NFT and Japanese Regulation
Trias Japan is exploring its localization in Japan and should obey the regulation while keeping innovative. Therefore, Trias Japan actively communicates with people in the block industry. This talk focuses on the compliance of NFT in Japan.
NFT (Non-Fungible Token) is an irreplaceable token issued on the blockchain. In recent years, NFT digital art has attracted great attention. Meanwhile, because NFT is a new concept that has never existed and there are no specific regulations, it looks like staying in a laissez-faire state. In view of the increasing number of deceptive cases, it is necessary for us to learn how are the laws and regulations for NFT formulated in Japan and the regulatory trend.
This time, Y. Kitano of Trias Japan visited the GVA law firm and talked with lawyer Kumagai about the future of NFT.
Note: this passage was first published by Trias Japan. This is the translation.
Original article: https://note.com/triasjapan/n/n95db4cb94ffb
Not completely unregulated
Y. Kitano: Speaking of NFT, Beeple’s Everydays — The First 5000 Days was sold for 7.5 billion yen, which suddenly ignited his popularity. Since then, countless NFT works have been traded. How do Japanese laws treat such NFT works?
Kumagai: if artworks are simply made to NFTs, there is no need for special industry law in many cases. NFT is not a term defined by Japanese law. Therefore, there is no law to directly regulate it.
Y. Kitano: This is a new concept, so I don’t think the laws and regulations have caught up.
Kumagai: Yes. But this does not mean that there are no laws and regulations at all. It is important to determine what the nature of NFT is. For example, if it has the nature of cryptocurrencies such as bitcoin or Ethereum, it will be regulated by the capital settlement law. If it has the functions of payment/remittance, it will be bound by foreign exchange transactions and other regulations stipulated in the banking law. In addition, if the profits of businesses related to NFT are obtained by holding NFT, the NFT will become a securities and will be governed by the financial instruments and trading law. According to the specific use of NFT, there will be some factors that will be trapped by existing laws and regulations, and it will be very important to identify this.
Reg should be right to the point
Y. Kitano: From the current situation of NFT market, many people buy NFT for speculative. Some people think it may be a financial product.
Kumagai: As a work of art, if the price changes when you own it, even if the purchase motivation is speculation, I don’t think it will be a problem in commercial law. However, if NFT is given the function of distributing profits only through holding, it should be regulated by the monetary and commercial code.
Y. Kitano: For example, a platform has launched a mechanism to return the resale profits of some NFT artworks to IP holders. Does this work?
Kumagai: Since it is an internal mechanism of the platform, such a system itself does not contact Japanese law. This is an agreement similar to the “Droit de Suite” recognized by overseas copyright laws such as France. Droit de Suite is a mechanism to return part of the profits to the intellectual property holders during the resale of artworks, but it has not been recognized by the Japanese copyright law. With the emergence of NFT, I think this is a problem worth discussing.
Y. Kitano: It will be interesting if we can achieve this with blockchain, which will be an application scenario of NFT. In addition, some people think that the concept of NFT can be used as the definition of assets in the metaverse of virtual space. When life itself is transferred to virtual space and all assets are expressed in NFT, I think it is no longer within the scope of the current law.
Kumagai: If NFT is distributed in the virtual space and can be exchanged into various things, or as a payment method for receiving certain services, it’s similar to encrypted assets. It is often said that the FSA said in its public comments in 2019 that NFT is not an encrypted asset, which emphasizes the low barrier to market access, but this explanation changes according to individuals and specific use cases. For example, each bank of Japan note has a number. Strictly speaking, each note is different. But people all think that money has no personality and can be replaced. If NFT is treated as a substitute, it may also be judged as a cryptocurrency asset.
Y. Kitano: Anyway, I think it’s necessary to enrich the application scenarios.
Kumagai: That’s right. In this sense, it may be more important to develop guidelines, such as specific regulatory laws applying to each NFT use case, rather than developing a law to jointly regulate NFT. The Japanese cryptocurrency Business Association (JCBA) has just formulated the NFT business guide, but with the accumulation of future cases, there may be similar country-led guides, so that enterprises can enter the industry at ease.
For a better future
Y. Kitano: Another problem with NFT is that NFT can be bought and sold freely on the Internet, but does the ownership of works actually transfer?
Kumagai: In this part, I have no choice but to pay attention to whether the transfer of NFT ownership is connected with the transfer of physical goods in law. If the company providing NFT wallet service is attacked by hackers and the NFT that should have been stored is stolen, I think there are problems such as whether the user compensation is appropriate.
Y. Kitano: The country’s initial position on cryptocurrency assets seems to be to regulate after the incident. Because NFT has a borderless nature, I think NFT issued in Japan may be sold overseas. In this case, what should I pay attention to?
Kumagai: Even if it is legal in Japan, it is not necessarily legal abroad, and vice versa. I think it is necessary to carry out research in advance because countries have different reactions.
Y. Kitano: I see. Trias is currently incorporating the concept of NFT into the blockchain verification system called Triathon to create games related to community incentives. In the future, we plan to provide infrastructure for the development of metaverse, but in any case, we hope that the environment for the healthy development of NFT has been in place, and we will strive to build it. Thank you so much today.
Kumagai: Thank you very much.