**5.1 The nature of the token and its underlying good and the legal regime applicable to NFT trading**

First of all, it is to be outlined that tokenization has different legal consequences and scope in the case of NFT trading and in the one of fungible virtual assets.

But the bunch of law-compliance specialties widens when taking into account the nature of the goods, services, or assets underlying the NFT. In the case of listed deliverable goods, like agricultural products quoted in commodity exchanges, NFTs can confer rights to the possession, transfer, disposal, withdrawal, or delivery of goods previously identified (e.g., selected wine bottles, or containers, with trademark and specifications of quality and provenance from a denomination of origin guaranteeing such characteristics) in favor of the token holder. The same structure would be applicable to collectable or individualized artworks or cataloged antiquities. The nature and extension of faculties granted by the token can differ substantially in the case of NFT unlisted goods, as the corresponding administrative or public-law regimes applicable to their registration vary depending on the civil-law regimes or common law principles for the delivery and efficacy of the transmission of property, and according to the nature of the tokenized object and

specialties of its delivery and transmission. The NFT negotiable tokens, or alternative fungible tradable tokens on which "derivative" rights on NFTs or underlying physical assets are created, require the implementation of regimes such as the one provided for in MiCA for their legal circulation as investment tokens, with specific supervision and provision of services efficiently supplied by professional intermediaries of blockchain services (virtual asset service providers – VASPs or crypto asset service providers – CASPs).

In civil law countries, legislators usually adopts Roman law antecedents to consider that the cession of any property, including rights annotated or recorded in a public registry of properties (mostly for real state but also for mobile financial property), requires, for legal efficacy of the transmission in favor of the acquiring party or purchaser, the compliance of registration standard principles like legitimacy. In most countries, transferor shall be deemed to remain the holder of the token until the name of the transferee is entered in the ledger or the token is received in the digital wallet of the purchaser.

Otherwise, most EU jurisdictions under MiFID domain set regimes on mobile fungible assets (namely listed assets) establishing specific rules of control and recognition of fungibility in order to effectively protect the position of both the registry (in terms of public trust) and the registered holders of traded assets. Thus, concepts like "tradability of securities" as noted in art. 18 of Spain's Decree 878/2015 developing national securities law (art. 6.4 Ley del Mercado de Valores) defines the "fungibility" of the book-entry securities associating it with the equality or identity of "characteristics" of the book-entry. The grouping of the property of the fungible securities in "balances" or "determined amounts" identified in the account of the holder, as in the case of classes and series of securities issued by the same company, demonstrates the capability of fungible assets for massive trading, without prejudice to "the needs of specification or breakdown of registered securities derived from special situations" (art. 18.3, ibid.) such as embargo, execution of sentences or usufruct contracts, modification of encumbrances, or other relevant circumstances that do not affect the identity of the characteristics among the fungible values but can be registered (as in the case of the pledge, whose registration is equivalent to possessory displacement of the recorded value, *ex* art 14.1 Decree 878/2015). Similarly, special regimes could consider NFT as eligible negotiable assets grouped in such amounts within segregated accounts to protect the rights of holders at the same level of fungible securities under the aforementioned circumstances, applying similar rules considering the singularities of NFT identity or individuation as a key characteristic for the autonomous recognition of the virtual asset as a category of DeFi tradable (and ledger-traceable) security.

The non-fungible characterization of NFTs, in a PDL network, and more specifically in the realm of the PPDL, can become preconfigured and programmed by the platform managers and by DApp/SC developers (with the acquiescence and participation of the issuer in the process) from the very beginning of the preparation of the platform in accordance with the PoA consensus protocol, and in any case they must be set to prepare the transfer of the cryptos no later than the start-up of the SCs layer and the contemporary provision and insertion of the tokens in the platform. In particular, in accordance with the specifications of the ERC requests for comments for the case of Ethereum network protocols and derivatives (for example, those of the Quorum-Ethereum kind).

#### **5.2 Investment and betting with NFTs**

All investments entail a bet in the sense of probability of nonreturn, partial, or total loss of committed funds, or materialization of the fundamental economic risks of price, market, and solvency of the issuer, in addition to operational, network

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

resilience, and regulatory risks. On the other hand, not every rational investment involves a bet in the classic sense of "game," limited or even prohibited according to civil law private regimes (e.g., Spanish civil code of 1889, arts. 1790 and 1801). Both ethical and social reasons, and the reasonableness of NFT trading control from a public order perspective and from the viewpoint of investor protection, should prevail in future specific NFT regulations. The magnitude of the interests potentially affected, also in the strict legal-private sphere, is exponentially growing in the case of the NFTs market. Thus, investments could require betting or gambling legal boundaries in the purest sense of market speculation. Surveillance should foresee the measurement of NFT returns and the consistency and soundness of their value and valuation methods, still in infancy and precarious, since the bul of the NFT investment value depends on unknown factors such as the issuer credit risk, the fulfilment of contractual promises of profitability, or the effective avoidance of cyber risks incorporated into the architecture of the PDL network wherein the transfer of tokens takes place.

Even the risks associated with the potential misuse of protocols or abuse of technical trading platform should be considered when legally qualifying NFT trading as gambling in this particular context. However, this does not exclude their generic character of "investments," and therefore, to the extent that investment contracts are made in the market, they must be subject to a specific regime, which many issuers seek to avoid by selecting unregulated DeFi trading forums and movements of headquarters or establishment of the platform and the underlying business (forum shopping), triggering overall risks borne by unaware investors, as already denounced by the best mercantile-law doctrine regarding speculative stock market positions.

Transactions made by virtual characters (avatars) proliferate exponentially (purchase of virtual yachts or virtual plot in a metaverse like Sandbox, created by Republic Realm Co.). The association between a metaverse and NFTs representing unrepeatable unusable objects (because they are unusable) is a symbol of elitism and selection of smart investment today. Decentraland, a "virtual local" of 560 m2 meters, was recently sold for 2.4 M USD in Mana cryptocurrency, located in the exclusive virtual street of Fashion Street, hosts fashion shows. Burberry, Gucci, Louis Vuitton, Adidas, and Nike (developing Nikeland metaverse) already operate in these virtual environments. Microsoft Teams video conferencing app, widely used in the professional and educational world, will soon allow Mesh to operate in the metaverse trading NFTs in virtual markets, creative form of a parallel financial system, but also of a mechanism of social separation, where operators develop systems possibly widening the digital social breach. This is why investment valuation must be redefined considering the difficulty of access to the market and use of sophisticated DeFi payment tools and NFT contracts by which a few investors gain stratospheric profits in the purest classic stock-market speculation on extra-volatile instruments.

Aside from ethical-philosophical considerations, these economic facts should lead to legislative reflection on the creative value mechanisms of NFTs, even with a possible redesign of the legal concepts of "utility" in the Paretian sense, and "value," since the emergence of new asset valuation models determining reactive mechanisms to protect the integrity of the market and the health of the financial system itself, aligned with the single European digital market and within the conceptual framework of the European digital finance strategy, led by the MiCA-IM-DORA proposed regulations. Measuring the value of NFTs on works of art in new NFT DeFi marketplaces connected on metaverses requires imagination and prompt reaction to volatility. Investment caprice, artistic novelty, or simply the sudden mobilization of large investments, in the absence of institutional market creation systems or control mechanisms such as the DeFi AMM, restrict a rational control of volatility. Classic CFROI-type valuation systems, and even other more accurately adjusted to market valuation like value-at-risk (VAR) or real-option methods, are practically useless in these virtual contexts, considering their geographic offshoring, their lack of jurisdictional control (and even competent jurisdiction), and the dilution of responsibilities associated with the use of DLT and linked digital technologies, whose scope does not seem difficult to intuit, despite their yet unknown full dimension. The role of national and regional regulators on NFT volatility control mechanisms is crucial for financial stability even when such tokens represent unique creations and cannot be legally reputed ARTs or present extreme valuation complexity according to traditional parameters.

An acceptable solution to these issues is the attribution of specific role to legislator in the control of NFT volatility when traded (directly or by means of rights on fractions of the underlying asset, virtual or not) in relatively profound and liquid marketplaces, including OTC and nonregulated or deregulated specific contracting spaces (IP e-markets, artwork virtual auctions, DeFi metaverse-linked platforms, ....). Legal measures to set volatility boundaries or prohibit certain NFT trades poses the eternal dilemma about the efficiency of law intervention and regulatory gatekeeping. Anyhow, we believe that the use of stablecoins as an anchor to limit the volatility of the value of the NFT requires three constructive assumptions:

