Understanding consumer protections for NFTs in Singapore
Leon Yee, Patrick Ong, and Jacob Low of Duane Morris & Selvam explain the rules around NFTs in Singapore, and suggest how established practices and model contracts could address uncertainty and reduce disputes
Non-fungible tokens (NFTs) are cryptographic tokens on a blockchain that can prove the ownership and authenticity of a digital asset, which can also be considered as digital data with a certificate of ownership. NFTs are non-fungible because no two NFTs are the same and each has a unique identification code and metadata.
NFTs are becoming increasingly popular as a mode to buy and sell digital artworks, permitting artists to monetise their authentic digital artwork, which could otherwise easily be copied. Crucially, NFTs can be used with both digital and physical artwork for establishing provenance. In addition, certain NFTs may involve the seller providing the buyer with an access pass, which allows NFT holders access to exclusive goods or services, including events, subscriptions, content, or limited-edition products.
The Bored Ape Yacht Club has been a key symbol of rising valuations in the NFT market, with the highest sale price recorded, at the time of writing, for a single Bored Ape NFT at $3.4 million. However, the price of NFTs across the board has decreased significantly this year. This is in part due to a crash in the crypto markets, with leading cryptocurrencies like Bitcoin and Ethereum reaching lows not seen since 2020.
Are NFTs subject to regulation under Singapore law?
At this time, NFTs remain unregulated in Singapore as a standalone product. On February 15 2022, the chairman of the Monetary Authority of Singapore (MAS), Tharman Shanmugaratnam, responded to a parliamentary question on whether the MAS plans to regulate activities in relation to NFTs. Shanmugaratnam stated that there are no such plans at this time, which is in keeping with the stance adopted by most other leading jurisdictions.
Under the Payment Services Act 2019 (PSA), activities including the provision of digital payment token (DPT) services would require a payment service provider licence. Under the PSA, it is unlikely that NFTs would be considered as DPTs, as they do not satisfy the definition of a DPT. One reason being, NFTs are not “a medium of exchange accepted by the public, or a section of the public, as payment for goods or services or for the discharge of a debt”.
With the increased uptake in NFTs, we expect to see greater regulatory scrutiny and oversight in this space in the future
Even if NFTs may be construed to be a mode of payment, it is likely that NFTs may be categorised as “limited purpose digital payment tokens”. Under this category, they are exempt from regulation under the PSA, where the purpose of their use involves nonmonetary consumer loyalty, reward points, in-game assets, or similar digital representations of value that cannot be returned to the issuer or sold, transferred or exchanged for money.
NFTs are also unlikely to fall within the regulatory ambit of the Securities and Futures Act 2001, unless the NFT has the characteristics of a capital markets product under the SFA, such as a security in which the holder is granted voting rights in the issuer.
What rights do purchasers of NFTs have in Singapore?
NFTs appear to have gained recognition from the Singapore courts as a valid form of property. In a recent decision by the Singapore High Court, an injunction was granted by the court to stop the sale of a particular Bored Ape Yacht Club NFT. This follows a similar ruling by the UK High Court where an injunction was issued by the court to freeze the sale of two Boss Beauties NFTs.
Transactions involving the sale, purchase, and trade of NFTs are usually done via online marketplaces – such as OpenSea, Rarible and Mintable – that provide a platform for creators to display their NFTs for sale and for collectors to view and purchase these NFTs. These online marketplaces generally do not have custody or control over the NFTs that users are selling or purchasing, and are not a party to the agreements to sell, purchase, or transfer these NFTs.
Instead, these peer-to-peer marketplaces allow users to connect their crypto wallets, such as MetaMask, to the platform, and transactions are facilitated by self-executing smart contracts, with most of these smart contracts occurring on the Ethereum blockchain.
The contractual relationship between a buyer and seller of NFTs, and their respective rights and obligations, are therefore governed by the specific terms of the smart contract. A smart contract is ordinarily understood as a contract in which some, or all, of the contractual obligations are defined in, and/or performed automatically by, a computer program without the need for human intervention.
Smart contracts can take a variety of forms with varying degrees of automation, including:
A natural language contract with automatic performance by code;
A hybrid contract in which some contractual obligations are defined in natural language and others are defined in code; or
A contract in which all the contractual terms are recorded solely in code.
The above three broad forms of smart contracts can be found on NFT marketplaces where sale listings sometimes include a link to a third-party website that sets out certain additional terms governing the use of the NFT and its associated content and benefits.
A paper published by the UK Law Commission on November 25 2021 concluded that the existing legal framework in the UK is able to facilitate and support the use of smart contracts, and that current legal principles on the basis of common law can apply to smart contracts in much the same way as they do to traditional contracts.
Therefore, while the validity of smart contracts has not been considered by the Singapore courts, it is likely that smart contracts governing the sale and purchase of NFTs would be legally enforceable in Singapore, provided that the essential requirements for the formation of a legally binding contract are satisfied.
These requirements include an offer and acceptance of the offer, accompanied by the provision of consideration, to create a certain and complete agreement, with the intention to create legal relations between the parties. Accordingly, an aggrieved party to a smart contract governing the sale and purchase of NFTs may seek to bring contractual claims similar to those available under a traditional contract in the Singapore courts, including under the grounds of misrepresentation or breach of contract.
Legal certainty in NFT contracts
However, given the pseudonymous nature of most NFT transactions, where it is common for parties to enter into smart contracts without knowing the real identity of their counterparties, this may pose a challenge in determining whether the Singapore court has jurisdiction to hear a claim under a particular NFT contract.
One of the biggest misconceptions that laypersons may have is that acquiring ownership of an NFT comes along with acquiring the IP rights to the underlying digital artwork or asset
To mitigate any uncertainties around the place of formation of the smart contract or the applicable law governing such a contract, it would be advisable for parties to expressly designate the Singapore courts as having jurisdiction and as the governing law of the smart contract for the sale and purchase of NFTs. This would provide parties with clarity on the content of their obligations and the consequences of any wrongdoing.
There may be some additional protection in cases where an individual consumer purchases NFTs from a person who sells them in the course of their business, and (a) the consumer or seller is resident in Singapore or (b) the offer or acceptance relating to the transaction is made in, or sent from, Singapore. In this case, the consumer may have recourse under the Consumer Protection (Fair Trading) Act 2003 (CPFTA) if the seller is found to have carried out certain unfair practices in relation to the transaction.
Some of the identified unfair practices under the CPFTA include the seller:
Doing or saying anything, or omitting to do or say anything, if as a result a consumer might reasonably be deceived or misled;
Making a false claim; or
Participating in any of the 27 unfair practices specified in the Second Schedule to the CPFTA.
Where the court finds that the seller has engaged in an unfair practice, some of the remedies that may be granted include an award of damages in the amount of any loss or damage suffered by the consumer as a result of the unfair practice, or an order of specific performance against the seller.
However, given that trades and transactions relating to NFTs occurring on online marketplaces are mostly conducted between people acting in their personal capacity, the availability of recourse under the CPFTA is practically limited.
What happens if the underlying asset linked to an NFT is compromised?
Given that an NFT is merely a unique token on a blockchain that makes reference to some off-chain data, the NFT is only as good as the link to its data. Accordingly, the off-chain data itself has to exist, it has to be stored somewhere, and it has to be accessible.
The underlying asset, such as the original digital artwork linked to an NFT, may be deleted or may be compromised if the server hosting it crashes. Some solutions that have been created to address these issues that affect NFTs include the use of an InterPlanetary File System that works by utilising a decentralised concept to provide a distributed system for storing and accessing files, websites, applications, and data rather than relying on a single domain host. Ultimately, the buyer may not have control over such issues, unless the entire domain is purchased or payment is made to keep the underlying artwork online.
Who owns the intellectual property (IP) rights in relation to NFTs?
One of the biggest misconceptions that laypersons may have is that acquiring ownership of an NFT comes along with acquiring the IP rights to the underlying digital artwork or asset. However, based on the premise that NFTs are conceptually distinct from the underlying assets they represent, the purchase of an NFT alone does not grant the buyer ownership of all rights, including IP rights, over the asset.
For example, when the NFT of Jack Dorsey’s first-ever tweet was purchased for nearly $3 million, the new owner of the NFT did not obtain IP rights over the tweet itself. The owner could not, therefore, print the tweet on t-shirts and sell them without permission, because Jack Dorsey still owns the copyright to that tweet. In most cases, the original creator of the artwork retains ownership of the underlying asset and the IP rights in relation to it, unless there is a separate IP assignment agreement.
IP rights, such as trademarks, patents, and copyright, are treated as a species of personal or movable property and, in certain cases, the creator may elect to transfer the IP rights in the artwork to the buyer of the NFT. However, in most cases, buyers of NFTs are merely given a licence to use, copy, and display the underlying artwork for certain limited purposes, including for personal non-commercial use, or as part of an online marketplace to sell and transact with the NFT that represents the artwork. In some cases, NFT creators can choose to add a royalty rate during the minting process, with royalty specifications added to the smart contract, thereby giving creators compensation each time their NFTs are sold.
The terms governing IP assignment and licensing may be set out in a smart contract relating to the sale and purchase of the NFT or in a conventional contract written in natural language. However, given that the relevant Singapore statutes require the assignment of IP rights to be done in writing and signed by or on behalf of the assignor, there is added complexity as to whether a smart contract would satisfy the relevant formality requirements. (See Section 138 of the Copyright Act 2021; Section 38 of the Trade Marks Act 1998; and Section 41 of the Patents Act 1994). It is therefore advisable to have the relevant terms set out in a separate natural language agreement.
In any case, given the relative ease of minting NFTs for copies of the original asset, plagiarism runs rampant on many NFT marketplaces. In January 2022, OpenSea reported that more than 80% of NFTs minted using its minting tool were fake. In the same month, French luxury fashion house Hermès sued the NFT creator Mason Rothschild for marketing a line of digital assets called ‘Metabirkins’ (digital duplications of the Birkin bag created by Hermès), for alleged trademark infringement and dilutive use of the Birkin name.
Cases like this underscore how important it is for buyers of NFTs to verify the authenticity and legitimacy of the relevant NFT, prior to purchasing it. Creators of the original underlying artwork or asset should be vigilant about theft of their works and may bring a claim for copyright infringement where they spot any unauthorised sale and dissemination of NFTs of their artwork.
However, the difficulty comes in determining which court has the jurisdiction to hear the case, given the challenge involved in pinpointing the exact location where the IP infringement took place.
As the popularity and attractiveness of NFTs continues to grow across a wide range of creatives and creators, from visual artists to musicians, the potential uses for NFTs are also expanding. With the increased uptake in NFTs, we expect to see greater regulatory scrutiny and oversight in this space in the future.
In the meantime, we are confident that the market will eventually develop established practices and model contracts that parties can use when transacting in NFTs via smart legal contracts, helping to address uncertainty and reduce the scope of disputes in this regard.