NFT’s Legal Shortcomings

NFT’s Legal Shortcomings: A Guide for European Consumers and All Project Founders

Non-Fungible Tokens (NFTs) are unique digital assets created on blockchain typically used to represent ownership of digital art and collectibles. NFTs are created on blockchain networks, which provide a secure and transparent way to prove ownership and authenticity.

With the growing popularity of NFTs, many projects have emerged that focus on creating, trading, and collecting these digital assets. However, many of these projects may be unaware of the legal requirements they must meet when operating in the UK and EU, regardless of project's business entity location. There are countless NFT projects not following these consumer laws, which can put users at risk of fraud and legal violations.

It is important to note that none of this constitutes as legal advice and is intended to instigate discussions around consumer rights when purchasing NFTs and other digital assets. You should always seek professional legal advice.

Legal Business Entity

One of the key things that users should look out for when engaging with NFT projects is the legal business entity behind the project. NFT projects should be registered as legal companies, and their name and location of registration should be clearly stated on their website. This information can typically be found on the company's registration documents, which are usually available through public databases.

In the UK, it is a legal requirement for businesses to include their business name on their website under Companies Act 2006. This helps consumers identify who they are dealing with and can provide some assurance that the business is legitimate. Users should demand this information from the project founders before committing to the project and giving them money. Non-compliance with the UK requirement of including business name on the website can lead to fines and penalties.

Please note, the Companies Act 2006 is very extensive legsilation and covers so much more than just placement of business name on a website.

Knowing the business entity behind an NFT project can also help users understand the level of transparency and accountability of the project. This can provide users with a better understanding of the financial health of the project and its ability to deliver on its promises.

Users should also be aware that NFT projects can take different forms, such as decentralized autonomous organizations (DAOs) which are run by a community of users. In this case, it is important to understand the governance structure of the DAO and how decisions are made. DAOs however are not legal entities in United Kingdom.

If you are dealing with a project that has not taken these steps to be a legal business, aside from you losing many consumer rights, you should consider whether they project is legitimate or serious enough about their delivery.

Consumer Rights

NFT projects may be subject to the UK Consumer Rights Act 2015 (CRA) which sets out certain rights and protections for consumers. The CRA applies to goods and services purchased by consumers, including digital assets, which NFTs are likely to fall under.

Under the CRA, consumers have the right to expect that goods are of satisfactory quality, as described, and fit for purpose. This means that NFTs should match any description provided and be fit for their intended purpose. For example, if an NFT is advertised as a limited-edition collectible, the consumer has the right to expect that it is indeed limited edition and that the ownership of the NFT is unique.

Consumers have the right to request a repair or replacement if an NFT is found to be faulty or not as described. If a repair or replacement is not possible or cannot be done within a reasonable time frame, consumers are entitled to a reduction in price or a refund. For example, the metadata or media files of the NFT are no longer available to access and cannot be replaced.

Distance Selling

Distance selling refers to the sale of goods or services that are made without the buyer and seller being in the same physical location. This typically includes online sales, phone sales, mail order. In the UK and EU, distance selling is regulated by laws such as the Distance Selling Regulations, which provide certain rights and protections for consumers in these types of transactions.

These regulations include the right to cancel an order within 14 days for any reason, the requirement for pre-contractual information to be provided to the consumer, and the right to a refund or replacement if the goods are faulty or not as described.

The distance selling regulations also apply to digital content and NFTs would likely be considered as "downloads and streaming services." This means that NFT projects may be able to make consumers opt out of their 14-day cancellation right if done correctly. The business still must inform the consumer about their 14-day cancellation right, and provide certain information, such as the company name, before the order is placed.

Something caught my eye on the Porsche NFT mint page that might just change the entire game for everyone.

And no one is talking about it... 👇🧵 pic.twitter.com/Vd4Mzidvhk

— Paul | Top Dog Studios (@darkp0rt) January 25, 2023

However, if the consumer is not told about their 14-day cancellation right, this period can extend to 12 months. The business may inform the consumer about their right to cancel at any time in that period, in which case they have 14 days to cancel from when they were told.

Non UK/EU companies

NFT projects that are based outside of the UK and EU may still be subject to UK and EU consumer laws when selling goods or services to consumers in these regions. This is because the laws apply to any business that offers goods or services to consumers in the UK and EU, regardless of where the business is located.

This means that international companies that sell NFTs to UK and EU consumers must comply with UK and EU consumer laws, including the UK Consumer Rights Act 2015 and EU Consumer Sales and Guarantees Directive. Failure to comply with these laws can result in penalties for the business, including fines and legal action.

Consumers should be aware that they have rights under these laws, regardless of where the business is based, and should demand relevant information from international companies before committing to a purchase. This could include information about the company's registration, contact information, and compliance with consumer laws.

Raffles

NFT projects may also be subject to UK laws regarding raffles and lotteries. The legality of raffles and lotteries in the UK is governed by the Gambling Act 2005. According to this act, a lottery is defined as "a competition or game that is capable of resulting in a prize being awarded to one or more of the participants, but only if certain conditions are met."

This definition can apply to NFT projects that offer raffles behind their paid tokens, which is effectively a lottery. As a result, these projects may require a special license to operate legally. However, it is likely that most NFT projects do not have such licenses, and therefore may be breaking the law.

Furthermore, it's worth noting that offering lotteries without a license is considered a criminal offense and can result in fines and even imprisonment.

OpenSea Secondary Sales

NFT projects that are sold on secondary marketplaces such as OpenSea may still be subject to UK and EU consumer laws, even if the sale is made by a private seller or by a business. This is because the UK Consumer Rights Act 2015 and EU Consumer Sales and Guarantees Directive apply to any sale of goods or services to consumers, regardless of whether the sale is made by a business or private individual.

Distance selling regulations also apply to secondary sales where the seller is a company. Consumers have the right to cancel an order within 14 days and receive a refund, unless the right was waived. If the consumer is not told about the 14 days cancellation rights, this can extend to 12 months.

Let's look at some examples. eBay, a marketplace in many ways similar to OpenSea, allows sellers to set up their own returns policy. They inform sellers that they have to give the consumer a legal minimum 14 days cancellation period. The seller may extend this if they wish.

Steam — a digital content store for games — has a checkbox just like Porsche did for their NFT drop. By clicking the button, you agree that Valve (Steam) provides immediate access to digital content as soon as you complete your purchase. Therefore, you expressly waive your right to withdraw.

Sales of stolen goods.

When buying a stolen goods in the UK, you legally are not the owner, the original owner is. Said owner can apply for court order to make you return the goods. It's also important to consider that handling stolen goods is a crime.

Consumers should be diligent about checking the provenance of the NFTs they are buying, and if they have any doubts, they should contact the marketplace or the creator of the NFT to verify the authenticity of the NFT before making a purchase.

Summary

In summary, it is important for founders in the NFT space to consider the legal implications of their business. This includes understanding consumer rights, distance selling regulations, and any other laws that may apply to their specific use case. One key step in protecting your business is to seek proper legal advice and guidance. Additionally, it is important to ensure that your technical partner has a vested interest in the success of the project and experience in navigating the Web3 ecosystem.

At Top Dog Studios, we understand the complexities of the Web3 world and have the experience and expertise to navigate them successfully. We pride ourselves on being a trusted technical partner, and are committed to helping our clients protect their interests and succeed in the industry.