China's first court ruling on NFT art theft holds marketplace accountable

·4 min read

A court in China's eastern city of Hangzhou handed down the country's first landmark ruling on a case involving non-fungible tokens (NFTs), holding a marketplace accountable for allowing a user to create a token from stolen artwork.

The lawsuit was filed by Shenzhen-based company Qice against Hangzhou-based BigVerse, which operates the marketplace NFTCN.

An NFTCN user listed an NFT using a cartoon picture created by artist Ma Qianli, according to the plaintiff, which is the sole copyright owner of Ma's works.

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The artwork, showing a cartoon tiger receiving a vaccine shot, was sold by the unnamed user for 899 yuan (US$137), according to an article published by the Hangzhou Internet Court last week.

The court decided that the platform failed to check whether the user who created the NFT was the rightful owner of the artwork, and therefore NFTCN was at fault for facilitating the infringement of the owner's "right to disseminate works through information networks".

BigVerse was ordered to compensate Qice 4,000 yuan (US$611) and stop the NFT from being circulated by sending it to an "eater address", according to the verdict published by Kinding Law Firm, which represented Qice.

An eater address is a cryptocurrency wallet address that does not have a private key, and so cannot be used for transactions. The process of sending crypto assets to an eater address is commonly called "burning", which is virtually equivalent to deletion, although most data stored on a blockchain cannot actually be altered or removed.

NFTs are unique units of data added to a blockchain that represents the ownership of a digital file. They exploded into mainstream consciousness in 2021, as enthusiasts touted their ability to allow the trading of digital assets, with collections of cartoon avatars and digital artworks being sold for millions of dollars in some cases.

Communities of NFT enthusiasts have formed in China, despite Chinese authorities' ambiguous attitude towards the digital assets. While Beijing remains hostile towards cryptocurrencies and has repeatedly issued warnings over the risks of NFTs, it has so far tolerated NFT-related activities.

Like elsewhere, NFT collectors and traders often come across frauds, thefts and copyright infringement issues, as the emerging field remains largely unregulated.

In one case in February, a Chinese college senior lost a rare NFT worth 200 ether, or roughly US$548,000 at the time, in a phishing scam.

The Hangzhou case marks the first public ruling on an NFT-related lawsuit in China, and provides valuable reference for future cases, said Liu Yang, a counsel at Deheng Law Offices in Beijing.

Because the marketplace directly profits from the NFTs on its platform by charging commission fees on transactions, it holds major responsibility in paying attention to user actions that violate other users' rights, the court argued.

The court also suggested that BigVerse establish an effective copyright vetting mechanism to check artworks uploaded onto its platform.

"The ruling deemed the supervising obligation of blockchain-related platforms higher than that of general marketplaces, such as e-commerce platforms," said Ni Longyan, a researcher at Fashion Law Research Centre of Zhejiang Sci-Tech University. "But generally speaking, network service providers are protected by the 'safe harbour rules' and are not obliged to actively review information on the platforms."

"The ruling also confirmed that NFT transactions in China are subject to information network dissemination rights," she said, adding that before the case, it was debatable whether NFTs should be subject to distribution rights instead.

But Liu noted that the ruling does not mean all NFTs are legally protected in China, especially those traded in cryptocurrencies.

The ruling also did not clearly define what rights an NFT owner possesses, as legal tools have yet to catch up with the new concept, said Xia Hailong, lawyer at the Shanghai Shenlun law firm.

"NFT and blockchain enthusiasts' definitions for these things have gone beyond what the copyright law can cover," he said, adding that the best legal concept to be applied to NFTs' copyright disputes would be the right to disseminate works through information networks.

"But it's a broad right that covers almost all actions that use and spread works online," Xia said. "The verdict was far from touching upon the core of the NFT ecosystem."

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2022 South China Morning Post Publishers Ltd. All rights reserved.

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