In brief - With the rise of Web3 technologies, we look at legal considerations around the NFT marketplace and the risk of money laundering, ownership of digital land and other digital assets, and the question of jurisdiction of a decentralised internet.
Web3, no it is not the access code to Spiderman's lair, it's the next evolution of the internet.
The internet, as we know it, is mostly Web 2.0. Most of the websites we have used since 2004 would be Web 2.0. The key characteristic of a Web 2.0 site is user-generated content.
In 2014, Gavin Wood, a co-founder of Ethereum, coined the term 'Web 3.0' and described it as an internet which is truly decentralised. The major aim of it being to give back internet power to the users. In order to achieve this, Web3 makes use of blockchain and cryptocurrency technology to create a form of ownership that is 'democratic'.
It is claimed that Web3 is the next evolution of the internet. An internet where there are no algorithms ordering the likelihood of websites for you, where Amazon is not listed above a small boutique dress shop, and where blockchain is key.
Web3 was just a concept for a number of years, but in the past eighteen months there has been rapid uptake and growth in Web3 technologies such as NFTs and cryptocurrency. Web3 builds off current Web 2.0 with added functionality (Web 2.0 is focused on read-write, Web3 is read-write-own or read-write-execute). Web3 is here, but not yet mainstream.
Here are four legal considerations we should be alive to as the landscape of the internet changes:
1. NFTs - ownership and licensing
A non-fungible token is a digital image owned by the token holder. There are numerous legal issues around NFTs starting with copyright, licensing, and money laundering to name a few.
In a virtual land where there is little regulation and an image created by someone on their computer can be sold for large sums of money ('The Merge' reportedly sold for $91.8 million in 2021 and 'Everydays: The First 5000 Days' for $69.3 million) there is little regard for the classic rights of copyright and trademarks. There is often a strange tension in NFTs where 'ownership' of the token represents absolute ownership, but the content of the token may not be yours to own.
It is inevitable that there will be extensive growing pains with NFTs as IP ownership and licensing conventions in this space are bedded down. As ever, a creator of an NFT must ensure that they are entitled to use the images they are creating and then licence them correctly.
Working in the NFT marketplace, participants must continue to keep regulatory issues in mind, including relevant securities laws and AML/CTF regulations.
2. Money laundering
A US Department of Treasury report, Study of the Facilitation of Money Laundering and Terror Finance Through the Trade in Works of Art, found that in the first three months of 2021, the market for NFTs generated $1.5 billion in trading, representing 1/20th of the entire art market in the US.
The Treasury Department noted that NFTs can be used to self-launder funds by transacting with themselves to create a record of sales on the blockchain. It is clear that NFTs and any digital asset of a similar kind are highly susceptible to money laundering.
Australia's Anti-Money Laundering legislation defines 'property' to mean 'any legal or equitable estate or interest in real or personal property, including a contingent or prospective one, but does not include money or digital currency.' (Emphasis added) It remains unclear how NFTs are viewed in Australia, but it would seem, for present purposes, that they are not 'property' for the purpose of Anti-Money Laundering legislation.
3. Digital land ownership and digital assets
NFT real estate is a digital plot of land which exists in an online or virtual world. The concept of buying virtual land is a strange one, but it exists and there are record sales in the Metaverse for NFT real estate, as was reported in The Wall Street Journal Metaverse Real Estate Piles Up Record Sales in Sandbox and Other Virtual Realms in November 2021.
But can virtual land be bequeathed? Yes, virtual land, cryptocurrency and NFTs are treated like any asset (as personal property) and can be specifically bequeathed in a Will or will otherwise form part of the residue of the estate. An issue for such digital assets is ensuring there is sufficient information available to the executors and beneficiaries to identify, access and transfer the assets. The number of stories about lost passwords thus nullifying the value of the purported asset are numerous and legendary (See The New York Times article Lost Passwords Lock Millionaires Out of Their Bitcoin Fortunes).
Who has control of a decentralised internet? What laws apply and to whom? If the blockchain spans multiple jurisdictions, will that mean laws from numerous countries apply? Which law takes priority? (The tightest laws? Or the laws with the largest penalty?)
There are no answers, only questions at this point.
This will be a key issue and area in which we expect the laws will continue to be developed in the coming years.
This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2023.