There is a rising interest in NFTs, due in part to the eye-watering prices that NFTs had transacted in recent months. Temasek holdings, the state-owned investment arm of Singapore recently led a fresh round of funding, valuing the Australian NFT start-up Immutable at US$2.5 billion. Due to the democratic nature of blockchain, anyone can access the blockchain technology and mint NFTs. Therefore, besides well-established companies seeking to launch a new business vertical, hobby artists are minting NFTs to access a wider audience and monetize their artistic works.

While there may be potential legal pitfalls surrounding NFTs and the technology underpinning NFTs may not be well understood, this has not deterred or slowed down the adoption of NFTs in Singapore. It is expected that NFTs will follow in the footsteps of cryptocurrencies and ICOs. 

There are no specific regulations or restrictions targeting NFTs in Singapore as yet. In addition, Singapore adopts a fairly open policy towards foreign investments, with restrictions applicable only in sectors considered critical to national security (e.g., telecommunication services, news and media broadcasting, financial services, professional services and property ownership). Since NFTs are yet another implementation of blockchain technology, albeit a relatively new one, the Singapore government has clarified that NFTs would be subject to existing regulations applicable to the underlying asset represented by the NFT.

At the moment, NFTs are generally used to tokenize artistic works and digital collectible items. Areas of law which may be applicable in transactions involving NFTs would likely include tax law, contract law, property law^[1] and intellectual property law, and restrictions on foreign investments would likely not apply.

If the underlying assets represented by a NFT fall within any one of the three classes of capital markets products (i.e., securities, units in a collective investment scheme, or derivatives contracts), the NFT would be subject to the regulatory regime for securities under the Securities and Futures Act. For example, there would be licensing requirements for companies that deal in such NFTs and requirements for prospectus in the offering of such NFTs.^[2]

Furthermore, if the NFT is utilized as a payment token, the NFT would be subject to the regulatory regime under the Payment Services Act 2019. For example, if the NFT is utilized as a payment token, there would be licensing requirements for companies that provide the following services even if the moneys are not necessarily accepted or received in Singapore: (1) dealing in the NFT; (2) operating an exchange for the NFT; (3) transferring of the NFT; (4) providing custodial services for the NFT; and (5) facilitating the exchange of the NFT without possession of money or payment tokens. In addition, there would be disclosure requirements to address money laundering and terrorism financing risks.

Singapore has recently passed the Financial Services and Markets Bill, which will come into force shortly.^[3] This new legislation is introduced to align with the enhanced standards adopted by the Financial Action Task Force in June 2019, which seeks to mitigate the risk of regulatory arbitrage by virtual asset service providers. Under the new legislation, any person or company in Singapore that provides digital token services overseas (e.g., a company incorporated in Singapore providing digital token services in the U.S.) would have to be licensed or registered in Singapore, and be subject to licensing and ongoing requirements to ensure that the Monetary Authority of Singapore has adequate supervisory oversight over them. Digital tokens include: (1) a digital payment token; or (2) a digital representation of a capital markets product. Regulated services include, among others: (i) dealing in digital tokens; (ii) facilitating the exchange of digital tokens; (iii) transferring and transmitting digital tokens; (iv) safeguarding of digital tokens; and (v) providing advisory or research analysis relating to the sale of digital tokens.

Following the collapse of the multibillion dollar cryptocurrency hedge fund Three Arrows Capital, the Monetary Authority of Singapore has (1) reprimanded Three Arrows Capital for providing false information and exceeding the assets under management threshold allowed for a registered fund management company, and (2) issued a statement signaling that it would clampdown on any ‘bad behavior’ from cryptocurrency industry participants. Coupled with the collapse of other cryptocurrency platforms such as Zipmex, Vauld and Holdnaught, we expect increased regulatory scrutiny by the Monetary Authority of Singapore on crypto and digital assets, such as NFTs.

^[1]  The Singapore courts have recently accepted cryptocurrencies as a form of property, and would likely treat NFTs as property. In a recent case, it was determined that stolen NFTs were capable of giving rise to proprietary rights which could be protected via a proprietary injunction.

^[2] Monetary Authority of Singapore: Reply to parliamentary question on regulation of NFT activities

^[3] The Financial Services and Markets Bill was passed on 5 April 2022 and will come into operation on a date that the Minister appoints by notification in the Gazette.

In the rush to mint or purchase NFTs, many might have overlooked the issues that may arise from such transactions, and especially so when parties involved may not be familiar with contract law and intellectual property law. Without diving too deep into intellectual property law, these are some of the commonly encountered issues in a typical NFT transaction.

First, the buyer needs to do his or her due diligence to ensure that the minter does indeed own the copyright that is purported to be sold in the NFT. Fraudulent transactions are not uncommon, and fraudsters may prey on the buyer’s eagerness to purchase the next NFT that will bring him or her to the moon.

Secondly, the buyer needs to know the exact bundle of rights he or she will be purchasing in the NFT as stated in the underlying contract. For example: (1) is it a sale of copyright or a grant of licence to use the copyright; (2) is there a territorial limit to the use of the copyright; (3) will the copyright author retain the right to use the copyright; (4) will there be other buyers who are entitled to use the copyright; and (5) will the buyer be entitled to sell the NFT. If the transaction is one of a sale (also known in legal terms as an assignment) or an exclusive licence of copyright, the transaction has to be made in writing and be signed by the owner of the copyright. Whether the underlying NFT contract satisfies the formalities requirement remains untested in Singapore law.

Lastly, if the transaction is not one of a sale or an exclusive licence of copyright, the buyer (a mere licensee) has no right to sue for infringement of copyright. Any action has to be brought by the copyright owner or the exclusive licensee. This point is especially pertinent when the NFTs are subsequently resold as sub-licenses granted by the exclusive licensee that do not qualify as an exclusive license. In other words, only the original copyright author and/or the first buyer of the NFT can bring an action against parties who infringe the copyright, but they may not suffer any economic loss.

There is an argument to be made that NFTs may emerge as security tokens and even digital payment tokens of the (near) future.

Although NFTs generally refer to tokenized artistic works and digital collectible items, it could theoretically be applied to other non-fungible digital or physical assets. Given the advantages of blockchain technology, companies and financial institutions may offer NFTs based on a bespoke suite of assets or derivatives of assets. For example, an NFT may be minted to represent the ownership of a physical artwork and fractional units may be sold to anyone with access to the Internet. While NFTs may be structured such that it would not fall within the existing capital markets regulatory regime and the Singapore authorities have cautioned that it cannot possibly regulate all products that people choose to invest their money in, it could be a matter of time before the issues caused by NFTs become too large for the Singapore authorities to ignore.

It would not stretch the imagination to conceive of NFTs as digital payment tokens. NFTs could be used as a form of currency or a medium of exchange as long as two or more parties agree on the value to the underlying goods. After all, fiat money was pegged to gold not too long ago. Further, by being pegged to tangible assets with intrinsic value, NFTs may hold their value better than cryptocurrencies which are subject to wild swings in prices. Therefore, if a critical mass of people agree on the value and use of a few NFTs, these NFTs could be transacted as digital payment tokens.

We therefore do not rule out the imminent application or extension of the existing regulatory regime for securities and payment tokens to NFTs.

On a related note, Singapore continues to parlay its position as a regional financial hub into becoming a regional cryptocurrency hub, permitting firms with the appropriate offerings to set up cryptocurrency platforms and exchanges. Investors are permitted to buy and sell NFTs using cryptocurrencies such as Ether and Bitcoin, but cryptocurrency exchanges must be mindful of banned cryptocurrency transactions in light of Singapore's Russia sanctions.^[4] Due to recent events in the cryptocurrency sphere (e.g. collapse of Three Arrow Capital and the various cryptocurrency platforms), the Monetary Authority of Singapore has signaled a greater degree of regulation is to be expected for crypto and digital assets, with the focus mainly on protecting the retail consumer from speculative trades and mitigating potential financial stability risks.^[5]

^[4]  La Prensa Latina: Singapore bans cryptocurrency payments that could violate Russia sanctions

^[5] Montetary Authority of Singapore: Opening address by Ravi Menon, MAS Managing Director 'Yes to digital asset innovation, no to cryptocurrency speculation'

From a cybersecurity and data privacy perspective:

• an important concern for NFT platforms and NFT investment companies based in Singapore would be to ensure that they are well prepared against any attacks on their platforms and users. In 2018, the Personal Data Protection Commission fined IHiS, an IT agency, a hefty sum of SG$750,000 for compromising the personal data of 1.5 million patients and for failing to implement the necessary security measures and employee training required to prevent such a data breach. This was despite the fact that the breach was carried out by highly skilled and sophisticated hackers;
• NFT platforms and NFT investment companies should be intimately familiar with 10 key obligations in relation to the handling and disclosure of personal data in Singapore under the Personal Data Protection Act: consent, purpose limitation, notification, access and correction, transfer limitation, accuracy, protection, retention limitation, accountability and data breach notification; and
• the retention limitation obligation of the Personal Data Protection Act requires organizations to stop retaining personal data once there are no legal or business purposes for such retention. The organization may encounter practical difficulties with removing personal data if it is permanently recorded in the blockchain.

We expect that the NFT market would see the following developments:

• Assets for investment: Once certain NFTs become more mainstream and fractionalized, they could be readily transacted as assets. To some extent this is already the case in Singapore, with local investors reportedly investing in fractionalized digital assets.^[6] Singapore based IX Swap, a decentralized exchange for security tokens and tokenized stocks announced a new initiative which would allow investors to purchase fractionalized NFTs.^[7]
• Tracing of provenance for arts and luxury goods: Many companies in Singapore have been exploring the use of blockchain technology for supply chain transparency. Glenfiddich has launched a series of 15 authentication NFTs kept in collaboration with the NFT platform BlockBar's Singapore facility, where each such NFT corresponds with a limited edition 46 year old single malt whiskey bottle. The owner of such NFT may opt to hold an NFT for potential resale value, or cash in the NFT to receive the physical whiskey bottle itself.^[8] In a similar vein, RtistiQ an online art marketplace in Singapore has launched NFT-authenticated art auctions.
• Gaming and Fashion NFTs: In Singapore, fully digital fashion labels Republiqe and Auroboros have embraced a digital evolution, launching digital NFT clothing which permit customers to share images of themselves in tailored digital garments.^[9] Established labels and brands have begun exploring this space – the Singaporean edition of fashion magazine Vogue has issued its own collection of 15 fashion-based NFTs.^[10] We would expect to see greater interest, as local brands explore new avenues of NFT enabled fashion – minting NFT garments for avatars in metaverse platforms for example.^[11] A recent development is the launch of the gaming NFT marketplace by Gamestop in partnership with Immutable, permitting users to trade NFTs featuring items like trading cards and virtual land plots from web3-related games.^[12]

^[6] Montetary Authority of Singapore: Opening address by Ravi Menon, MAS Managing Director 'Yes to digital asset innovation, no to cryptocurrency speculation'

^[7] GlobenNwswire: IX swap expands reach into fractionalized NFT market

^[8] The Drum: Glenfiddich's first NFT is a bet on long-term relationships with luxury consumers; South Morning China Post: NFTs for 46-year-old Glenfiddich single malt whisky to ensure buyers get the real deal

^[9] The Straits Time: When virtual clothes are pricier than real ones; Vogue: Clothing that doesn't exist - Singapore-founded brand Republiqe codes digital collections and auctions NFT garments

^[10] Vogue Business: Exclusive - Fashion magazines are minting NFTs

^[11] Yanko Design: Guardians of fashion brings NFT fashion and entertainment business into the metaverse

^[12] NFT Gators: GameStop officially launches gaming NFT marketplace with Iimmutable X