The recent conversation in Australia has focused on how the use of NFTs can benefit the artistic community, including how an NFT representing digital art can be set up so the artist is paid a royalty each time the NFT is traded. This is in contrast to traditional forms of art, where once an artist has sold their work they may never see any benefit from later sales and any increase in the value of that work. Notably, in 2021 one of Australia's most well-known musical artists, Flume, collaborated with visual artist Jonathan Zawada to release an NFT titled "Saccade", a 90-second video work featuring a multi colored eye which sold for A$66,000.

NFTs have garnered sufficient attention in Australia that the Australian Taxation Office has published guidance^[1] on how NFTs should be treated for tax purposes. Undoubtedly, as the creation and trading of NFTs becomes more common and sophisticated, the economic and legal implications in Australia of NFTs will similarly grow.

^[1] Australian Taxation Office: Non-fungible tokens 

Whilst some jurisdictions abroad are cracking down on regulating NFTs, Australia has not enacted any legislation regulating who may deal with NFTs (as a retailer, intermediary or consumer) nor how NFTs may be dealt with. In turn, the regulatory framework governing NFTs is derived from a variety of other practice areas, including:

• (Anti-money laundering) anti-money laundering laws, which are at major risk of being skirted by criminals that want to launder their "dirty" money through buying and selling NFTs under pseudonyms. Whilst Australia's financial crime regulator, Austrac, requires digital currency exchanges to register with Austrac and monitor/mitigate risk of money laundering, it has not yet announced similar obligations on NFT intermediaries. However, anti-money laundering legislation will surely arise once the Financial Action Task Force, the global money laundering and terrorist financing watchdog, publish comprehensive guidance on a global approach to prevent money laundering through NFT trade.
• (Consumer) general consumer/commercial laws. This is particularly important where NFTs are sold to consumers, in which case smart contracts (which are used in NFT trade) must be compliant with Australian consumer laws, including the consumer guarantees and provisions surrounding unfair contract terms.
• (Foreign investment) foreign investment laws. There are no specific foreign investment laws directly applicable to NFTs. However, amendments have been made to the Security of Critical Infrastructure Act 2018 (Cth) which have expanded the scope of critical infrastructure sectors to include sectors such as the data processing sector (which may capture blockchain infrastructure/network providers). These amendments have, in turn, expanded the scope of a national security business defined in the Foreign Acquisitions and Takeovers Regulations 2015 (Cth). This has resulted in some actions, including those previously identified as reviewable national security actions, becoming notifiable national security actions.

Due to the novelty of NFTs, the intersection between NFTs and Australian intellectual property law remains unclear. For example, without any other contractual arrangements, an owner of an NFT merely owns the token itself but not the intellectual property rights pertaining to the underlying asset or item. From a copyright perspective, whilst NFT owners may own the original copyright in the underlying asset or item, such ownership of a token differs from ownership of copyright. The majority of NFTs do not transfer any copyrights and parties purchasing NFTs should seek legal advice on the nature and scope of rights transferred in any sale or transfer of NFTs. Further, it is unclear how NFTs will account for moral rights in the creation of digital assets, including, for example, how co-contributors to works or derivative works will be credited with authorship. NFTs also give rise to a number of trademark queries, including whether the traditional forms of trademark protections are adequate to cover use of brands as an NFT or blockchain.

Similarly to the position in respect of Intellectual Property discussed above, the categorization of NFTs within the Australian finance space has not yet been settled. The main implication of NFTs from a finance perspective is the potential creation of a new class of personal property to be used as collateral in financing transactions. Whilst there have not been any publicized instances of Australian facilities being secured against NFTs to date, the concept of "collateral" is likely broad enough to capture NFTs given an NFT is a cryptographic "certificate" indicating ownership of a copy or representation of an underlying asset. NFTs therefore fit within the concept of "intangible property" under the Personal Property Securities Act 2009 (Cth) ("PPSA") (Australia's personal property securities legislation), being any type of personal property that is not financial property, goods or intermediated securities. As set out in the above section, a lender taking security over an NFT should be mindful that the security over the NFT will not extend to the underlying asset itself. Rather, a security interest in the underlying asset can only be obtained from a person with rights in the underlying asset (and whether the lender obtains any rights over the underlying asset will therefore turn on any contractual arrangements dealing with the NFT and the underlying asset).

Assuming NFTs are capable of being collateralized, financiers need to understand how to "perfect" a security interest over them and so that they can enforce this security. Perfection is the process of obtaining the highest level of protection over collateral under the PPSA. A financier can perfect a security interest in an NFT provided that (1) the security interest arises pursuant to a security agreement, (2) the financier is granted rights in the NFT under the security agreement by a person who has rights in the NFT, and (3) the financier registers that interest on the Personal Property Securities Register. After a security interest has been perfected, it can be enforced by notifying the grantor that it has been seized in accordance with PPSA s 123(2). However, unlike other types of intangible property such as intellectual property which can be forcibly transferred to the secured party by court order (for example, to the Trademark Registrar in the case of a trademark), ownership of NFTs is recorded on a decentralized blockchain. Blockchain's decentralized nature therefore means that NFTs cannot be forcibly transferred, irrespective of any court order. Accordingly, whilst seizure of an NFT by law can be effected in the same manner as for intellectual property, financiers may encounter additional complications when attempting to practically seize an NFT because a grantor could refuse to transfer the NFT to the secured party (despite the risk of being in contempt of court order).

Generally speaking, under the Privacy Act 1988 (Cth) (similar to other jurisdictions such as the EU), individuals have the right to access and correct their personal information. Due to the immutable nature of NFTs, there is a risk NFTs may contain personal information that are not compliant with privacy laws. Cybersecurity considerations must be taken into account when dealing with NFTs. For example, the underlying digital asset and the NFT will likely be stored separately and in an online server. Owners of NFTs should ensure adequate cybersecurity measures are implemented to minimize the risk of any data loss, identify theft or potential cyber-attacks.

Anything, including physical assets, can be tokenized with an NFT. The possible applications of NFTs are far-reaching and include (amongst others):

• assisting Australian companies to comply with modern slavery legislation. This can be done by linking goods which form part of their supply chains with NFTs to assist tracking and data accuracy;
• incorporating NFTs into Australia's increasingly digitized land registers; and
• allowing luxury brands to link certain goods to NFTs in order to make those goods non-fungible and "scarce". This can increase these goods' value and assist authentication of luxury items when on-sold.

Further, there is an emerging insurance market for NFTs representing digital art. Whereas for fine art, insurance would ordinarily cover loss and damage to the artwork itself, insurance of NFT artworks may instead address risks related to security of the digital key (which proves ownership of the NFT), storage and backup of the NFT and digital counterfeiting.

Ultimately, the NFT area is constantly evolving, so it is important to continually monitor developments as we anticipate regulators will likely take steps to establish a legislative framework for NFTs in Australia.