itself is stored on “a non-cryptographically secured, separate server owned by a host platform”.4Louise Williamson and Lauren Rapeport, ‘Non-fungible tokens: at the UK legal and tax frontier’ (31 March 2021) Withersworldwide <https://www.withersworldwide.com/en-gb/nfts-at-the-uk-legal-and-tax-frontier> accessed 25 October 2021. In simpler terms, the NFT is a tokenisation of the rights that might be derived from the art, e.g. a licence to a particular combination. Owning the NFT would be owning the rights encapsulated in the NFT. Collectibles and art NFTs appear to be the most popular categories of NFTs.5Elizabeth Howcroft, ‘NFT sales surge to $10.7 bln in Q3 as crypto asset frenzy hits new highs’ (5 October 2021) <https://www.reuters.com/technology/nft-sales-surge-107-bln-q3-crypto-asset-frenzy-hits-new-highs-2021-10-04/> (accessed 26 October 2021).

Potential Applications of NFTs

NFTs could also become increasingly popular with the development of the metaverse. Broadly speaking, the metaverse is a “vision of an internet-enabled virtual world where people have avatars and interact with digital assets and even corporeal objects with augmented reality”.6Joanna Ossinger, ‘NFTs, Are the Revenue Model for Metaverse, Crypto Veteran Says’ (12 September 2021) Bloomberg <https://www.bloomberg.com/news/articles/2021-09-12/nfts-are-the-revenue-model-for-metaverse-crypto-veteran-says> (accessed 26 October 2021). As the metaverse develops, it is predicted that NFTs would become the revenue model for the metaverse, especially in the realm of digital assets. NFT sales volume surged to US$10.7 billion in the third quarter of 2021, up more than eightfold from the previous quarter.7Elizabeth Howcroft, ‘NFT sales surge to $10.7 bln in Q3 as crypto asset frenzy hits new highs’ (5 October 2021) <https://www.reuters.com/technology/nft-sales-surge-107-bln-q3-crypto-asset-frenzy-hits-new-highs-2021-10-04/> (accessed 26 October 2021). The most expensive reported NFT sale was the work of digital artist, Beeple, entitled “The First 5,000 Days” which was sold at Christie’s for US$69.3 million in March 2021.8Angelica Villa, ‘Beeple NFT Fetches Unprecedented $69.3 M. at Christie’s’ (11 March 2021) ARTnews <https://www.artnews.com/art-news/market/beeple-makes-69-million-1234586424/> (accessed 30 October 2021). Twitter founder Jack Dorsey had also sold his first tweet as an NFT for US$2.9 million.9Taylor Locke, ‘Jack Dorsey sells his first tweet ever as an NFT for over $2.9 million’ (22 March 2021) CNBC <https://www.cnbc.com/2021/03/22/jack-dorsey-sells-his-first-tweet-ever-as-an-nft-for-over-2point9-million.html> (accessed 26 October 2021). The growth of NFTs may be attributed to newfound wealth belonging to the “crypto rich”, i.e. cryptocurrency investors who have benefitted from a steep appreciation in cryptocurrency especially over the past few years. It should be recognised that while NFTs are promising, there are also critics who argue that the bubble surrounding NFTs may eventually burst.10Jemima Kelly, ‘NFTs are the latest get-rich-quick scheme for the cryptosphere’ (17 March 2021) Financial Times <https://www.ft.com/content/2757d760-c29e-4834-8636-7601adbacf47> (accessed 30 October 2021).

It has been suggested that NFTs could one day be used to record anything from ownership of homes to birth certificates.11Tony Gallagher, ‘What Are NFTs And Are They Here To Stay?’ (30 June 2021) Forbes <https://www.forbes.com/sites/forbesfinancecouncil/2021/06/30/what-are-nfts-and-are-they-here-to-stay/?sh=542409072f15> (accessed 30 October 2021). NFTs could take its place as an important aspect of the digital world. The NFT model offers a number of opportunities for innovation, including applications in the decentralised finance (DeFi) space. Therefore, it is increasingly important to understand the legal characterisation of NFTs, including how they are, or may be, regulated and taxed.

NFTs May Facilitate a New Creator Economy

It is anticipated that the biggest use of NFTs would be in the digital content realm. Currently, a content creator publishes their work on a social network and the platform earns money by selling advertisements to the followers of the content creator.

In return, the content creator receives coverage but not necessarily money. NFTs facilitates a new creator economy by attaching ownership to the content.12‘How NFTs are Changing the Creator Economy’ (8 June 2021) Binance Blog <https://www.binance.com/en/blog/421499824684902131/nft/how-nfts-are-changing-the-creator-economy> (accessed 30 October 2021). When the content is sold, the sale proceeds are paid directly to the content creator. If the new owner sells the NFTs, the original creator can automatically receive royalties,13See example Taylor Locke, ‘This 12-year-old coder helped develop an NFT collection that made over $5 million in 3 weeks’ (1 October 2021) CNBC <https://www.cnbc.com/2021/10/01/12-year-old-helped-code-non-fungible-heroes-nfts-that-made-millions.html> (accessed 29 October 2021). provided this has been programmed into the smart contract.14For a better understanding of smart contracts, see Ben Chester Cheong and Harry Kishen, ‘Legal Risks Beneath Blockchain-enabled Smart Contracts’ (January 2021) Singapore Law Gazette (accessed 30 October 2021).

While sceptics can screenshot an NFT artwork and claim they now have the image for free, the analogy that can be drawn from the real world would be that one cannot assert that they are the owner of the “Mona Lisa” by simply buying an imitation of it. It is envisaged that a piece of content gains more value by the number of times it is screenshot and shared.15‘Non-fungible tokens (NFT)’ Ethereum.org <https://ethereum.org/en/nft/> (accessed 26 October 2021). The latest revision to the Singapore Copyright Act16Copyright Act (Cap 63, 2006 Rev Ed). passed on 13 September 2021 now covers the commissioning situation, viz. creators who are commissioned to create photographs, portraits, engravings, sound recordings, or films, will, by default, own the copyright in the works.17Copyright Bill (No 17/2021), s 135. This default position will apply unless the contrary is provided for by contract. This reverses the previous position where the commissioning party would by default own the copyright to such commissioned works. Indeed, this will ensure that copyright continues to reward the creation of works and incentivise creativity.

In effect, the NFT points to the existence of the digital asset on another server, and so there is a separation between the NFT and the asset itself. This leads to questions about the exact nature and value of an NFT. Is it the NFT or the asset itself that holds the value? While an individual holds the NFT which evidences their ownership of the original asset, images of that digital asset, be it an artwork, tweet or basketball dunk by LeBron James,18Cardiff Garcia and Stacey Vanek Smith, ‘The $200k NBA NFT’ (9 March 2021) npr.org <https://www.npr.org/2021/03/09/975450173/the-200k-nba-nft> (accessed 30 October 2021). can be copied infinitely and viewed by anyone on the internet. Hence, for this to work, perhaps, it may be necessary to set conditions for reproduction, similar to the conditions for the reproduction of Singapore currency images.19‘Reproduction of Singapore Currency Images’ Monetary Authority of Singapore <https://www.mas.gov.sg/currency/Using-Images-of-Singapore-Currency> (accessed 28 October 2021). One possibility may be that those who reproduce images of the digital asset would need to include the word “SPECIMEN” diagonally across the reproduced images, yet the key difficulty with this approach would be enforcement.

Problems with NFT Legal Ownership of the Underlying Asset

The legal status of NFTs is not entirely clear. Apart from terms stating otherwise, the digital token created from tokenisation of an underlying asset (whether digital or physical) does not automatically grant legal ownership of the underlying asset by referring to the immutability of the blockchain ledger. For example in the UK, a distributed ledger is not a legally recognised registry such as the HM Land Registry,20Louise Williamson and Lauren Rapeport, ‘Non-fungible tokens: at the UK legal and tax frontier’ (31 March 2021) Withersworldwide <https://www.withersworldwide.com/en-gb/nfts-at-the-uk-legal-and-tax-frontier> accessed 25 October 2021. although there are plans to work towards a distributed ledger of residential title deeds in the UK which would reduce the time taken to complete a typical conveyancing transaction from 22 weeks to less than 10 minutes.21‘Towards a distributed ledger of residential title deeds in the UK’ (July 2020) Mischon de Reya <https://www.mishcon.com/upload/files/HMLR%20White%20Paper.pdf> (accessed 28 October 2021).

The presence of the distributed ledger does not change the fact that the underlying asset for NFTs always exists somewhere else off-chain’.22Sean M Sullivan, ‘What You Don’t Know About NFTs Could Hurt You: Non-Fungible Tokens and the Truth About Digital Asset Ownership’ (24 March 2021) Davis Wright Tremaine LLP <https://www.dwt.com/insights/2021/03/what-are-non-fungible-tokens> (accessed 30 October 2021). When an NFT is purchased, the purchaser is buying the token itself and not the digital asset that is linked to the token. This “link” between the token and the asset does not automatically lead to the transfer of rights or obligations in the asset – that occurs as a matter of contract between the buyer and seller.23Sean M Sullivan, ‘What You Don’t Know About NFTs Could Hurt You: Non-Fungible Tokens and the Truth About Digital Asset Ownership’ (24 March 2021) Davis Wright Tremaine LLP <https://www.dwt.com/insights/2021/03/what-are-non-fungible-tokens> (accessed 30 October 2021). This is where the role of the legal counsel is important to draft the terms of sale of any NFT to safeguard the purchaser’s interest in the digital asset (especially if it involves an exorbitant sum of money). Without the terms of the contract, it would be difficult to sue an individual for breach of contract if only the token and not the digital asset is transferred.

Additionally, as a practical tip, it is important to enquire where the underlying content is hosted. Blockchains are useful as ledgers in tracking transactions but do not work well as a storage or distribution system for digital assets.24Sean M Sullivan, ‘What You Don’t Know About NFTs Could Hurt You: Non-Fungible Tokens and the Truth About Digital Asset Ownership’ (24 March 2021) Davis Wright Tremaine LLP <https://www.dwt.com/insights/2021/03/what-are-non-fungible-tokens> (accessed 30 October 2021). To address this shortcoming, digital assets should be created, as far as possible, with the Interplanetary File System (IPFS) which allows for a greater assurance that the NFT is associated with a piece of content that cannot be changed.25Aaron Frank, ‘How to Embed Trust Into the Foundations of the Internet’ (19 September 2021) Singularity Hub <https://singularityhub.com/2021/09/19/how-to-embed-trust-into-the-foundations-of-the-internet/> (accessed 28 October 2021). Otherwise, the ‘rug pulls’ phenomenon may materialise which may cause substantial losses to the buyer.26Aaron Frank, ‘How to Embed Trust Into the Foundations of the Internet’ (19 September 2021) Singularity Hub <https://singularityhub.com/2021/09/19/how-to-embed-trust-into-the-foundations-of-the-internet/> (accessed 28 October 2021).

Furthermore, the blockchain itself may not be a comprehensive record of ownership as private keys can be transferred off-chain. If these off-chain transactions are not properly recorded on a digital ledger, then it may lead to increased information uncertainty which would be an anathema to those who assert that NFTs could provide a complete solution to establishing ownership.27Balázs Bodó, Daniel Gervais and João Pedro Quintais, ‘Blockchain and smart contracts: the missing link in copyright licensing’ (2018) 26(4) International Journal of Law and Information Technology 311-336. Another cause for concern among regulators is that NFTs allow for anonymous buyers of digital artworks, and this lack of transparency may become a cesspit for money laundering and terrorism financing.28Matthew Long, ‘The New Digital Art Trade Is Ideal for Criminals’ (20 April 2021) Bloomberg Law <https://news.bloomberglaw.com/white-collar-and-criminal-law/the-new-digital-art-trade-is-ideal-for-criminals> (accessed 28 October 2021).

Financial Regulation of NFTs

An underlying asset that is tokenised also exposes the token issuer to different types of regulations. Currently, digital tokens that are deemed to be a capital market product may be subjected to financial regulation. Fungible digital tokens can be broken into three distinct categories, security, currency and utility. NFTs are also capable of the same categorisation. For example, a stablecoin capped at 100 units and pegged 1:1 against S$100 is the same from a regulatory perspective as 100 unique NFTs representing S$100.

While there are currently no specific laws to regulate NFTs in Singapore, the characteristics and purpose of NFTs have to be carefully considered in order not to breach any of the existing regulatory laws set by the Monetary Authority of Singapore (MAS). In this regard, minters of NFTs should clearly define the NFTs once they have been minted. Sports memorabilia NFTs or even Pokemon cards should be defined differently at the minting stage to avoid being classed as NFTs with security designations.

At present, digital tokens and cryptocurrency are not recognised as a form of legal tender under the Currency Act and are therefore not subject to these regulations.29Currency Act (Cap 69, 2002 Rev Ed), ss 2 and 13. Furthermore, it is arguable that the current Payment Services Act (PSA),30Payment Services Act 2019 (No. 2 of 2019). which “regulates cryptocurrency service providers and digital payment tokens, does not apply to NFTs due to the non-fungible nature of NFTs – which only allows an exchange for specific goods”.31Jirapong Sriwat and Soraviya Chasombat, ‘Overview of Non-Fungible Tokens from a Regulatory Perspective’ (October 2021) Nishimura & Asahi <https://www.nishimura.com/en/articles/overview-of-non-fungible-tokens-from-a-regulatory-perspective.html> (accessed 28 October 2021).

Under the PSA, tokens which fall under the scope of “limited purpose digital payment tokens” are exempted from the application of the PSA.32Payment Services Act 2019 (No. 2 of 2019), First Schedule, ss 2(l) and 3. It is arguable that NFTs being non-fungible will fall within the scope of limited purpose digital payment tokens and are therefore exempted from the application of the PSA.

Similarly, in the European Union, the MiCAR regulation33Proposal for a Regulation of the European Parliament and of the Council on Markets in Crypto-assets, and amending Directive (EU) 2019/1937 (the ‘MiCAR Regulation’). defines crypto assets as “a digital representation of value or rights that can be electronically transmitted and stored using distributed ledger technology or similar technology”.34MiCAR, Art 3, para 1, no 2. However, MiCAR is “not intended to apply to crypto assets that are unique and not fungible with other crypto assets, including digital art and collectibles whose value is attributable to the unique characteristics of each crypto asset and the benefit it provides to the crypto asset holder”.35‘NFT – Legal Token Classification’ (22 July 2021) EU Blockchain Observatory and Forum <https://www.eublockchainforum.eu/sites/default/files/research-paper/EUBOF%20-%20NFT%20-%20Token%20Classification%20Latam.pdf> (accessed 28 October 2021). It is thus important to demonstrate the non-fungibility of any NFT on offer, to avoid being considered a security token or cryptocurrency.

Furthermore, NFTs do not fall under the definition of “digital payment tokens” as they are not recognised as an accepted mode of payment for goods and services,36Payment Services Act 2019 (No. 2 of 2019), s 2. hence there is a case to be made that it would not be regulated under the PSA.

In relation to the law on securities, the offer or issuance of digital tokens may be regulated by the MAS provided that such tokens constitute “capital markets products” as defined under the Securities and Futures Act (SFA).37Securities and Futures Act (Cap 289, 2006 Rev Ed), s 2(1) states that: ‘capital markets products include any securities (such as shares, debentures and units in a business trust), units in a collective investment scheme, derivatives contracts (such as derivatives of shares, debentures and units in a business trust), spot foreign exchange contracts for the purposes of leveraged foreign exchange trading, and such other products as MAS may prescribe as capital markets products’. While it may seem that NFTs “can be traded in markets, accumulated speculatively and used as a medium of exchange in limited cases, they are not yet readily exchangeable [and] the relative value of such an NFT in relation to another NFT […] cannot be determined by comparing it to an existing market or equivalent asset”.38‘NFT – Legal Token Classification’ (22 July 2021) EU Blockchain Observatory and Forum <https://www.eublockchainforum.eu/sites/default/files/research-paper/EUBOF%20-%20NFT%20-%20Token%20Classification%20Latam.pdf> (accessed 28 October 2021). Hence, these limiting features do suggest, at least on first blush, that NFTs would not qualify as a capital markets product.

However, it may be possible to argue that NFTs would fall under the definition of a capital markets product if the fractional parts of an NFT are issued (known as F-NFTs).39Jinia Shawdagor, ‘What are Fractionalised NFTs?’ (29 October 2021) CryptoVantage <https://www.cryptovantage.com/non-fungible-tokens/what-are-fractionalized-nfts/> (accessed 30 October 2021). Fractional NFTs are not unique and would be fungible.40Mehab Qureshi, ‘Fractionalised NFTs: Know Your NFTs? You Can Own One Too! At Least a Part of It’ (21 September 2021) The Quint <https://www.thequint.com/explainers/what-are-fractionalized-nfts-how-do-they-work-who-can-benefit> (accessed 29 October 2021). An example would be a shopping mall fractionalised into multiple NFTs to allow various people to invest in the F-NFTs. Hence, if an F-NFT is determined to be a type of capital markets product due to its characteristics or purpose, the offering of such F-NFTs would be subject to the SFA with respect to the offering of securities and the licensing requirements for dealing in securities. The US Securities Exchange Commission has stated that issuing F-NFTs would be considered investment contracts under US securities law.41Samuel Haig, ‘SEC’s ‘Crypto Mom’ warns selling fractionalized NFTs could break the law’ (26 March 2021) <https://cointelegraph.com/news/sec-s-crypto-mom-warns-selling-fractionalized-nfts-could-break-the-law> (accessed 26 November 2021).

Be that as it may, it remains to be seen how NFTs would be specifically regulated in Singapore from a financial regulatory standpoint.

Taxation of NFTs

Unlike the US42Charles Kolstad and Diana Wierbicki et al, ‘NFTs: Collectibles or not?’ (22 September 2021) Withersworldwide <https://www.withersworldwide.com/en-gb/insight/nfts-collectibles-or-not> (accessed 25 October 2021). and UK, Singapore does not impose a tax on capital gains.43Joyce Beebe, ‘The Uncharted Territory of Taxing Non-Fungible Tokens (NFTS)’ (8 June 2021) Baker Institute Blog <https://blog.bakerinstitute.org/2021/06/08/the-uncharted-territory-of-taxing-non-fungible-tokens-nfts/> (accessed 25 October 2021). In the US, NFTs are considered as “collectibles” where income from trading NFTs are subject to a 28 per cent tax44Internal Revenue Code of 1986, s 1(h)(4). on trading gains.45Amber Gray-Fenner, ‘NFTs: Why The Next Big Thing In The Digital Economy Is A Cash Cow For The IRS’ (10 August 2021) Forbes <https://www.forbes.com/sites/ambergray-fenner/2021/08/10/nfts-why-the-next-big-thing-in-the-digital-economy-is-a-cash-cow-for-the-irs/?sh=39aa085b4545> (accessed 20 October 2021). South Korea, for instance, has said that they will not be taxing NFTs as yet.46Danny Park, ‘South Korea will tax crypto but not NFTs’ (7 October 2021) forkast <https://forkast.news/headlines/south-korea-tax-crypto-not-nfts/> (accessed 29 October 2021). In the UK, NFTs may be treated as taxable asset for capital gains tax and inheritance tax purposes but there are no explicit guidance as yet.47Louise Williamson and Lauren Rapeport, ‘Non-fungible tokens: at the UK legal and tax frontier’ (31 March 2021) Withersworldwide <https://www.withersworldwide.com/en-gb/nfts-at-the-uk-legal-and-tax-frontier> accessed 25 October 2021.

On the issue of taxing digital tokens in Singapore, the Inland Revenue Authority of Singapore (IRAS) has issued two guides on the topic, one for goods and services tax (GST) in November 2019, and the other for income tax in April 2020. Where GST is concerned, digital payment tokens are no longer subject to GST from 1 January 2020.48Desmond Teo, ‘Key tax considerations when trasacting in digital tokens’ (31 August 2021) EY <https://www.ey.com/en_sg/you-and-the-taxman/key-tax-considerations-when-transacting-in-digital-tokens> (accessed 30 October 2021). However, to be a classified as a digital payment token for GST purposes, a token has to be fungible, among other things. This clearly takes the NFT out of consideration.49IRAS e-Tax Guide – GST: Digital Payment Tokens (19 November 2019) IRAS <https://www.iras.gov.sg/media/docs/default-source/e-tax/e-tax-guide_gst_digital-payment-tokens.pdf?sfvrsn=da8cafda_0> (accessed 29 October 2021), para 2.2. Instead IRAS has said that the “transfer of NFTs such as those that represent ownership rights to specific property (e.g. intellectual property, digital artwork) will remain a taxable supply of services as such tokens are not fully interchangeable for use as consideration”.50IRAS e-Tax Guide – GST: Digital Payment Tokens (19 November 2019) IRAS <https://www.iras.gov.sg/media/docs/default-source/e-tax/e-tax-guide_gst_digital-payment-tokens.pdf?sfvrsn=da8cafda_0> (accessed 29 October 2021), para 5.5.

Where income tax is concerned, the guide does not specifically cover NFTs.51IRAS e-Tax Guide – Income Tax Treatment of Digital Tokens (17 April 2020) IRAS <https://www.iras.gov.sg/media/docs/default-source/e-tax/etaxguide_cit_income-tax-treatment-of-digital-tokens.pdf?sfvrsn=8003d133_0> (accessed 29 October 2021). It only covers payment, utility and security tokens. Purchases and sales of these tokens would be subject to scrutiny to determine whether any gains or profits made out of their realisation should be taxed as income or tax-free as capital.52IRAS e-Tax Guide – Income Tax Treatment of Digital Tokens (17 April 2020) IRAS <https://www.iras.gov.sg/media/docs/default-source/e-tax/etaxguide_cit_income-tax-treatment-of-digital-tokens.pdf?sfvrsn=8003d133_0> (accessed 29 October 2021). From the respective definitions, it would seem that NFTs do not fall under any of these definitions.53IRAS e-Tax Guide – Income Tax Treatment of Digital Tokens (17 April 2020) IRAS <https://www.iras.gov.sg/media/docs/default-source/e-tax/etaxguide_cit_income-tax-treatment-of-digital-tokens.pdf?sfvrsn=8003d133_0> (accessed 29 October 2021). However, if a company creates and sells NFTs tied to an underlying asset, it would seem that this would be a normal sale transaction (of the underlying asset) and subject to corporate income tax. Yet, there remains very difficult questions with the valuation of NFTs and the attribution of profits.

IRAS has not explicitly dealt with the tax treatment for NFTs. However, there are conceptual issues where taxation of NFTs are concerned. If a NFT is sold, the following questions would need to be considered to decide on the tax treatment. What exactly is being sold and why? Is it the underlying asset, is it certain limited rights in the underlying asset, or are such rights so limited that the asset being sold amounts to no more than the NFT itself? Income taxes, GST and/or stamp duties may be relevant depending on the answers.54‘Non Fungible Tokens: The Global Legal Impact’ (June 2021) Clifford Chance <https://www.cliffordchance.com/content/dam/cliffordchance/briefings/2021/06/non-fungible-tokens-the-global-legal-impact.pdf> (accessed 29 October 2021).

Bearing in mind that while there are no capital gains taxes in Singapore, other countries do generally impose taxes on capital gains. Hence, other cross-border taxation issues would include the following questions. Which jurisdictions would get to claim taxing rights? Are NFTs located where the beneficial owner of the NFT is resident, as is generally the approach taken with respect to cryptocurrencies, or might they be located in the jurisdiction of the underlying asset (and where would that be if the underlying asset itself is digital)?55‘Non Fungible Tokens: The Global Legal Impact’ (June 2021) Clifford Chance <https://www.cliffordchance.com/content/dam/cliffordchance/briefings/2021/06/non-fungible-tokens-the-global-legal-impact.pdf> (accessed 29 October 2021). The UK tax authority’s view is that bitcoin and similar fungible tokens will be located where the beneficial owner of the token is resident.56Natasha Oakshett, Lauren Rapreport and Ed Cubitt, ‘Taxation of cryptoassets: location, location, location’ (21 September 2021) Withersworldwide <https://www.withersworldwide.com/en-gb/insight/taxation-of-cryptoassets-location-location-location> (accessed 30 October 2021). It seems plausible to assume that the same principle could apply to NFTs representing digital assets. However, given that the location of the NFT’s underlying asset (if referred to physical assets) can be identified (unlike a bitcoin), it remains to be seen if the beneficial owner approach would be applied to NFTs.

Intellectual Property of NFTs

As alluded to earlier, there is a bifurcation of an NFT and the underlying asset.57Dinusha Mendis, ‘When you buy an NFT, you don’t completely own it – here’s why’ (24 August 2021) The Conversation <https://theconversation.com/when-you-buy-an-nft-you-dont-completely-own-it-heres-why-166445> (accessed 29 October 2021). An example would be Jack Dorsey’s original tweet which was auctioned on the “Valuables platform”.58Stu Robarts, ‘You Can Now Buy Jack Dorsey’s Original Tweet’ (6 March 2021) ScreenRant <https://screenrant.com/jack-dorsey-selling-first-tweet-nft/> (accessed 30 October 2021). According to the “Valuables FAQ”, owning a tweet means purchasing a “digital certificate of that tweet”, which is the NFT. 59Valuables FAQ <https://docs.google.com/document/d/1kBx-HXY8ow_7bElsJZ6Sk3r2V9cQjSRdWFyKCUXZtAs/edit> (accessed 30 October 2021). The Valuables FAQ makes it clear that “these tweets are purely collectibles and they do not confer copyright or commercial rights to the buyer”.60Valuables FAQ <https://docs.google.com/document/d/1kBx-HXY8ow_7bElsJZ6Sk3r2V9cQjSRdWFyKCUXZtAs/edit> (accessed 30 October 2021).

What this means is that even though the buyer of Jack Dorsey’s tweet may have spent millions of dollars on the NFT, the buyer cannot use the tweet itself (e.g. by printing it on a shirt) without permission, as the copyright would still be owned by Twitter and Jack Dorsey.61Will Garton and Farah Mukaddam, ‘NFTs and Intellectual Property Rights’ (October 2021) Norton Rose Fulbright <https://www.nortonrosefulbright.com/en/knowledge/publications/1a1abb9f/nfts-and-intellectual-property-rights> (accessed 30 October 2021). Ownership of an NFT does not automatically transfer ownership rights in the underlying asset. Be that as it may, it would be possible for the NFT seller to transfer those intellectual property rights to the buyer. However, there must be express written terms either in the smart contract62For a better understanding of smart contracts, see Ben Chester Cheong and Harry Kishen, ‘Legal Risks Beneath Blockchain-enabled Smart Contracts’ (January 2021) Singapore Law Gazette (accessed 30 October 2021).https://lawgazette.com.sg/feature/legal-risks-beneath-blockchain-enabled-smart-contracts or elsewhere. Otherwise, assignment of the intellectual property would not automatically occur on the sale of an NFT.63Melvin Pang, ‘Copyright in Singapore broken down and explained’ (9 April 2019) Asia Law Network <https://learn.asialawnetwork.com/2019/04/09/copyright-in-singapore-broken-down-and-explained/> (accessed 29 October 2021).

Conclusion

There are complex legal issues and risks that NFTs raise. No one knows exactly if NFTs would thrive into the future or fade into obscurity as a fad. It may be argued that if the metaverse materialises, then there could be a strong case that NFTs may well take off. It is recommended that NFT buyers make use of an institutional cryptocurrency custody service to protect their NFTs. In a decentralised space, two questions arise if the private key to the token is lost, first, what would happen to the original asset, and second, what remedies would the token holder have? On the other end, what if the server which stores the underlying asset, e.g. a digital artwork, disappears or is hacked? Does this mean that the NFT becomes worthless to the holder?

One explanation for the current hype of NFTs could be the restlessness caused by COVID-19 and the increased dependence on the virtual world for entertainment. But that perhaps is just a minor driving force as the long-term success of NFTs would very much depend on the development of the metaverse. In the metaverse, it is envisaged that owning digital art or other digital assets through NFTs could be much the same as owning a physical collection of art or collectibles. Regulation would need to be developed to deal with NFTs if it gains widespread adoption. Lawyers will similarly need to be familiar with this blockchain asset class in order to competently advise their clients (be it content creators, buyers or sellers).

The author is grateful to an anonymous peer reviewer for insightful comments provided to improve the flow of the article.

Endnotes

Endnotes
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Lecturer of Law
Singapore University of Social Sciences
E-mail: [email protected]

Ben Chester Cheong is a full-time Lecturer of Law at the Singapore University of Social Sciences. He holds a LLM from the University of Cambridge, a LLB (1st Class Hons) from the University of Exeter, and placed 3rd out of 664 candidates in the Singapore Bar Exams (Part B). He is admitted to practise law in both England & Wales and Singapore, and also serves as an Of Counsel in the Financial Services (Regulatory) Practice at RHTLaw Asia LLP.