During a sale at Christie’s on March 11, 2021, a digital work by American artist Beeple sold for $69.3 million and brought non-fungible tokens or NFTs (non-fungible tokens) to the forefront of the international scene.
These digital certificates of authenticity inserted within the Blockchain technology allow the sale of virtual works by ensuring the control of the copyright to the owner, as well as the traceability of transactions.
The term “NFT” therefore refers to a dematerialized cryptographic token, unique and non-interchangeable, with its characteristics and value. This unforgeable token can represent a physical or digital asset, such as a tweet for example, whose certificate of authenticity is sealed in the ERC (Ethereum Request for Comment) blockchain.
After the beginnings of 2017 and the craze around crypto kitties, which allowed to buy and sell virtual cats, (read Cryptochatons panic the Ethereum blockchain), the world of luxury has now seized this technology to guarantee the authenticity of a product and avoid counterfeits (Aura) while facilitating and securing its possible resale. Art is not left out with record sales such as the Nyan Cat for 600,000 USD, tweets, as well as game cards or sports with the Paris Saint-Germain who has just joined forces with the Parisian artist Ludo to launch a series of NFT this weekend.
But how does NFT work and what legal rules apply to these tokens?
Let’s give a look to the French legal framework, for example: to date, NFTs are not subject to any specific regulations.
However, the system resulting from the PACTE law supplementing order no. 2014-559 of May 30, 2014, on participatory financing, has validated the use of the blockchain by recognizing the shared electronic recording device (DEEP) and the character of intangible property related to the tokens.
NFTs are above all digital assets subject to the provisions of Article 86 of the PACTE Act of May 22, 2019, which created Article L. 54-10-1 of the Monetary and Financial Code (CMF). The latter defines a digital asset as follows: “Any digital representation of value that is not issued or guaranteed by a central bank or by a public authority, that is not necessarily attached to a legal tender and that does not have the legal status of a currency, but that is accepted by natural or legal persons as a means of exchange and that can be transferred, stored or exchanged electronically.”
These tokens are also defined by Article L. 552-2 of the CMF: “any intangible asset representing, in digital form, one or more rights that can be issued, registered, stored or transferred using a shared electronic recording device that makes it possible to identify, directly or indirectly, the owner of said asset.”
How a digital token is created and circulated, using a shared electronic recording device or “DEEP”, therefore characterizes the token as opposed to any other digital asset.
In a broad reading of Article L. 552-2 of the CMF, NFTs could therefore be attached to the concept of digital tokens.
Having said that, what about the rights attached to the NFT?
When a person creates an NFT and associates one of his works with a computer program called a “smart contract”, he affixes his digital signature, then registers it in the blockchain via an operation called “minting”.
In the case of the artist Beeple, he first saved his work in a distributed file system called Interplanetary Filesystem (IPFS), in compressed form. People then created a metadata file in IPFS, along with a description of his artwork. Then he connected to the Ethereum blockchain to run the MakersTokenV2 smart contract and created a token: the NFT (token #40913) which was then transferred to the user account “Metakovan” for $69 million.
The artist can then freely decide which intellectual property rights he or she agrees to transfer through the NFT. By default, the sale of an NFT does not result in an automatic transfer of intellectual property rights.
Thus, when a buyer acquires an NFT, he does not buy the work, but only acquires the token, which is a reproduction of the work inserted in a blockchain. He is not the owner of the economic rights attached to the work, but of the rights on the NFT itself. He can, for example, sell it on the secondary market of these intangible goods.
Furthermore, as an NFT is a digital asset, it would appear to be subject to Article 150 VH bis of the CGI and would be taxed when the tokens resulting from the transfer or sale are converted into euros. Except in special cases, the 30% flat tax would then be applied rather than the progressive tax scale plus 17.2% social security deductions.
However, given certain creations, NFTs could be considered as works of art. However, it remains very difficult to include or exclude them in the scope of application of the work of the mind, as provided by articles L. 111 and following the code of the intellectual property. It is difficult to include them because NFTs are clearly in another category than the enumerated works (L. 112-1). But it is also difficult to exclude them because the definition of work remains very subjective.
As a result, there is currently uncertainty about the tax regime applicable to these NFTs, and Senator Jérôme Bascher of the Oise region of Europe has just questioned the Ministry of the Economy and Finance in a question no. 22200 of April 15, 2021, about the vagueness surrounding the taxation of NFTs.
So, whether it’s a fad like crypto kitties or a real prospect for the future, be careful in any case when you wish to acquire one of these tokens to be aware of the extent of your investment and its consequences.
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