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The Financial Action Task Force (FATF), the global standard setter in relation to AML, has recognised that NFTs may create opportunities for money laundering or terrorist financing and has called for further regulation, so we are likely to see international developments in this space in the coming months. Whether NFTs fall within the scope of existing AML regulation will depend on local implementations of FATF guidance in relevant jurisdictions and the specific characteristics of the NFT in question. See page 8 onwards for highlights of the considerations across key global financial centres. What are the practical considerations? Data and storage NFTs are hosted on a DLT platform, which typically does not enable storage of large files, such as digital assets. As a result, the NFT and its underlying digital asset are typically connected to each other via a link. If the digital asset is stored on a conventional server, there is risk that the file could be changed or deleted, or the server could shut down, hence breaking the link between the asset and its corresponding NFT. Certainty of the reliability and security of the link and the server hosting the digital asset is essential. A more robust alternative is a distributed, decentralised storage system, but these are yet to be widely adopted. Litigation risk The usual risk of misrepresentation when selling digital assets will apply to NFTs. NFT issuers need to be clear with purchasers about the risk of market volatility leading to a complete loss in value for them. Whether NFT owners have any rights in relation to the underlying asset in such a case remains to be seen. Environmental cost The execution and validation of NFT transactions on a blockchain, particularly under the Ethereum blockchain which relies on proof-of-work validation, is computationally intensive and requires a large amount of energy. This type of validation is similar to the mining or creation of new Bitcoins, which Cambridge University recently found consumed more energy than the entire country of Argentina on an annual basis. Validating NFT transactions will continue to consume significant amounts of energy until more sustainable data centres and validation techniques are created at large scale. There is ongoing work around migrating Ethereum from "proof-of-work" to "proof- of-stake" validation, which is anticipated to considerably decrease the amount of energy required for validation. However, proof-of-stake validation raises separate network operation concerns, which may impact the overall anticipated reduction in energy consumption, including in relation to security, fairness, and transaction redundancy. Alternative platforms may offer issuers more sustainable solutions today. This will be a key consideration for potential issuers, advisers and purchasers who are focussed on reducing their environmental impact. Reputational risks Brand reputation is key for entities who have worked hard to build close ties with their fans, followers and supporters. The reputational benefits of being associated with a nascent technology need to be balanced against the risks such technologies inherently bring. If an issuer's NFTs or tokens significantly reduce in value, there is a great risk of brand devaluation. Equally, the issuer's brand could be affected by issues with the platform used to sell and trade the NFT, which may, in extreme circumstances, render the NFT worthless. NFT issuers should also consider the risk of reputational damage by issuing NFTs on platforms that have a negative environmental impact, as set out above. a NON-FUNGIBLE TOKENS: THE GLOBAL LEGAL IMPACT CLIFFORD CHANCE 7PDF Image | NON-FUNGIBLE TOKENS GLOBAL LEGAL IMPACT
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NFT (Non Fungible Token): Buy our tech, design, development or system NFT and become part of our tech NFT network... More Info
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