NFT regulations in Japan

Non-fungible tokens (NFTs) in the art, gaming and sporting sectors are rapidly gaining popularity worldwide, and consequently are receiving significant attention and developing in practice in Japan. Beginning around April 2021, NFT markets started to appear in the country, and many companies have announced entering NFT-related businesses in collectables, sports and blockchain games, among others. As a result, NFT businesses in Japan are expected to continue to grow.

This article explores the recent status of NFTs in the country by focusing on the treatment of NFTs under Japanese law.

Legal status of NFTs

There is currently no law in Japan that directly regulates NFTs. However, if money or other assets that are considered to be a “distribution of profits” are delivered to a holder of an NFT, it is highly likely that the NFT falls within the definition of “securities” under article 2.1 of the Financial Instruments and Exchange Act. Even if an NFT does not correspond to securities, if it has an economic function, such as being a means of payment, there is the possibility that it falls within the definition of a “crypto asset” or a “prepaid payment instrument” under article 2.5 or article 3.1 of the Payment Services Act.

However, when looking at how NFTs are transacted, there is no delivery of money or other assets that can be considered to be a distribution of profits to the holder from the NFT itself, and it can be surmised that an NFT does not have an economic function, such as being a means of payment. Therefore, as to the current state of play, it is understood that NFTs are not subject to the financial or business regulations under the Financial Instruments and Exchange Act, the Payment Services Act, or other Japanese laws.

If NFTs are used as premiums (i.e. contest prizes or promotions), the Act against Unjustifiable Premiums and Misleading Representations will apply, and NFTs will be subject to price caps and controls on the total amount. Gambling is, in principle, illegal under the laws of Japan and criminal penalties can be imposed, and the use of NFTs in any act of gambling is prohibited.

Legal significance of transactions

There are instances where the expression “acquiring ownership of an NFT” is used in transactions of NFT items. Under the Civil Code of Japan, while the “thing” that becomes the object of ownership is a tangible object (article 85), the NFT itself is intangible digital data and, therefore, does not become the object of ownership. Specifically, even if an NFT is purchased, its ownership is not acquired.

The Tokyo District Court decision of 5 August 2015 indicated that Bitcoins, which are tokens on a blockchain, are not objects of ownership since they are not tangible. Acquiring an NFT is understood as proof of the technical nature of a one and only NFT on a blockchain in a non-rewritable manner, as the acquirer of digital data specified by the token.

Furthermore, acquiring an NFT item does not mean acquiring the copyright of the item. A copyright is the right to exclusively use a copyrighted work and is granted to the author of the copyrighted work under the Copyright Act. However, even if an NFT item is acquired, unless there is an agreement with the copyright holder to acquire the actual copyright, the acquirer will not acquire the copyright to such work. Unless a licence is obtained from the copyright holder, the right to use the copyrighted work is not obtained by the acquirer.

In the case of art, according to article 45 of the Copyright Act, the owner of the original work of the copyrighted work of art can publicly exhibit such work without obtaining the copyright holder’s authorisation. However, in the case of an NFT, since it is not subject to ownership, article 45 does not apply.

Therefore, how the acquirer can use the NFT will be determined by the terms of the agreement between the acquirer and the copyright holder. Although the licence terms are not always clear in all NFT transactions, the resale of an acquired NFT work to a third party can be thought to be included as an implicit licence. Otherwise, the scope of licence in the agreement will have to be construed from the descriptions in the metadata of the NFT, or from the terms of use of the platform on which the NFT is being transacted.

Considerations in transactions

The key points to consider in transactions of NFT items in Japan are:

(1) For creators or sellers:

(i) The creator or seller must make sure that third-party rights are not infringed when listing an NFT item. Selling another person’s copyrighted work by making it into an NFT without authorisation can be an infringement of the reproduction right (article 21), adaptation right (article 27), automatic public transmission right (article 23.1) and other rights under the Copyright Act. If a third party’s image is used without authorisation, that use is an infringement of such person’s image and publicity right. Under the laws of Japan, an image right (shozoken) is recognised as a right that protects an individual’s appearance, and a publicity right is a right that protects the economic value of the image of a famous person.

(ii) To prevent subsequent unnecessary disputes, an NFT seller should clarify the extent to which such work will be licensed to the purchaser. The seller also should confirm the terms of use of the marketplace, and consider how to state the terms of use within the metatag of the work.

(iii) Once a work is sold as an NFT, since the work cannot be retrieved unless the creator repurchases it, whether there will be an effect on the seller’s existing business and the scope of it should be considered.

(2) For purchasers:

(i) When purchasing an NFT, the purchaser needs to confirm in advance the scope in which the NFT item can be exploited. In particular, the purchaser needs to confirm the types of use that are being licensed in the agreement in terms of copyright use, as well as the terms of use of the platform and the information within the metatag of the NFT.

(ii) There have been instances where items having the same content were sold multiple times. Moreover, a seller is not legally prohibited from selling similar works as NFTs. Even if an item is the one and only item as an NFT, the purchaser should be aware that there is the possibility of the same or similar work existing in other markets.

(iii) Since the copyright is not acquired, the purchaser needs to be aware that the purchaser cannot bring a claim seeking an injunction or damages based on copyright, even if a third party is exploiting a similar work without authorisation.

(iv) Since NFTs cannot be usually transacted between platforms with differing blockchain protocols, the purchaser should confirm the platforms on which the acquired NFT can be resold.

(3) For platformers of marketplaces:

(i) To avoid legal disputes, a platformer needs to clarify the relationship of rights between the transacting parties through a term of use, and clearly provide limitations of liability and other disclaimers that are to apply to transactions and users.

(ii) Since records of a rights-infringing work cannot be deleted from a blockchain, a platformer should consider how to prevent unlawful or unauthorised transactions preemptively.

(iii) Although an NFT will exist on a blockchain virtually forever, a platformer should consider the continuation of, and succession methods for, its service so that NFT purchasers do not incur damages due to the termination of the platform services.

(iv) A platformer needs to take appropriate actions for the security of its platform system. A security breach incident on an NFT platform was reported in Japan in August 2021.

While NFTs hold hidden possibilities as a new means of content distribution, their structure and legal positioning are not necessarily fully known at this time. To duly expand NFT businesses in the future, an understanding of NFTs by parties to transactions, and the creation of clear and proper rules, are desirable, and such efforts are currently being made by various stakeholders.

Market participants also will need to be mindful of Japanese legal and regulatory developments that likely will result as NFTs gain prominence, and should seek advice from knowledgeable counsel.