The non-fungible tokens (NFTs) business is literally exploding all over the world, including in  Italy. Indeed, NFTs have been catching the attention of technology buyers, investors, high-profile artists, renowned celebrities, sport teams and, most of all, fashion brands. Gucci, Dolce & Gabbana, Prada are just a few examples of Italian luxury companies that recently entered this market. And many others are ready to join. But this is not just a company business. Many artists, musicians and sport stars such as Zlatan Ibrahimović, Morgan and Achille Lauro have been involved with NFT digital creations of their own. Recent NFT trends include generative artwork, fractionalizing valuable collectibles, and participation into established communities.  

A non-fungible token is a special, one-of-a-kind cryptoasset whose authenticity has been registered on a blockchain ledger that tracks the NFT’s ownership and transaction history. Each NFT is certified unique. This is its main peculiarity. Indeed, NFTs use blockchain technology but are different from other traditional cryptocurrencies. The latter are fungible tokens, which means each cryptocurrency unit is equivalent to another, so one can be exchanged with another. However,  NFTs cannot be exchanged for another asset, but they can be sold and transferred.

From an Italian regulatory perspective, there is neither a specific legal framework regulating NFTs nor a definition of NFTs.

However, Italy has developed a dedicated legal framework applicable to virtual currencies in general in terms of anti-money laundering obligations, registration and reporting requirements. In this context, virtual currency is defined as “a digital representation of value that is not issued or guaranteed by a central bank or a public authority, is not necessarily attached to a legally established currency, is used as a means of exchange for the purchase of goods and services or for investment purposes, and which can be transferred, stored and traded electronically”.

To better understand the IP implications regarding  NFTs, we need to remember that NFTs  can be divided into two components:

1. the token – i.e. the digital certificate of ownership as recorded on the blockchain; and
2. the underlying content – which may or may not be stored on the blockchain. This could be an asset eligible of IP protection, such as a work of art, a design, a trademark, and so on.

This duality is the basis of the main discussions on the creation, purchase, and resale of NFTs under an IP perspective.

The ownership of the token does not imply also the ownership of the underlying content. This principle is relevant not only for the chain of purchaser(s) of the NFTs, but also for the entity creating the same.

Italian copyright law reserves to the rightowner the exclusive right to commercially exploit a work of art, granting to the same the right to copy, distribute, modify, reproduce, make available to the public such work, and many other rights. Similarly, tokenizing an asset that includes a third-party trademark is forbidden without an authorization by the trademark owner. To tokenize an asset, an agreement therefore needs to be reached with the holder of the rights on the underlying content. A recent decision of the Court of Rome – the first in Italy concerning NFTs – confirmed this. It stated that tokenizing the image of an athlete showing the logo of a famous football club amounts to an infringement, even if the athlete embodied in the same played in such team and granted his authorization for the tokenization of the image.

With regard to the purchase of NFTs, this does not grant any right on the underlying content, unless otherwise agreed by the parties. To refrain from legal liabilities, purchasers should be aware of the conditions or licence terms provided in the smart contract regulating the sale of an NFT. Usually, the owners of the rights on the underlying contents retain all IP rights on the same, while granting to the NFT purchaser a limited, non-exclusive, transferable license on the content, for example for resale or to display it for personal use.

Considering that, under Italian law, the evidence of the transfer has to be given in writing, smart contracts are key.

Finally, brand owners have started to show an increasing interest in the registration of trademarks covering virtual goods, including NFTs. Indeed, by filing trademarks in connection to digital goods, companies would assure trademark protection also in the “meta world”. And this facilitates the enforcing strategies, whose effectiveness cannot be taken for granted without a tailored registration. So far, the Italian trademark office has not given guidance on filing. Yet, most companies are filing applications in classes 9, 41 and 42 to claim protection for NFTs and related services. The  judgment of the Court of Rome mentioned above seemed to praise this strategy and, after pointing out the well-known character of the football club’s trademarks, it highlighted that their registration in class 9 (in particular with reference to downloadable electronic publications), could cause confusion on the market, and ground a claim for unfair competition and dilution. Thus, it granted the club an injunction against the company that tokenized and sold the NFTs.

As a general note, digital assets that are (a) unique, rather than interchangeable, and (b) in practice used as collectibles, rather than as payment or investment instruments, can be regarded as NFTs. Such assets are generally not considered to be virtual assets and, at first glance, do not appear to fall within the mentioned definition of virtual currencies set out under Italian law. However, as also indicated by the Financial Action Task Force (FATF), a case by case assessment of the nature of the assets may be needed regardless of the definition or terminology used to refer to the relevant assets.

This means that even if NFTs are not specifically deemed to fall within the definition of virtual currencies set out under Italian law, they can qualify as such and the issuers or providers may become subject to relevant anti-money laundering, registration and reporting obligations if the NFTs meet the relevant conditions set out under the definition, are to be used for payment or investment purposes in practice and can be transferred, stored and traded electronically. According to the approach of the Italian financial market authority CONSOB, NFTs might also be considered as financial products and subject to the Italian Consolidated Financial Act, if they meet the following conditions:

1. a capital disbursement;
2. the expectation of a financial gain; and
3. the assumption of a risk directly linked and correlated to the capital disbursement.

Moreover, the EU’s draft Regulation on Markets in Cryptoassets (MiCA) does not specifically regulate NFTs. It only provides for an exemption according to which issuers of “crypto-assets that are unique and non-fungible” do not need to publish or register a whitepaper for them.

Given the rapid growth of NFTs in the EU market, it may make sense to envisage the adoption of more tailored rules on NFTs both at an EU and domestic legislation level.    

The potential interplay of Italian data protection legislation with NFTs, including EU Regulation 679/16 (“GDPR”) as well as Legislative Decree 196/2003 ("Italian Data Protection Code"), raises a number of interesting questions, which to date have not been entirely explored.

In principle, the sale of NFTs shall not entail the disclosure or exchange of relevant personal data. However, transaction history on a blockchain is publicly accessible to all users. Although the real life identity of participants is not disclosed, there might be information which, regardless of it being encrypted or hashed, qualifies as personal data. This would happen when personal data is not entirely anonymised, but only pseudonymised. By matching or combining the public key of the wallet making the transaction with other available information, it might be possible to trace back to the actual individual. In addition, the list of transactions, or the domain information sometimes associated with the wallet, may also reveal the individual’s identity. Also, depending on its nature, the digital asset associated with the NFT might hold additional personal data (including of third parties).

The decentralised nature of most blockchain systems, and the fact that distributed ledger technology involves by definition multiple parties, makes it difficult to correctly identify data protection roles and, as a consequence, allocate and exercise GDPR-liabilities appropriately. While the qualification of data controllers or processors is carried out on the basis of a factual approach, there might be different outcomes depending on the way the blockchain is actually operated.

In addition, one of the core features of NFTs – immutability – raises concerns with regard to the rights accorded to data subjects under the GDPR and the Italian Data Protection Code, including the right to correct or erase their personal data. In fact, the information on a blockchain shall be permanently logged and not alterable in order to preserve the authenticity and traceability of the transaction history, including the parties of those transactions. This might make the actual exercise of data protection rights challenging.

Also, a number of scams and breaches recently reported by some NFTs marketplaces and users demonstrate that cybersecurity risks associated with NFTs are real. In order to address such issues, attention to data protection by design and by default, and adoption of the most adequate security standards, both in the deployment of the blockchain and the creation of the NFT itself, as well as the adoption of mindful practices by users accessing their crypto-wallets, shall be paramount.

With the increasing interest for the Metaverse, the hype around NFTs is booming. As the Metaverse is an embodied virtual reality where businesses and individuals can experience a living virtual world with an independent economy, cryptocurrencies (including NFTs) could be used to acquire goods, such as digital clothing to dress-up the avatars, or design and furnish a house or buy pieces of arts.

Yet, the future of NTFs is uncertain. While there are already several promising applications in many industries such as luxury, sport and gaming, some may  argue that this is just a bubble that will not last.   

The doubts and questions are still many, and with a lack of certainty , the most conservative and risk adverse may be reluctant to invest. For this reason, companies should expect that the Italian legislator will soon focus its attention  on these assets, providing guidance from a regulatory, IP, advertising, consumer law and privacy perspective.