**3.1 The meaning of permissioning in tokenization and the concept of public-permissioning**

From a DLT structure or architectural perspective, the tokenization or creation of cryptos or tokens can be materialized according to various complex technical procedures. We herein consider the options actively present in token markets within the context of permissioned DLT networks (with authorization or permission of certain nodes to record transactions or data exchanges in the blockchain and blocks – onchain transactions), as long as they are publicly accessible and allow anyone to perform operations.

The concept of "permissioned" network or distributed ledger (PDL) is consolidated in international standards since 2019. In general, this adjective opposes to "permission-less" or without permission, in such way that distributed ledgers can be considered as permissioned or permission-less from the double perspective of:

a.Node or nodal requirements for a network member to be approved as capable to validate the recorded transactions, and to be eligible to effectively record them on the ever growing block-chain as a part of the information tied to the ledger, which plays a key role as a practically immutable or indelible and unforgeable data registry. PDLs are governed or administered by permissioned or authorized nodes in accordance with the bylaws or previous contracts governing the network and the competences of nodes ("miners" in permission-less ledgers).

b.Public accessibility to the information recorded in the distributed ledger. Permissioned transactions (corresponding to PDL data traffic) are not publicly accessible or readable without authorization granted by ledger administrators who may require self-identification through certificates or other digital means.

Permissionless ledgers like Bitcoin have received most attention from the markets since 2015, but tokens (including NFT) should be traded only in PDLs, better qualified to address most of the legal requirements posed by token use cases in the DeFi industry from the viewpoint of legislators and governmental financial institutions.

The former affirmation rests on both technical and legal reasons, and also in economic considerations. Total anonymity and decentralization characterizing Bitcoin does not match legal requirements of control and supervision essential to protect DeFi markets and investors. Otherwise, transaction costs and "proof-of-work" classical requirements to tie blocks and computational effort (including electrical consumption) to find out nonce numbers (it takes roughly ten minutes for a miner to sign a Bitcoin block, and fractions of seconds to sign a PDL block) render permissionless costly, environmentally unsustainable and undesirable for token trading and related contract negotiation and execution.

Apart from fastness and computational dramatic cost reduction, other technical aspects favor PDLs as the natural site for optimal token contracting, like the possibility of further control of recorded transaction, the supervision of functioning and cost of the consensus algorithm, and many options to adopt and adapt adequate fairness properties among participants. The legal matters include the support from external legal agreements or the regulatory enforcement in critical financial subsectors like NFT contracting.

The terminology varies from the general perspective of the International Standards Organization (ISO), whose standards recognize the concept of public ledgers in several standards, to the most specific viewpoint of, among others, the specific standards of the International Telecommunications Union (ITU-T) and the European Telecommunications Standards Institute (ETSI). Those institutions consider that PDLs are "trusted" blockchain, whose domain is defined by compliance and interoperability (cf. https://www.etsi.org/deliver/etsi\_gr/PDL/001\_099/001/01.01.01\_60/ gr\_PDL001v01010 1p.pdf, 1 et seq.) and the corresponding definitions contained in the ISO/DIS 22739 Terminology, ISO/CD 23257.2 Reference architecture set by the Blockchain Technical Committee ISO TC 307. It should be noted that CEN-CENELEC: CEN (European Committee for Standardization) and CENELEC (European Committee for Electrotechnical Standardization) have stable liaisons with ETSI ISG PDL; and a new Technical Committee acts as mirror with ISO/TC 307. This Focus Group decided to continue as a Joint Technical Committee (CEN/CLC JTC19) since 2019.

On the public nature of a blockchain, see the standards of ITU-T FG DLT, Technical Specifications and Technical Reports D1.1, D3.1 and D3.3; cf. ETSI GS PDL-012, developing a layered PDL reference architecture; ETSI GR PDL 003 V1.1.1 (2020-12); Permissioned Distributed Ledger (PDL); Application Scenarios, http:// www.etsi.org/deliver/etsi\_gr/PDL/ 001\_099/003/01.01.01\_60 /gr\_PDL003v010101p. pdf; ETSI GR PDL 004 V1.1.1 (2021-02); Permissioned Distributed Ledgers (PDL); Smart Contracts; System Architecture and Functional Specification, http://www. etsi. org/deliver/etsi\_gr/PDL/001\_099/004/ 01.01.01\_60/ gr\_ PDL 004v010101p.pdf.

The aforementioned standards have become crucial to understand the meaning and scope of permissioning and the possibilities of authorization granted by nodes

#### *NFT Legal and Market Challenges in Permissioned Blockchain Networks DOI: http://dx.doi.org/10.5772/intechopen.106460*

to DeFi platform managers, intermediaries and NFT investors, as we will show below (section 3.2) since the conditions of legally recognizable markets depend on the technical characterization and structure of permissions granted by and to operating nodes in the network.

It is to be well noted, finally, that in order for a token market to be successfully deployed with full compliance control capacity by market authorities, the optimal solution seems to combine the advantages of permissioning under proof of authority (PoA) protocols and the publicness or public nature of the network, meaning public access to operate and openness for the public control of nodal activity, and therefore, decentralized control of the network, which is not possessed or dominated by a single entity.

The standards of the International Telecommunications Union outline the distinction between public and private blockchains; for instance, in ITU-T Focus Group DLT Technical Specifications and Technical Reports of 2019, namely D1.1, D3.1 ,and D3.3. The European Telecommunications Standards Institute develops a layered architecture in documents like ETSI GS PDL-012 and ETSI GR PDL 003 V1.1.1 (2020-12), and a concept of PDL in several key documents like [1].

The concept of public-permissioned network as a distributed ledger (PPDL) has been introduced in the Ethereum blockchain practice by Consorcio Red Alastria, the generator of the first worldwide essay or alpha version of a PPDL, encompassing ETSI PDL standards and functioning philosophy recently detailed [2], situating the governance and access control in the Platform Service Layer within the PDL network architecture.

#### **3.2 Significance of authority proofing in PDLs for token contracts**

In the case of PDLs based on the Ethereum blockchain protocol, transactions are developed applying IBFT or Byzantine-type consensus protocols to grant permission to record transactions on blocks, under a DLT network system configuration where different alternative tests or validation protocols can coexist (e.g., specific test of permission or authorization by validator nodes, known as Proof of Authority or PoA [3]). For the proper execution of such protocols and the deployment of smart contracts to automate the fulfilment of programmed transactions related to payment and transmission of tokens, and other effects linked to their normalized trading on exchange platforms (and their corresponding asset and benefit transference among node addresses), the developers of Ethereum have devised different standards, called Ethereum Request for Comments, ERCs, which entail substantially different characteristics, serving to carry out transactions a variety of tokens.

Derived from Proof of Stake (PoS) and in the Ethereum 2.0 blockchain (today ready for the mining of more than 100k transactions per second, thanks to new shards or channels for massive-data distribution, which guarantee the scalability of the network), the PoA protocol aims to keep the strengths of PoS (financial incentive for validators, limited computational effort and hardware sophistication; sharding scalability) overcoming its drawbacks, mainly the assumption that 'staked-tokens' owners have incentive to act in the network's interest (they actually do not, since dominant holders 20% accrue more investment in the network's success than other having 1% less holdings staked, regardless of the actual stake size). PoA algorithm, instead of tokens as stake, takes participants' identity as stake, thus implying the disclosure of validators as known entities risking their reputations for the right to validate the blocks. Thus, unlike in PoS, monetary discrepancies between validators are irrelevant, ensuring equal motivation to work for network success.

Regarding DeFi token trades, the specification of ERCs depends, among other relevant factors, on the content of the rights associated or incorporated to the cryptos. And such rights granted to the token holder or acquirer previously depend on the mechanism or mode of representation of digital assets involved in the standard.

In the case of NFTs, one of the key characteristics of the rights associated with the token is non-fungibility which implies the full identification of the token, its individuation, plus the limitation to massive trade whenever the token is unique and there is no prevision for massive token trade-off on a DLT market platform. In a PDL-Ethereum context, different protocols generating different types of ERCs constitute an ideal and flexible way for the orderly management of the corresponding transactions on tokens and associated smart contracts to efficiently execute trades. The structure of such trading varies considering the NFT intrinsic structure and tradability as an investment token.

It is to be noted that the first characteristic of the NFT to consider to this extent is the market tradability of the crypto. Some NFTs could be traded despite they are technically (apart from its referred or underlying asset) non-fungible or unique, since massive tradability could be obtained by means of fractioning or by means of contractual linking or connections to tradable assets or rights constituted on such massively tradable assets in regular or specific DeFi markets, which should be regulated. Deputy members of EU Parliament (MEPs) and EU INATBA (International Association for Trusted Blockchain Application), representing DLT industries, have been suggesting according considerations within the MiCA Task Force Working Groups created to feedback MEPs with relevant criteria from DLT industry and PDLs. Spain's DLT Alastria Consortium (cofounded by Prof. J. IBÁÑEZ) is a founding member of INATBA, thus participating since 2021 in finance WGs operating in INATBA MiCA Task Force (cf. https://inatba.org/mica-task-force/).

Proof of Authority (PoA) blockchain protocols, within this context, may play a key role to determine the consent of public supervisors in order to authorize the legal trading of NFTs in the scope and within the boundaries predetermined by the securities markets applicable rules. The reputation of validators is held by market authorities, which makes PoA impractical for public blockchains like Bitcoin and Ethereum, wherein hundreds or even thousands of validating nodes operative, and the identity requirement becomes a clear advantage to comply with regulations in the context of public-permissioned blockchains subject to legal specific requirements. In a PoA-network PPDL, a relatively small number of validating nodes re-centralize or make the market less decentralized, facilitating supervision, with enough degree of decentralization but gaining in investor and market confidence (like in the cases of Hyperledger Besu networks, an implementation of Enterprise Ethereum offering two PoA alternatives; or in the Alastria Consortium Telsius and Besu networks), with much higher throughput capacity than in permissionless blockchains, minimal computational effort and no specialized equipment (like in PoS). The acceptation of established financial institutions (as investment banks, financial intermediaries, or crypto-asset service new providers) as validators for crypto-transactions should be a legal previous condition to the settlement of DeFi market platforms for cryptos.

Previous authorization of intermediaries in traditional financial markets is essential to the market confidence and investor protection. Similarly, previous authorization of validating nodes in crypto-transactions will probably be a legal and also economic-efficient precondition for the development of token transactions in general, and in particular for high-risk token investments like NFT trading. Although PoA-based algorithms are unlikely to power big market platforms with thousands

or millions of users, they are already optimal to build networks tailored to the needs of a limited number of known stakeholders (agreeing, [4]), as in the case of certain limited-client oriented NFT platforms and markets.
