US State Treasury Department Report Warns Of The Pitfalls Of NFTs For The Unwary

| General

US State Treasury Department Report Warns Of The Pitfalls Of NFTs For The Unwary!

What Has Happened?

On 4th February 2022, the United States Treasury Department released its study into the art industry, focussing on the rapid increase in the Non-Fungible-Token sector. The risks posed are seen as “concerning”, as they could lead to terrorist financing and money laundering.

What Does It Mean?

The results of the study alerted the market to three issues for key NFT players to consider. Some NFTs are advantageous because they allow value to be transferred “peer to peer” without accruing shipping and transportation costs. However, for all the advantages of NFTs, the U.S. Treasury Department highlighted the worrying trend of criminals manipulating them.

Another benefit of using NFTs is the “incentives” potentially available for participants. These assets have the advantage over other types of transactions regarding time and cost as they use smart contracts. There is a perception that higher revenue can be reached using NFTs. However, the United States Treasury Department warned about the risks of complacently overlooking due-diligence procedures when entering these transactions, the risk of money laundering activity and the difficulties involved in identifying the parties involved in purchases.

What Impact Could This Have on The Legal Profession?

This announcement is worth listening to as lawyers are on the front line against such unscrupulous practices. They need to identify the methods such delinquents use to take advantage of vulnerabilities. Legal representatives should be advising affected parties to respond in three ways. Primary concerns include strengthening their diligence procedures to mitigate against such potential regulatory action.

Such parties need to seek to protect their legal positions by ensuring that they have received proactive advice on any new developments' patent and copyright law implications. More particularly, they will need to consider the I.P. relationship pre-contract, during the contractual relationship and post-contract termination. They should be incorporating and clearly communicating these rights into smart-contract documentation.

However, Claudia Milbrandt from Clifford Chance Solicitors warns clients that human error can creep in where the person's judgment is involved. She elaborates that this is the case where contract clauses are incorporated which contain words such as ‘necessary” or “reasonable”.

There is also the potential litigious action coming down on those negatively manipulating the market through behaviour which attempts to control, exploit and wield influence over a particular market or sector. The announcement warned key operators that such behaviour might be seen as unfair, dishonest and widespread abuse of its position. Sidley Austin Solicitors advises clients to do all they reasonably can to reduce the risk of such allegations and legal action being levelled if unwittingly purchasing small amounts of NFT shares which grants them rights to a financial return.

Turning to Anti-Money Laundering, which is another crucial aspect potentially inundating lawyers. They should be advising those affected to carry out risk assessments with baked-in Anti-Money Laundering measures as a top priority.

This study also highlighted the importance of CPD training as lawyers should stay on the pulse of judicial thinking, ensuring they attend their CPD training and carry out research to mitigate against the risks of new emerging uncontemplated challenges. An important area will be their knowledge of I.T. knowhow as this will provide lawyers with the resources needed to provide up-to-date advice.

In conclusion, NFTs are a potential legal minefield for the unwary. Lawyers need to build relationships with clients develop their legal knowledge by keeping abreast of new legal developments to stay ahead. This way, lawyers will be better placed to provide clients with the real-world strategies required to support the needs of the modern client through the challenges faced.

The Legists Content Team

Assessing Firms

#Allen&Overy #CliffordChance #HoganLovellsLLP #Latham&Watkins #LinklaterLLP #NortonRoseFulbright #Slaughter&May #AddleshawGoddard # Ashurst #BakerMcKenzie #Bird&Brd

This Article was Written Using the Following Sources

[1] Department of the Treasury - Study of the Facilitation of Money Laundering and Terror Financing Through the Trade in Works of Art – February 2022 - Study of the Facilitation of Money Laundering and Terror Finance Through the Trade in Works of Art (treasury.gov)

[2] Section 610(c) Anti-Money Laundering Act 2020 - Study of the Facilitation of Money Laundering and Terror Finance Through the Trade in Works of Art (treasury.gov)

[3] William M.(Mac) Thornberry National Defense Authorization Act 2021 - Study of the Facilitation of Money Laundering and Terror Finance Through the Trade in Works of Art (treasury.gov)

[4] Art Basel and UBS - The Art Market 2021 - The Art Basel and UBS Global Art Market Report

[5] Reyburn, S. and Carvajal, D. – Gauguin Painting is Said to Fetch $300 Million, - New York Times – 5th February 2015 - Gauguin Painting Is Said to Fetch $300 Million - The New York Times (nytimes.com)

[6] Peers, Alexandra – ‘Qatar purchases Cezanne’s The Card Players for More than $250 Million, Highest Price Ever Paid for a Work of Art – Vanity Fair -For $250 Million, Qatar Buys One of Cézanne’s The Card Players, the Priciest-Ever Painting | Vanity Fair

[7] Teitelbaum. D et al – Sidley Austin – 11th February 2022 - U.S. Treasury Study of Money Laundering Risks in the Art World Focuses on NFTs | Insights | Sidley Austin LLP

[8] Blockchain and its application in the field of I.P. – Smart Contracts and IPR Management – Clifford Chance – Talking Tech – 5th November 2021 - Blockchain and its application in the field of I.P. (cliffordchance.com)

[9] – Milbradt, Claudia – Clifford Chance Solicitors – Securing I.P. rights in blockchain technology – A German law perspective – 29th October 2021 - https://talkingtech.cliffordchance.com/en/emerging-technologies/blockchain---distributed-ledger-technology/blockchain-and-its-application-in-the-field-of-ip.html

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