What are non-fungible tokens?

Non-fungible tokens ,unknown until early 2021, are now a buzz expression which is trending across the universe (and the metaverse) and 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.

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 work”⁷. 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 Act⁸ lays 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.

This article was published in Business Magazine Mauritius