So, What the Hell is a NFT, Legally?

As you may already know, the Internet has been abuzz recently with “NFT“s, or Non-Fungible Tokens, an offshoot of blockchain technology, a form of distributed ledger. Basically, an NFT is an electronic token (an asset, of sorts) that been created and placed on a blockchain , and which is capable of containing certain information and passing from one buyer to the next.

Recently, artists realized that they could personally create and authenticate tokens but associating them with some of their works (think copyright), in essence creating digital tidbits capable of being bought, sold and exchanged, over time. This, couple with a limited supply, created an instant collectors’ market of NFT enthusiasts and who are now investing in upcoming artists, in a manner that is strangely reminiscent of Renaissance patrons of the arts. This allows artists to make some money and collectors to… well… collect.

The numerous stories I’ve been seeing online about this lead me to reflect as to what exactly these little electronic tidbits are, legally I mean. Are people buying art, perhaps electronic copies, or something else?

Legally, the first thing we should note is that this little trend does NOT involve people dealing or trading art (or I.P.) online. No real transfer of rights (intellectual or otherwise) gets created or transferred when buying an NFT-type electronic token, not really anyway. In effect, what will happen upon any of these purchases is that a transaction will be recorded on the blockchain at issue, showing you as the “owner” of such and such token. Period.

Does this grant you a real right of ownership to that intangible? Maybe, maybe not. But one thing for sure, what these transactions do NOT do, is transferring title to any intellectual property, such as the copyrights in this drawing or this photo, for example. So, contrary to some may be thinking reading stories about the NFT-craze, people are not buying the I.P. to copyrighted works using this scheme.

Sure, people may be buying (using the term loosely) something that was created by Mr. X, and then get bragging-rights about it, but little else. Sure the NFT may be one of the few linked to that particular piece of artwork (a music album, for example) but little else. Buying an NFT does NOT get you any real rights to the actual artwork or the I.P. to it.

The truth of it is, at law, we’re not dealing with any asset that can be readily categorized or put in a neat little box here. NFTs are rather a pure creation of the electronic age, before any rights or legislation applies to them. In effect, those who create NFTs decide what little rights (let’s call them that) they are deciding with accompany their offering of NFTs. In practice, this will usually translate to fairly little, for example a personal right (read license) to display a piece of artwork for one’s personal pleasure, etc.

So, if your reflex upon reading this is to ask what a NFT is good for, the honest answer may be: to fill an artist’s pockets. That said, don’t get me wrong, NFTs are a cool idea and I’m all for encouraging budding artists with a modicum of intermediaries who’ll profit in between; let’s just be clear as to what little legal effects are created when buying one of these tokens. At least for now anyway, we’re not dealing with anything that has inherent great value here, aside from what other collectors may be after that is.

Coinsquare to Disclose to the CRA the Identity of Certain Sellers of Cryptocurrency

We learned this week that the Federal Court recently ordered Coinsquare Ltd., a cryptocurrency trading platform, to disclose the identity of some of its clients to the Canadian tax authorities.

After a similar fight between this company and the IRS, Canadian taxation authorities have also been trying to get Coinsquare to disclose who its clients are, so as to ascertain tax liability of profit-making users, something Coinsquare has so far refused to do. For the Canada Revenue Agency (the “CRA”), given how difficult it is to determine which taxpayers are making profits by selling cryptoassets, platforms such as Coinsquare should be required to report to the authorities any transaction allowing Canadians to generate taxable profits, whenever transacting intangible assets of this kind, so as to avoid allowing such taxpayers to avoid tax liability too easily.

Even though the CRA initially requested that Coinsquare disclose the identity of all its customers since 2013, Coinsquare managed to negotiate much less onerous disclosure obligations. According to the recently issued Federal Court order, the company is only required to disclose the identity and assets of its biggest clients, those who meet a certain threshold. This corresponds to about 10% of Coinsquare users.

For the CRA, this was a first foray into the realm of cryptocurrency platforms, including to get them to cooperate with Canadian tax authorities in a way that increases the odds of collecting tax on profits made through the sale of cryptoassets by Canadians. Given the substantial profits now being made by some cryptocurrency traders, one can certainly understand the CRA’s motivation in attempting to get trading platforms like Coinsquare to collaborate.