Sunday, June 16

What are non-fungible tokens?  

Non-fungible tokens unknown until early 2021, is now a buzz expression which is trending across the  universe (and the metaverse). It is high on the agenda of both techno geeks and regulators. The  breakthrough of non-fungible tokens (commonly referred to as NFTs) has gathered a global  momentum and Mauritius is no exception. 

An NFT is a blockchain powered piece of data deployed by smart contracts which relates to an  underlying item which it represents. A popular term used for describing an NFT is a “certificate of authenticity” as it guarantees the authenticity and digital scarcity of the underlying item that it  represents. The said underlying items represented by an NFT are usually virtual in nature but there is  a growing interest in such virtual representation of physical assets. The fact that an NFT is unique to  the item it represents gives it a non-interchangeable characteristic. NFTs are therefore distinguishable  from cryptocurrencies, which are mutually exchangeable and therefore fungible, hence the term “non fungible”. 

The growth of NFTs has impacted the arts and multimedia market globally. This new method of  making and trading creative works has put digital artists in the forefront of the market. Traditional  artists are also resorting to NFTs to be abreast of this new trend. Nowadays, the tokenisation of all  forms of media including music, videos and digital images is achievable. NFTs have gained public  attention especially due to large sales generated by artists. One highly referenced example is the  digital artwork Everydays: The First 5000 Days by the artist Beeple which was sold for an amount of USD 69.3 million by the auction house Christie’s. 

NFTs have the potential to not only positively impact the protection of artists but also to democratise arts. An NFT’s uniqueness can ultimately guarantee the same uniqueness as the work it represents1 hence its characteristic of being a “certificate of authenticity”. Moreover, theoretically, by holding an  NFT, ownership over the work can be traced without ambiguity and the rights attached thereto  enforced seamlessly2.  

NFTs under Mauritius laws 

One aspect which appears to be left unexplored is the current application of Mauritius copyright laws to NFTs. What do you own when you purchase an NFT representing an artwork? 

NFTs were in August 2021 considered as unregulated by the Financial Services Commission3. The position seems to have changed with the enactment of the Virtual Asset and Initial Token Offering  Services Act 2021 (“VAITOS”). The VAITOS which came into operation on 7 February 2022  provides a wide definition of the term “virtual asset”, which could include NFTs. 

The Copyright Act 2014 was enacted to provide a more effective protection of copyright and related  rights to creators. The copyright protection is provided to a “work” which can be any artistic, literary, scientific or derivative work. The work will be protected where it is fixed in some material form and irrespective of its mode or form of expression. A copyright under Mauritius laws consists of the  economic and moral rights subsisting in a work.  

1John Salmon and Benjamin Mendelson, Blockchain-key legal and regulatory issues, LexisPSL IP & IT Practical Guidance 2Ibid  

3Investor Alert: Non-Fungible Tokens, 2021, Available at: fungible-tokens.pdf, [Accessed 03/08/2022]

By holding the economic rights in a work, the author or owner has the exclusive right to carry out or  to authorise4: the reproduction, the translation, the adaptation, the arrangement or other  transformation, the distribution to the public, the rental, the public performance or broadcasting and  other forms of communication to the public of the work.  

The moral rights on the other hand allows an author to claim authorship of the work and to object to  any distortion, mutilation or other modification of, or derogatory action in relation to, the said work,  which would be prejudicial to his honour or reputation5. Moral rights are unassignable6.  

Essentially a copyright is, subject to certain exceptions, originally vested in the author of the work  who is the natural person who created that work. Hence, an NFT which is a representation of the  underlying work on the blockchain cannot by itself provide ownership of the copyright to the creator or a purchaser of the NFT. The NFT will be owned by the person who “mints” the NFT but there is no  certainty that this person is the author or owner of the underlying work itself. The NFT is, therefore, merely the ownership of “the metadata associated with the work7. Any reproduction or distribution  of the underlying work following the purchase of an NFT could be akin to an infringement of the  copyright of the author/owner. 

Moreover, the Copyright Act8lays down specific requirements for assignments or licensing of  economic rights. Any assignment of an economic right, and any exclusive licence to do an act subject  to authorisation by an author or owner of a copyright should be in writing and signed by the  corresponding party to the agreement. To be effective, it appears that a transfer of an NFT 

representing a work should be backed up by a duly executed assignment or license agreement of the  copyright in the work. This would ensure the extended and optimal use of the work by the purchaser. 

To sum up, smart contracts would be the appropriate tool to solve such copyright law issues inasmuch  as they automate, without any human intervention, behaviour on the occurrence of a trigger event,  according to predetermined instructions9. It remains to be seen how the courts of Mauritius will  construe the existence, validity and enforceability of smart contracts. The VAITOS surely paved the  way for addressing those issues by providing a definition of a “smart contract” and specifying that it  can be enforceable by computer code and by ordinary legal methods or a mixture of both. 

4 Section 6(1) of the Copyright Act 2014
5 Section 7(1) of the Copyright Act 2014
6 Section 7(3) of the Copyright Act 2014
7 Andres Guadamuz , 2021, Non-fungible tokens (NFTs) and Copyright, Wipo Magazine, Page 32, Issue 4/2021 8 Section 12(2) of the Copyright Act 2014
9 Salmon and Mendelson, Blockchain-key legal and regulatory issues