Category Archives: Uncategorized

In this post, we analyze non-fungible tokens (NFTs), play-to-earn scholarships, and the Yield Guild DAO under Japanese laws. With respect to the scholarships, it is worth noting that they are mainly offered overseas – presumably in compliance with the relevant laws – and that Japanese laws only apply if Japanese residents are involved. The following post is written under the assumption that this is the case.

You can find more information about the legal and regulatory environment for NFTs in our previous posts:

  1. ‘Play to Earn’ under Japanese Laws (September 2, 2021)
  2. NFTs: An overview of the current state in Japan, the legal and regulatory environment, and the latest guidelines by the JCBA and BCA (April 27, 2021)
  3. Buyer Beware – Digital Art and Non-Fungible Tokens (NFT) (March 22, 2021)

1. Overview

1.1. Play-to-Earn (P2E)

The P2E model was pioneered by Axie Infinity. Axie Infinity is an online game that allows players to receive rewards in the form of Smooth Love Potions (SLP) when playing the game. SLP are tokens that are needed for breeding new Axies and which can be traded on global crypto exchanges.

1.2. Scholarships

To play Axie Infinity, a player needs at least three Axies. In August 2021, the price for three Axies was around USD 1,000 and as such unaffordable for many players. Yet, despite the high costs, the game continued to gain popularity – especially in countries with low incomes. One of the reasons behind the continued success were scholarships. Under the scholarship program, owners of Axies give their Axies to players who in turn use them for playing the game. When earning SLP as rewards, players must share them with the owners of the NFTs. The percentage players retain is somewhere between 40 and 75 percent, depending on the provider of the scholarship and scholarship program.

Scholarship programs in a nutshell
  1. Owners of Axies search for scholars on discord and other platforms.
  2. Scholars sign scholarship agreements with an owner and start playing the game.
  3. Rewards earned in the game are shared between the players and the Axies’ owners.
Even though scholars may use Axies for playing, they are not authorized to sell them under the scholarship agreement.

1.3. Yield Guild Games

Yield Guild Games (YGG) describes itself as a “play-to-earn gaming guild, bringing players together to earn via blockchain-based economies”. YGG initially raised funds from a16z and other investors in exchange for YGG tokens and invests those funds into NFTs that are used in blockchain games. Proceeds from utilizing the NFTs – for example from lending the NFTs to players of P2E games or selling them on the market – are distributed to YGG token holders.

In some cases, YGG further brokers scholarships for NFT holders who want to put their NFTs to use and earn a passive income. Initial activities focus on Axie Infinity, The Sandbox, and League of Kingdoms. Further games will be added in the future.

While the core team of YGG currently manages all activities, YGG aims to become fully decentralized in the future. Once the transition is completed, decision-making will be transferred from the core team to the YGG DAO, i.e. the YGG token holders.

2. Analysis under the Applicable Laws and Regulations

2.1. Legal Structures of Scholarships

Scholars and managers enter into scholarship agreements on an individual basis. Usually, the agreements are initiated via Discord or other channels. Under Japanese laws, the following structures may be considered.

2.1.1. Lease Agreement

Where a scholar promises to pay a certain amount of money for the use of Axies and to return the Axies at the end of the agreement to the manager, the agreement might be considered some form of lease. Since Article 601 Civil Code only covers the lease of tangible assets, it cannot be applied directly to the lease of intangible assets such as Axies. Applying Article 601 ff Civil Code by way of analogy seems, however, possible.

Assuming Articles 601 ff Civil Code can be applied analogously, scholars would not be allowed to sublease Axies to third parties without the prior consent of the managers (Article 612(1) Civil Code). In cases where the contract period is not specified by the scholarship agreement, the agreement may be terminated by either party by giving the other party one day’s notice (Article 617(1)(iii) Civil Code). As it is not clear whether courts will allow for an analogous application of Articles 601 ff Civil Code, it is advisable to cover all matters comprehensively in the scholarship agreement.

Since the use of Axies is not subject to restrictions under the Copyright Act, it is further advisable to implement proper measures to ensure that owners are sufficiently protected (e.g. prohibition to use Axies for breeding, prohibition to create merchandise with the Axie).

2.1.2. Contract for Work or Delegation

Managers may among others specify how many hours a scholar must play per month, require daily logins, or instruct scholars to only use Axies with certain characteristics for breeding. In addition, the scholarship agreement may stipulate a minimum amount of SLP a scholar must earn during a pre-defined period. In exchange, the manager agrees to pay a remuneration to the scholar.

Depending on the exact arrangement, the scholarship agreement may either be considered a contract for work (Article 632 Civil Code) or delegation without legal authority (Article 656 Civil Code). In both cases, scholars would have to deliver earned SLP to the NFT’s owner (Articles 632 and 646 Civil Code. Where the scholarship agreement is structured as a contract for work, NFT owners may further require scholars to complete the agreed work (Articles 559 and 562 Civil Code).

It is our understanding that the rewards collected by scholars are generally passed to the manager. Based on the scholarship agreement, the manager will then return a predefined amount to the scholar for playing the game. The situation is, therefore, similar to revenues generated by tenants of farmland.

2.1.3. Fund

The scholarship arrangement may further be structured as a partnership according to Article 667 Civil Code or a silent partnership according to Article 535 Commercial Code. In these cases, both the owners of the NFT and the scholar make contributions in kind – the owner by providing his Axies and the scholar by contributing his labor. Profits generated by the partnership or silent partnership are then distributed between NFT owners and scholars according to the scholarship agreement.

In a partnership, the owner may for example invest Axies and appoint the scholar as an executive of the partnership (Article 670(2) Civil Code). Here, the NFT owner would have the right to inspect the scholar’s business but lose the right to manage the partnership on his own (Article 673 Civil Code). If the scholar does not play the game and defaults, the agreement cannot be canceled (Article 667-2(2) Civil Code). Instead, the manager may request the dissolution of the partnership (Article 683 Civil Code). A voluntary resignation from the managing position by the scholar appointed as the manager of the partnership would only be possible if the scholar has a valid reason for resignation (Article 672(1) Civil Code).

NFT Owners’ Rights and ObligationsScholars’ Rights and ObligationsOther
  • receipt of royalties
  • obligation to provide Axies to the scholar
  • obligation to replace Axies that do not conform with the characteristics outlined in the scholarship agreement
  • obligation to return Axies upon expiration or termination of the scholarship agreement
  • obligation to manage the Axies with the care of a good manager
  • prohibition to sublease the Axies
  • right to demand the reduction of royalties in cases of defect
If the term is stipulated in the scholarship agreement, the agreement is automatically terminated with its expiration. Otherwise, it can be terminated by either party by giving one day’s notice.
Delegation / Contract for Work
  • obligation to pay remuneration
  • obligation to provide Axies to the scholar
  • right to decline or reduce remuneration in case of non-performance by the scholar
  • obligation to process certain paperwork and to complete the work
  • obligation to deliver SLP rewards to the manager
  • payment for performed services
The agreement may automatically terminate upon expiration of the term (if specified) or can be canceled by the manager at any time. If the manager decides to cancel the agreement which constitutes a contract for work, he must generally compensate the scholar for losses. If the agreement constitutes a delegation agreement, it may be terminated at any time by either party.
  • obligation to invest Axies as an in-kind-investment
  • right to inspect the status of the business
  • right to participate in profits
  • right to demand dissolution of the partnership
  • obligation to invest labor as an in-kind-investment
  • obligation to perform certain services
  • right to participate in profits
  • right to demand dissolution of the partnership
If the partnership has achieved the purpose for which it was set up, it is automatically dissolved. It is also dissolved if there are other reasons for dissolution which are stipulated in the scholarship agreement.

Proceeds are distributed in proportion to each partners’ contribution in case of liquidation.

 2.2. Regulatory Considerations for the Different Scholarship Structures

The regulatory considerations vary greatly depending on the legal structure of the scholarships. For scholarships structured as leasing arrangements, money lending regulations may be considered. For agreements structured as partnerships or silent partnerships, the Financial Instruments and Exchange Act (FIEA) may be applicable. For scholarship structured as delegation agreements or contracts for work, no particular regulations apply.

2.2.1. Money Lending Business Act

Article 2(1) Money Lending Business Act defines money lending business as the business of lending money (including the provision of funds by discounted bills, the sale of mortgages, or similar methods) or acting as an intermediary for the lending of money. Businesses engaging in money lending services must register with the Financial Services Agency (FSA) (Article 3(1) Money Lending Act).

Since Axies neither constitute money nor a currency-denominated asset, the lending of Axies does not fall under the Money Lending Business Act. It is therefore not necessary to register with the FSA.

2.2.2. FIEA

The FIEA applies to a wide range of financial instruments and provides a comprehensive registration regime for businesses engaging in financial instruments services (Article 2(8) FIEA). According to Article 29 FIEA, businesses providing financial instruments services must generally register as a financial instruments business operator (FIBO) with the FSA. This also applies to those soliciting the offer to sell rights in a partnership or silent partnership. Both are generally considered collective investment schemes under the FIEA (Article 2(2)(v) FIEA).

Axies do, however, not fall under the category of money or money equivalent as specified in Article 2(2)(v) FIEA, Article 1-3 FIEA Enforcement Order, and Article 5 FIEA Definitions Ordinance. Even where the owner of NFTs contributes his NFTs to the partnership or the silent partnership, the FIEA does therefore not apply.

2.3. Regulatory Considerations concerning YGG’s Activities

2.3.1. Scholarship Brokerage

Since NFTs do not constitute money or currency-denominated assets (see item 2.2.1 above), the brokerage of scholarships does not constitute an intermediary service for money lending and is therefore not regulated.

2.3.2. YGG Tokens

On August 19, 2021, YGG announced that it had raised USD 4.6 million from a16z and other major venture capital firms. In exchange for their investment a16z and the other investors received YGG tokens. The tokens allow them to participate in the revenues generated by the YGG. Assuming the tokens were sold to investors in Japan, it is highly likely that they would qualify as rights in a collective investment scheme under Article 2(2)(v) FIEA – and given the tokenization of those rights – as electronically recorded transfer rights (Article 2(3) FIEA). In order to offer electronically recorded transfer rights to the public, it is generally necessary to file a prospectus and to register as a type II FIBO (Articles 28(2)(i), 2(8)(vii), 29 FIEA). Where the rights are only offered to qualified institutional investors a notification under Article 63 FIEA is sufficient.

If the solicitation is, however, performed by a DAO with a sufficient degree of decentralization, the solicitation falls outside the scope of the FIEA as there is no eligible intermediary that could be regulated. As YGG is still managed by the core team, this degree of decentralization has most likely not been achieved yet.

Finally, it should be noted that collective investing schemes investing in NFTs are not subject to disclosure obligations under Article 4 FIEA, as NFTs do not constitute securities.

2.3.3. Investment in NFTs

A fund investing exclusively in NFTs does not invest “in securities or in rights connected with derivatives transactions, based on investment decisions that are grounded in an analysis of values of financial instruments” as stipulated in Article 2(8)(xii) FIEA. It is therefore unlikely that the investment management regulations apply to the investment manager (Article 28(4)(i) FIEA).

As NFTs are further not considered crypto assets within the meaning of Article 2(7) Payment Services Act, the buying and selling of NFTs for investment purposes does not constitute a crypto asset exchange business. It is therefore not necessary to register as a crypto asset exchange service provider.


This post is for discussion only. The content of this post has not been confirmed by the relevant authorities or organizations mentioned in the post but merely reflects a reasonable interpretation of their statements. The interpretation of the laws and regulations reflects our current understanding and may therefore change in the future.
This post does not recommend the use of or investment in NFTs, scholarships, or any other tokens or projects.
Axie Infinity and Yield Guild Games are only used for illustrative purposes. Given the format of the post, not all details of the game mechanics and token design have been considered comprehensively, so that the results of the assessment may deviate from the results by the regulator, or a legal opinion prepared by us or another law firm. By no means, the explanations should be understood as a legal opinion. If you need legal advice on a similar project, please free to contact us or consult with your lawyer.

Axie Infinity, the blockchain game by Sky Mavis, made major headlines recently. With more than 350,000 daily active players, the game is one of the most successful blockchain games so far. According to data from token terminal_, the game generated USD 581.7 million in revenue over the past 90 days. To put this into perspective, this is more than Ethereum over the same period of time.

So, what is behind the success of Axie Infinity?

Part of it can be attributed to the active Axie community and the cute pets – called Axies – that are used for battles. The other part is the new ‘Play-to-Earn’ gaming model. This model allows players to earn ‘real’ money by playing the game. Depending on the token price, the rewards are said to be somewhere between USD 300-500 per month. With the latest increase of AXS, they might be even higher.

The Play-To-Earn Model

To understand how the ‘Play-to-Earn’ model works, it is necessary to take a closer look at the game and the tokens involved.

There are basically three types of tokens in the game.

  1. Axie Infinity Shards (AXS)
  2. Smooth Love Potion (SLP)
  3. Axies, items, lands (NFTs)

To play the game players need at least three Axies. The Axies can be bought on the marketplace and currently cost around USD 200 or more.

To breed new Axies, players need 4 AXS and a certain number of SLP. To control the Axie population, it becomes increasingly expensive to breed Axies with same parents. After being used for breeding 7 times, Axies become sterile and cannot be used for further breeding.

breed countbreed numberSLP cost

As all assets in the game are represented by NFTs and all rewards are paid in AXS or SLP, there are different ways for players to earn income:

» farming SLP and AXS by playing quests or battling other players
» participating in tournaments
» breeding new Axies and selling them on the marketplace
» speculating on rare Axies

In the future, it will also be possible to use AXS for staking. Staked AXS will allow token holders to earn additional AXS from the staking and treasury pool.

Legal and Regulatory Considerations

Now that we know the basic gaming mechanics and the functions of each token, it is time to get a better understanding of the legal and regulatory environment in Japan. As the results of the analysis vary considerably, it is necessary to assess each activity and token individually.

Farming of AXS/SLP: The farming of SLP and AXS by playing quests or battling other players is generally subject to the limitations under the Improper Premiums and Misleading Representations Act (IPMR). The IPMR provides limits for items and other assets that can be given away for ‘free’. In the case of play-to-earn models where players must make an initial investment to play the game, the amount that can be given away for free is limited to JPY 100,000 or 2 percent of the initial sales, whichever is higher, or – for initial investments below JPY 5,000 up to 20 times the price of the initial investment.

Gambling laws do generally not apply as users are not required to pay any fees to qualify for the rewards. The fact that users must purchase three Axies to play the game is irrelevant as the purchase is neither directly nor indirectly linked to the rewards earned by playing quests or battling other players.

As users are not required to pay any fees or other consideration – time and effort spent for playing the game are not considered – there is no purchase or exchange of crypto assets. Crypto asset regulations do therefore not apply to the issuance of AXS and SLP.

Tournaments: Where players are required to pay a fee to participate in a tournament and win rewards, there is a high chance that both the organization of the tournament and the participation in the tournament is considered illegal gambling. Something different only applies where the fees are only used to cover the expenses of the organizer. The expenses may include prizes for the winning players or teams.

Breeding of Axies: Since a user must pay a certain amount of SLP to breed new randomly generated Axies, there is a possibility that the breeding of new Axies is considered illegal gambling.

Selling Axies: When selling items combined with the promise of future returns, companies must comply with the Specified Commercial Transaction Act. Under the act, companies must not engage in certain advertising efforts and must disclose specific information, including the company’s name, to prospects. Given the ambiguous wording of the act, it is uncertain whether it applies to the sale of Axies by Sky Mavis. For sales by users, the act is irrelevant.

Selling AXS, SLP, NFTs by Users: The sale of AXS, SLP, and NFTs by the user is not regulated under Japanese laws.

Marketplace for AXS, SLP, NFTs: AXS and SLP are considered crypto assets under Japanese laws. Anyone who offers a marketplace for the exchange of AXS and SLP would therefore generally have to register as a crypto asset exchange. The same would apply to custodial wallets that manage the private keys controlling the users’ AXS and SLP.

NFT marketplaces for Axies, items, and lands are not regulated in Japan.


The play-to-earn mechanism of Axie Infinity is only used for illustrative purposes. Given the format of the article, not all details of the game mechanics and token design have been considered comprehensively, so that the results of the assessment may deviate from the results by the regulator, or a legal opinion prepared by us or another law firm. By no means, should the explanations be understood as a legal opinion.

Capital and financial markets regulation is based on the principle ‘same business, same risks, same regulation’. At the same time, global standard setters and national regulators alike consistently highlight that regulations are meant to be technology-neutral.

So, what happens if the technology changes the risk profile of a business?

The risk profile is redefined.

In a blockchain context, this seems to be one-directional, however. Rather than considering the full transparency and auditability of permissionless blockchains when assessing the risk profile, the FATF and national regulators do not get tired of stressing the risks related to pseudonymity and peer-to-peer transactions. The fact that blockchain analytics companies can track every transaction on most major networks is only considered as part of the risk mitigation measures.

By then, the risk profile is already established and may cause financial institutions and other regulated entities to refrain from interacting with the blockchain space altogether.

If technology changes the risk profile, it should apply in both directions.

Non-fungible tokens (NFT) have been a topic in the Japanese crypto industry since early 2018. With the NFT craze in 2021, they have become increasingly popular and seen more mainstream adoption. It does, therefore, not come as a surprise that the Japan Cryptocurrency Business Association (JCBA) and Blockchain Contents Association (BCA), as two of the leading industry associations in Japan, issued NFT guidelines more recently.

In this article, we are taking a closer look at the state of the Japanese NFT market and the legal and regulatory environment for NFTs while considering the JCBA and the BCA guidelines.

JCBA NFT-guidelines (April 2021, written in Japanese)

BCA NFT-guidelines (2nd edition) (December 2020, written in Japanese)
We have been advising leading blockchain gaming companies on NFTs and other NFT-related matters since early 2018.
In case you are looking for more information on blockchain games and crypto art, you might find the following two articles interesting.

Blockchain Games and the Japanese Law (November 2018, written in Japanese)

Buyer Beware – Digital Art and Non-Fungible Tokens (NFT)

I. The State of the Japanese NFT Market

1. Blockchain Games

Traditionally, items purchased in a game could only be used within the game and not be transferred to other players. This has changed with blockchain games, where game items are represented by NFTs. By allowing players to control the NFTs, they become able to buy, sell, exchange, and lend items represented by NFTs to other players – even outside of the game. According to the JCBA, the use of NFTs further ensures that the game assets do not disappear after the termination of the game. What is most likely meant is that the NFT does not cease to exist. Yet, it may lose its value as the represented asset might not be used anymore due to the termination of the game.
Popular blockchain games on the Japanese market include My Crypto Heroes, Crypto Spells, and Contract Servant.

Traditional online games Blockchain games
  1. In-game items do not exist outside of the game and can generally not be transferred, sold, or lent freely to other players outside the game.
  2. Game assets accumulated over time become unavailable and useless after the game is terminated.
  1. Users may transfer, sell, or lend game assets represented by NFTs to other players of the game (Game Assets).
  2. Third parties can provide services using tokens.
  3. As long as a blockchain exists, NFTs representing digital assets are permanently available.

Source: JCBA Guideline, page 4.

(1) My Crypto Heroes
My Crypto Heroes by double was released in November 2018. The game is an RPG in which players can gather, build their character, and win items by completing challenges and fighting enemies. Both heroes and items are represented by NFTs and can be freely transferred peer-to-peer or traded on NFT markets.

My Crypto Heroes fast became the world’s number one blockchain game and still has the highest number of (active) users and transactions.

(2) Crypto Spells
Crypto Spells by Crypto Games is a card game in which players use cards represented by NFTs to fight with the computer and other players. There are several ways to acquire new cards, including battles and trading/exchanging them with other players within and outside the game.

(3) Contract Servant
Contract Servant by Axel Mark is a card game in which players have a deck of eight cards (servants). There are two types of servants – common servants and token servants, where the token servant is issued as an NFT. The tokens can then be traded among players through a market function. Players are further able to earn rewards from league battles each week.

(4) Other Notable Games
Other notable blockchain games in Japan are Crypton, Crypton Racing, and Brave Frontier Heroes. Further, double jump.toyko launched MCH+, a blockchain game development program that is based on the knowledge gained from My Crypto Heroes.

2. Crypto Art

In February 2021, Christies sold a Beeple artwork for JPY 7.5 billion. The artwork itself is stored on the InterPlanetary File System (IPFS) and represented by an NFT on the Ethereum blockchain. In Japan, a number of crypto art related services have been launched more recently. The major platforms are nanakusa, NFT Studio, and Token Link.

(1) nanakusa
In March 2021, Smart App released nanakusa – a marketplace for crypto art. nanakusa allows crypto artists to mint NFTs and sell crypto art via the platform. Purchasers of crypto art may further sell artworks – or more precisely, the NFT representing the artwork – via the trading platforms. From the information provided, it seems that royalties are paid to the crypto artists for all secondary sales.

(2) NFT Studio
In March 2021, CryptoGames released NFT studio. The platform allows artists to mint NFTs on Ethereum and Polygon for their crypto art. Similar to nanakusa, NFT studio includes features that allow artists to participate in the price for secondary sales.

In January 2021, Platinum Egg released Token Link, an NFT market for game items. Only a few months later, in April, Platinum Egg implemented an auction mechanism for crypto art.

3. NFT Market

(1) Coincheck NFT Market
In March 2021, Coincheck, the operator of one of the largest crypto exchanges in Japan, launched an NFT market. Currently, the only NFTs listed on the market are from Crypto Spells and The Sandbox. More NFTs will be listed in the future. The company has 2 million active users and hundreds of billions of yen in crypto assets under custody. As such, Coincheck will be an important partner for content providers and a gateway to the Japanese market for foreign projects.

When applying for listing, from our experience, projects must provide Coincheck with information about the blockchain used, the primary sale, IP content, and, where applicable, transaction volumes on other markets. As Coincheck is a member of the JCBA and a head of the NFT committee of the JCBA, it is also valuable to check JCBA guidelines in more detail.

(2) Participation by Major Companies
While Coincheck’s NFT market is the first of its kind in Japan, other major companies, including Mercari[1], LINE[2] and GMO Internet group[3] have announced that they are considering launching their NFT market. The entry of other major players is a clear sign that NFTs are gaining increasing mainstream traction on the Japanese market.

II. NFT Guidelines of Japanese Organizations

Currently, there are no laws and regulations that specifically deal with NFTs. Depending on their design, NFTs may, however, fall under the definition of crypto assets, prepaid payment instruments, or money orders under the Payment Services Act (PSA) or the Banking Act or constitute securities within the meaning of the Financial Instruments and Exchange Act (FIEA). Whether this is the case must be analyzed on a case-by-case basis. The guidelines prepared by the JCBA and the BCA aim to provide some more clarity in this regard.

(1) JCBA guidelines
The JCBA is one of the leading industry associations in Japan. Its members range from crypto-asset exchanges to other crypto asset service providers. The NFT committee of the JCBA issued NFT guidelines on April 26, 2021. The guidelines are meant to provide local and foreign NFT issuers with more clarity when applying for a listing on a Japanese NFT market.

Matters covered by the JCBA guidelines
(1) Use cases of NFTs
(2) Flowchart for determining whether NFTS fall under existing laws and regulations
(3) Profit-sharing arrangements
(4) Settlement
(5) Gambling
(6) Premiums and Representations Act
(7) Anonymity and privacy
(8) Security
(9) User protection
(10) Handling of new NFTs (type of NFT that requires careful handling)

The following chart provides a good overview of the key considerations when determining the legal and regulatory environment for NFTs.

Source: JCBA Guideline page 5.

In the case of blockchain games, it is also necessary to consider gambling laws. According to Japanese criminal law, gambling is a criminal offense. It is defined as a game of chance where players can win monetary prizes, except for small gifts. While the definition is rather blurry, NFT issuers implementing mechanics similar to gatcha should consider gambling regulations carefully.

Blockchain games that include incentives for users, such as the free issuance of NFTs, must further comply with the Premiums and Representations Act. The Premiums and Representations Act regulates the free provision of goods and services by a business which aims to induce potential customers to buy the business’s products or services.

The Premiums and Representations Act stipulates limits for lotteries, competitions, etc. While the total amount differs, the following limits must generally be considered for lotteries and other competitions.

  Description Examples The maximum amount of premiums
Premiums (general) Premiums that are offered to anyone visiting a shop or anyone purchasing goods or services. Gifts to all purchasers, gifts to all visitors, etc. (1) If the transaction price is less than JPY 1,000, the premium must not exceed JPY 200.

(2) If the transaction price is JPY 1,000 or more, the premium must not exceed 2/10 of the total transaction price.
Premiums and prices (game of luck and game of skill) Premiums that are given to users as prices in a game of chance or skill. Lotteries at the store.
Quiz games and other games
(1) If the transaction value is less than JPY 5,000, the maximum amount of the prize must not exceed 20x the transaction value.

(2) If the transaction value is JPY 5,000 or more, the maximum amount of the prize must not exceed JPY 100,000.

※Both are capped at 2% of the total transaction value.

Source: Prepared by our office based on the Consumer Affairs Agency website, etc.

The JCBA guidelines further provide that NFT issuers should implement measures that prevent users from using NFTs for money laundering and terrorist financing; consider security risks for storing NFTs and implement measures to deal with thefts or losses; properly explain to users that there is the risk that the NFT might become worthless if the service is terminated; and consider that NFTs are highly likely to be used for criminal purposes, including money laundering.

(2) BCA guidelines
The BCA was established by SNS and gaming companies and is involved in a number of initiatives aiming at the protection of minors and the elderly when using blockchain applications. On March 24, 2020, the BCA published the BCA guidelines on blockchain content (incl. NFTs) to protect consumers and promote self-regulation. A revised version of the paper was published on December 25, 2020.

Matters covered by the BCA guidelines
(1) Gambling
(2) Premiums and Representations Act
(3) PSA
(4) FIEA
(5) Prevention of scams and other fraudulent practices

The interpretation of the laws and regulations, including the PSA, FIEA, Gambling Laws, and Premiums and Representations Act, is largely in line with the interpretation by the JCBA.

With respect to gambling, the BCA guidelines hold that blockchain games should avoid or at least carefully consider implementing any of the following mechanics: (i) in-game gachas (vending machine type mechanics) that issue NFTs or other in-game items; (ii) collection of fees to participate in rewards.; (iii) randomized creation and burning of NFTs and other in-game items with monetary value; and (iv) collection of fees to participate in competitions where the collected fees are distributed to the participants depending on their ranking.

The BCA guidelines further include self-regulation for member companies that include (i) the prohibition of loss compensation, (ii) the prohibition of insider trading, (iii) the monitoring and prevention of market manipulation, and (iv) the obligation to disclose material information to all users.
In addition, the guidelines hold that the issuance of NFTs may involve scams and other fraudulent practices, such as the termination of services shortly after selling the NFTs. To prevent fraudulent practices, member organizations are advised to (i) provide all material information to their users, (ii) secure the necessary funds and resources to ensure that the content shown to the users is actually delivered, and (iii) conduct test sales of NFTs and extensive beta-testing to enable users to understand the content of the services and NFTs prior to the actual launch.

III. Future Issues

Given the fact that NFTs are a relatively new phenomenon that is still evolving, many issues are yet solved. The following explanations are meant to provide some guidance for matters not included in the BCA and JCBA guidelines but relevant for the industry.

(1) NFTs and External Services
In most cases, the data represented by NFTs is stored off-chain. This raises the question of how consumers can be protected from later changes to the service and what companies can do to avoid claims for damages. In the case of blockchain games, NFTs typically represent assets that are stored on the servers of the blockchain game company. If the company now decides to change its terms of use or to terminate its services, this may ultimately render the NFT worthless and, in some cases, non-functional. To ensure that the game company does not face any claims for damage, this scenario must sufficiently be covered in terms of use. The same applies to crypto art, where the artworks are stored on the servers of a marketplace. If the data is stored and subsequently deleted on the InterPlanetary File System (IPFS), the situation is much more unclear and requires further consideration.

(2) NFTs and IP
For NFTs that are used for crypto art or in blockchain games, it is necessary to consider the relationship between the content provider and the holder of the NFT carefully. Two aspects are of utmost importance. First, the rights that are represented by the NFT should be clearly stipulated in the sales documentation of the initial sale. This also includes the question of how the rights represented by the NFT are transferred. Second, the relationship between the off-chain data and the NFT, as well as the retention of the off-chain data, should be considered carefully to avoid potential actions for damages. In cases where the content provider participates in all further sales, this should be clearly indicated in the contract as well. In the future, it is possible to discuss what rights should be granted as best practices.

(3) Issues concerning the trading of NFTs
If not explicitly provided in the contract, it is unclear under Japanese laws whether the rights represented by an NFT – i.e., the economic substance – are transferred (i) if both parties agree to the transfer and the transfer is recorded on the blockchain or (i) by mere agreement. To increase legal certainty and to ensure that the data recorded on the blockchain accurately reflects reality, the terms of sale should clearly stipulate that transfers only become effective if it is recorded on the blockchain. While there is no legal precedent, we believe that this solution is most practical and reflects the parties’ intentions.

(4) Taxation of NFTs
The taxation of NFTs another issue to be considered. In February 2019, the Japan Cryptocurrency Tax Association (JCTA) found that the taxation of income from the sale of NFTs is “an issue that has not been clarified in tax law.” The document finds, however, that “NFTs have an independent value, and if income is generated from the sale or exchange of NFTs, it will generally be taxed as miscellaneous income.”

(5) Secondary distribution of NFTs and rewards for creators
For many projects, content creators are rewarded when a secondary sale takes place. Examples are the above-mentioned nanakusa and NFT Studio, who both pay royalties to the content creator for secondary sales. In other cases, the content creator might want to transfer all his IPs to achieve higher prices for the initial sale. It is likely that both models will exist side by side in the future, but best practices still have to evolve. Further discussions are necessary in that regard.

The content of this article has not been confirmed by the relevant authorities or organizations mentioned in the article but merely reflects a reasonable interpretation of their statements. The interpretation of the laws and regulations reflects our current understanding and may therefore change in the future. This article does not recommend the use of or investment in NFTs. This article provides merely a summary for discussion purposes. If you need legal advice on a specific topic, please feel free to contact us.


[1] On April 2, 2021, Mercari announced that it established a new company to plan and develop blockchain-related services, including NFTs.

[2] LINE tweeted recently that it is building an NFT platform. The tweet states that it intends to build services that make it easy to mint, buy, sell, and exchange NFTs.

[3] GMO announced developing a marketplace that allows users to buy and sell NFTs representing digital art and music from famous artists.

On March 19, 2021, the Financial Action Task Force (FATF) announced that it is updating its guidance for a risk-based approach to virtual assets and virtual asset service providers. The update is open for comments until April 20, 2021, and, if implemented as is, will have far-reaching implications for the DeFi space.

The Updates

The updates include the following areas and are meant to provide the public and private sector with more clarity:

  1. definition of virtual assets (VA) and virtual asset service providers (VASP)
  2. guidance on the implementation of the ‘travel rule’
  3. guidance on the risks and potential risk mitigants to P2P transactions
  4. guidance on the licensing and registration of VASP
  5. guidance on the application of the standards to stablecoins
  6. principles of information-sharing and cooperation amongst VASP supervisors

The focus of this post will be on item 1. The other areas will be covered in a separate post in the future.

The definition of VA and VASP

Virtual Assets

“A virtual asset is a digital representation of value that can be digitally traded, or transferred, and can be used for payment or investment purposes. Virtual assets do not include digital representations of fiat currencies, securities and other financial assets that are already covered elsewhere in the FATF Recommendations.”

Source: Glossary of the FATF Recommendations

In the updated guidance, the FATF highlights that no asset should entirely fall outside the FATF standards. At the same time, no asset should be considered both a VA and a traditional financial asset. In cases where it is difficult to characterize an asset as a VA or a traditional financial asset, jurisdictions are required to decide which designation suits best to mitigate and manage the risk of the product. 

So what is a VA according to the FATF?

A VA is not a traditional financial asset. The digital representation of fiat currencies, securities or other financial assets are therefore not covered by the definition. For an asset to be considered a VA, the asset must further be digitally traded or transferred and used for payment or investment purposes. The otherwise denied inherent value of cryptocurrencies is seen as a defining feature of VA.

While it is easy to see that cryptocurrencies, utility tokens and governance tokens are covered by the definition it is not clear whether non-fungible tokens (NFTs) are included as well. Given the fact that they have a similar risk profile with respect to cross-border transfers, their increasing popularity, and pseudonymity, it is however likely that the FATF wants to see these assets covered by the definition as well.

“Assets should not be deemed uncovered by the FATF Recommendations because of the format in which they are offered and no asset should be interpreted as falling entirely outside the FATF Standards.“

Source: Draft updated Guidance for a risk-based approach to virtual assets and VASPs, para 40

To include NFTs representing digital art, collectibles or in-game items would however constitute a departure from the principle of financial markets regulation. After all other unique assets such as traditional arts, real estate, etc. are not covered by the definition of traditional financial assets as well which are fungible by definition – or in other words interchangeable with each other.

Virtual Asset Service Providers

“Virtual asset service provider means any natural or legal person who is not covered elsewhere under the Recommendations, and as a business conducts one or more of the following activities or operations for or on behalf of another natural or legal person:

i. exchange between virtual assets and fiat currencies;
ii. exchange between one or more forms of virtual assets;
iii. transfer of virtual assets;
iv. safekeeping and/or administration of virtual assets or instruments enabling control over virtual assets; and
v. participation in and provision of financial services related to an issuer’s offer and/or sale of a virtual asset.”

Source: Glossary of the FATF Recommendations

As with the definition of VA, the FATF highlights that the definition of VASP must be interpreted broadly. Without going into the details of what services are covered by item (i) to (iv), the focus of this post is on the question to which extent DeFi protocols are covered. The updated guidance provides more clarity on this which does, however, not necessarily mean that you will like it.

In short, it can be summarized as follows:

Software developers do not fall under the definition of VASP. But – according to the FATF there are hardly any cases where someone only provides a software solution.

So, let’s look at this in some more detail.

In the guidance, the FATF reiterates that it does not intend to regulate technology. The target of regulation are always natural or legal persons – in other words, individuals and legal entities. This point is important as it allows projects to assess whether they fall within the scope of VASP and, where necessary, make changes to their setup. As can be seen from the following statement, this will become increasingly difficult – yet not impossible – in the future.

“The FATF takes an expansive view of the definitions of VA and VASP and considers most arrangements currently in operation, even if they self-categorize as P2P platforms, may have at least some party involved at some stage of the product’s development and launch that constitutes a VASP. Automating a process that has been designed to provide covered services does not relieve the controlling party of obligations.”

Source: Draft updated Guidance for a risk-based approach to virtual assets and VASPs, para 75

According to the FATF, the expansive view is a conscious choice. Despite its commitment to innovation and not regulating software developers, this could still be the ultimate result. Similar to blockchain companies that were not meant to be excluded from traditional finance on a wholesale basis but still have a hard time opening bank accounts, the regulation of software developers might just be another collateral damage, and as such a conscious choice by the FATF.

So, if the regulatory environment was as strict as we claim here, how is it possible that projects like Uniswap allow users to exchange millions worth of dollars daily without being regulated?

First, the new guidance has not been finalized yet.

Second, the guidance has not been implemented into national law yet.

Third, even if it was implemented as is, law enforcement is still a different issue altogether.

The fact that the FATF intends to update its guidance on VAs and VASPs shows that the success of DeFi has not gone unnoticed. From the request for public comments, it is also clear that the overall direction is set – more regulation rather than less. The request only aims at removing potential ambiguities that could give countries room for interpretation and offer loopholes for DeFi projects and other innovations.

Getting back to Uniswap which was initially funded by venture capital, there is indeed the risk that it falls under the definition of VASP. The fact that the governance of Uniswap was largely distributed to the community by an airdrop last year, does not necessarily lead to a different result if other elements of the VASP definition remain in place.

Where the initiators of a protocol, for example, control the admin keys of the exchange’s smart contracts, the initiators may be considered a VASP. If transaction fees, on the other hand, are not distributed to the initiators of the protocol but the liquidity providers, this may lead to different results as the VASP – if existent – is not provided as a business.

Since there is no bright line test, there is always the possibility that DeFi protocols or the teams behind them are considered VASP. As the FATF wants its recommendations to be as broad as possible, it is highly likely that the teams behind DeFi protocols will initially be considered VASP unless active measures are taken, and proper structures implemented are implemented to further mitigate this risk.


The updated guidance shows that the FATF has been monitoring the DeFi space closely. If implemented as is, most projects will be covered as VASP under the new guidance. The growing regulatory burden has the potential to slow down innovation in the DeFi space. More likely than not, the industry will however find an appropriate answer which either includes increasing decentralization or the implementation of new solutions such as DeFi Compli from CipherTrace.

Besides all the criticism, the new regulations should also be considered as an opportunity for CeFi as it will most likely allow registered exchanges to implement DeFi solutions much more easily.

In 2019, Andreessen Horowitz predicted that in the not-too-distant future every company will be a FinTech company. Fast-forward to today, and most large companies embed financial services into their products to streamline the customer journey and increase their lifetime value.

Embedded finance typically covers the following services:

Generally speaking, there are three different types of entities involved in embedded finance – brands, enablers, and license holders.

BrandsNon-financial services companies that embed financial services into their platforms and applications to improve the user experience and increase their lifetime value.
EnablersCompanies acting as the middle layer between brands and license holders.
License HoldersFinancial services companies that are registered with or licensed by the Financial Services Agency (FSA)

Historically, enablers and license holders have been largely identical in Japan. Yet, there is no particular reason why this should not change. In particular, the amended Act on the Provision of Financial Services is likely to bring new momentum to the FinTech industry as it allows financial intermediaries to provide services across different sectors with a single registration.

For brands the upcoming changes mean that they will be able to embed different types of financial services much easier, which in turn will drive demand for enablers connecting them smoothly with different license holders.

What type of license should the license holder hold?

The type of license depends on the kind of services the license holder intends to provide. In most cases one of the following licenses is required:

One example that might be different from other jurisdictions is to the provision of lending services in online shops. Depending on the type of lending services different licenses are needed. A careful analysis is therefore necessary.

If the license holder, for example, makes the payment on behalf of the buyer by granting an instalment loan, this is considered an ‘instalment sale’ which falls under the supervision of the Ministry of Economy, Trade and Industry. If the license holder, however, lends the money to the buyer, and the buyer uses that money to pay the shop, lending regulations apply, and the license holder falls under the supervision of the Financial Services Agency.

What type of license does a brand need?

A brand only needs a license if it acts as an intermediary for financial services. ‘Intermediation’ under Japanese laws is understood broadly and covers any act that furthers the execution of financial contracts. If a brand’s application, for example, seamlessly integrates financial products, this is generally considered an intermediation of financial services.

On the contrary, the introduction of financial products does generally not require a license. If a user is forwarded to the license holder’s website to purchase financial products, for example, the brand is not regulated.

Until this year, the intermediation of different kinds of financial services required different licenses. The intermediation of banking services required a banking agent license, the intermediation of securities services required an intermediation of financial instrument license and so on. For the intermediation of different types of financial products, the brand therefore needed different licenses. From mid of this year, this will change however, and a single license will be sufficient.

What type of license does an enabler need?

If an enabler provides intermediary service as described in the previous section, it has to apply for an intermediation license.

If an enabler, however, only provides a software solution connecting the brand with the license holder a license is not required.


Depending on the exact service, companies may or may not be subject to license requirements in Japan. At a very high level the regulatory environment is as follows:

A more detailed overview can be found in the following section.

Detailed overview of what licenses are necessary

As mentioned above, the license requirements differ considerably depending on what kind of service is carried out. A careful case-by-case analysis is therefore necessary.


Instruction by brand

brandenablerlicense holder
service providedbrand instructs user’s bank to transmit money to brand’s account for purchasing goods or servicesprovides API for instructionmoney transfer
applicable lawsnot regulatednot regulatedBanking Act (BA) or Payment Services Act (PSA)
license/registration requirementnot regulatednot regulated  banking license under BA or money transmitter license under PSA

Instruction by third party

brandenablerlicense holder
service providedinstructs user’s bank to transmit money to brand’s accountmoney transfer
applicable lawsBA or not regulatedBA or PSA
license/registration requirementregistration as electronic payment services provider under BA if instruction is given to bank   not regulated if instruction is given to money transmitter  banking license under BA or money transmitter license under PSA

Payment by third party (performance by user at the time enabler receives payment)

brandenablerlicense holder
service providedentrusting the collection of payment to the enablerreceiving payment from user and making payment to brand   (performance by user under the agreement with brand at the time enabler receives payment)
applicable lawsnot regulated
license/registration requirementnot regulated  

Money transmission (not related to the purchase of goods or services)

brandenablerlicense holder
service providedbrand instructs user’s bank to transmit money to another person’s accountmoney transfer
applicable lawsBA or not regulatedBA or PSA
license/registration requirementregistration as electronic payment services provider under BA if instruction is given to bank   not regulated if instruction is given to money transmitter.  banking license under BA or money transmitter license under PSA


Inhouse instalments

brandenablerlicense holder
service providedbrand provides installment loan to user to finance purchases
applicable lawsInstallment Sales Act
license/registration requirementnot regulated

Credit purchase brokerage

brandenablerlicense holder
service providedbrand intermediates advance payment and installment payment from license holderslicense holder makes advance payments to brand and receives installment payments from user
applicable lawsnot regulated-Installment Sales Act
license/registration requirementnot regulatedregistration as credit purchase brokerage business and in cases where the amount is less than JPY 100,000 registration as small-amount credit brokerage business

Loan affiliated sales

brandenablerlicense holder
service providedbrand intermediates loan and then jointly and severally guarantees the loan paymentlicense holder provides loan to user to finance purchase in brand’s online shop
applicable lawsInstallment Sales Act, BA or Money Lending Business Act (MLBA) or Financial Services ActBA or MLBA
license/registration requirementbrands must comply with some duties under the Installment Sales Act (no license/registration)   intermediaries of loans must obtain a bank agency business license under BA or register as money lending business under the MLBA or as financial services intermediary under Financial Services Actbanking license under BA or registration as money lending business under MLBA  

Affiliated loan

brandenablerlicense holder
service providedprovides access to loan products in its online storelicense holders provides loan to user to finance purchase in brand’s online shop
applicable lawsBA or MLBA or Financial Services Act BA or MLBA
license/registration requirementintermediaries of loans must obtain a bank agency business license under BA or register as money lending business under the MLBA or as financial services intermediary under Financial Services Actbanking license under BA or registration as money lending business under MLBA


brandenablerlicense holder
service providedprovides interface for investments in securities through appinvestment into securities
applicable lawsFinancial Instruments and Exchange Act (FIEA)FIEA
license/registration requirementif brand is a financial institution, it must be registered as a financial institution engaging in the investment advisory and agency business; it is not allowed to use a financial services intermediary under the FIEA   if the brand is not a financial institution, it can act under the investment advisory business or as a financial instruments intermediary business under the FIEA or a financial services intermediary business under the Financial Services Actinvestment business under the FIEA


brandenablerlicense holder
service providedprovides access to insurance products in its online storeprovides insurance products
applicable lawsInsurance Business Act or Financial Services ActInsurance Business Act
license/registration requirementregistration as insurance agent under Insurance Business Act or financial services intermediary under Financial Services Actinsurance business license or small insurance business license


brandenablerlicense holder
service providedprovision of withdrawals and deposits through the appdeposit
applicable lawsBA or Financial Services ActBA
license/registration requirementpermission for banking agency business under BA or registration as financial services intermediary business under Financial Services Actbanking license


Debit cards issued by large companies

brandenablerlicense holder
service providedissuance of debit cards linked to bank accountsdeposits
applicable lawsBA or Financial Services ActBA
license/registration requirementpermission for banking agency business under BA or registration as financial services intermediary business under Financial Services Actbanking license

Debit cards issued by money transmitters

brandenablerlicense holder
service providedissuance debit cards linked to money transmitterstransfers
applicable lawsPSAPSA
license/registration requirementnot regulatedregistration as money transmitter under PSA


Photo by Ashwin Vaswani on Unsplash

Non-fungible tokens (NFTs) have become increasingly popular more recently. Starting with small blockchain games such as Crypto Kitties in 2017, they have entered public awareness with NBA Top Shot and the Christie’s auction raising USD 70 million for a digital art piece.

Given the recent success and increasing interest of mainstream media, it is time to take a closer look the mechanics and legal classification of NFTs. In many cases it is still unclear what NFTs legally represent, and poor technical implementation may render them worthless despite the buyer spending millions of dollars.


NFTs are commonly said to represent something unique. It may therefore come as a surprise that the content represented by the NFT can often be downloaded by anyone and duplicated freely. Take ‘Everydays: The First 5000 Days’ which was auctioned off by Christie’s recently. While you cannot simply download the high-resolution picture from Christie’s website directly, it is recorded on the Inter Planetary File System (IPFS) where it can be accessed and downloaded by anyone. The file stored on IPFS is the same file the buyer of the digital artwork will eventually receive.

Beeple (b. 1981), Everydays: The First 5000 Days – Sold for USD 69,346,250 by Christie’s

The high-resolution file is recorded on IPFS and can be accessed and downloaded by anyone. The size file is 326MB. It might therefore take some time to download.

So, if the content is not unique, what is it, then? In fact, it is the token itself. NFTs, unlike other tokens, are not interchangeable. Each NFT has unique features and given these features, a different economic value. While you can easily interchange ten ERC-20 tokens with ten ERC-20 tokens of the same kind, you cannot do this with NFTs as you will end up with tokens that have different features and a different economic value.

Implemented properly, NFTs inextricably link to the content which they represent. Depending on the design, they may represent digital ownership or some other rights and make the otherwise easily duplicable content scarce.

Common use cases

Common use cases of NFTs include digital art, digital collectibles, in-game items and worlds, domain names, event tickets, and fan tokens. The focus of this post will be on digital art.

The anatomy of NFTs and related problems

When dealing with NFTs it is important to understand why an NFT is unique, but more importantly, how it links to the content represented by it and where the content is stored.

On Ethereum, there are different token standards for NFTs – ERC-721 and ERC-1155. In the case of ERC-721, the NFT contains a mapping of unique identifiers with each identifier representing a single asset/content. In addition, it allows to track the owner of the token easily and creates a public trail of ownership. In the case of ERC-1155, the identifiers do not represent single assets but groups of assets. Tracking the provenance of single tokens is only possible if an ERC-721 superset is implemented. Given the possibility to track provenance, digital art typically uses the ERC-721 standard.

The metadata, which makes a token unique may either be on-chain or off-chain. Because of the costs for storing something on-chain, it is typically stored off-chain. In these cases, the NFT only contains a pointer to an external source which is typically an URL.

Once minted the data on the token becomes immutable and cannot be changed.[1] Depending on how the external content is stored the same is not necessarily true for the content. If the pointer in the NFT points to a URL that is controlled by a central entity or the artist himself, the artist may decide to replace the picture stored under the URL or to delete it completely. In addition, the link itself may be removed resulting in the NFT pointing to a 404 website.

Ultimately, this would leave the owner of the NFT in a very bad position as he still owns the NFT pointing to the URL where the digital art was originally stored. To draw attention to this issue, neitherconfirm replaced digital art with pictures showing rugs more recently.

To avoid this from happening and to ensure the data lives on forever, more recent projects including Beeple’s artwork on Christie’s use IPFS. Unlike current URLs, the IPFS creates unique URLs for files stored on the IPFS in a decentralized manner. If the file is changed, a new URL will be produced, meaning that the original file will always sit at the URL referenced in the NFT. Stated differently, the content and the token will become inextricably linked.

Legal issues

As important as the technical implementation is the question of what NFTs legally represent. This is important as it may limit what the creator or the buyer of an artwork can do, which again affects the price – both for primary and secondary sales. Other issues include the legal classification of NFTs under the Payment Services Act (PSA) and the Financial Instruments and Exchange Act (FIEA), their custody, and consumer protection laws.

Copyright and Ownership

Art, in general, involves a number of complex questions revolving around ownership and copyright. When creating an artwork, the creator generally becomes the first copyright owner. Registration at the copyright office is not necessary but may be advisable in some cases as it establishes a record of copyright ownership. For digital artworks, the same result can be achieved by signing the picture digitally, recording the corresponding NFT on the blockchain, and storing the high-resolution file on the IPFS.

But what does the NFT exactly represent? Digital ownership? Copyright? Or both?

This really depends on the artist as well as the platform the artist uses to sell his artworks. At an absolute minimum, an NFT represents digital ownership. The ownership of a digital artwork is transferred when transferring the NFT itself. The copyright, however, remains with the creator unless explicitly agreed otherwise.

As the first copyright owner, the artist has the exclusive right to make copies, sell and distribute the copies, prepare derivative works based on the copyrighted artworks and publicly display the artworks. In case you have been wondering how it is possible that some of the pictures in Beeple’s ‘Everydays: The First 5000 Days’had been sold in other auctions before but are still shown in his latest piece – this is the reason.

Beeple (b. 1981), Everydays: The First 5000 Days with one of the artworks sold earlier on Nifty Gateway

The copyright gives creators the following rights/protection:

Compared to copyright, ownership rights are rather limited and, broadly speaking, restricted to non-commercial use.

If a creator wants to grant the owner the right to use the artwork for commercial purposes (merchandize, display, etc.), he may either transfer the copyright or grant the owner a license to use the artwork commercially.

It should be noted that some platforms require creators to give the platform a license to use the artwork for commercial and non-commercial purposes. In the case of Open Sea, for example, the creator grants the platform a worldwide, non-exclusive, royalty-free license to use the uploaded artworks for non-commercial and commercial purposes.

“By submitting, posting or displaying Content on or through the Services, you grant us a worldwide, non-exclusive, royalty-free license (with the right to sublicense) to use, copy, reproduce, process, adapt, modify, publish, transmit, display and distribute such Content in any and all media or distribution methods (now known or later developed). This license authorizes us to make your Content available to the rest of the world and to let others do the same. You agree that this license includes the right for OpenSea to provide, promote, and improve the Services and to make Content submitted to or through the Services available to other companies, organizations or individuals for the distribution, promotion or publication of such Content on other media and services. Such additional uses by OpenSea, or other companies, organizations or individuals, may be made with no compensation paid to you with respect to the Content that you submit, post, transmit or otherwise make available through the Services.” OpenSea, Section 9 Terms of Service

When selling digital artworks to users, the creator must therefore consider which rights he has already granted to the platform to avoid potential conflicts. If a creator has given the platform a non-exclusive license to use the artwork for commercial purposes, he cannot grant an exclusive license to the buyer anymore.

Hashmasks clearly distinguished between ownership and copyright as well. In its terms and conditions, Hashmasks states that the buyer of the NFT does not only become the owner of the artworks but also that he is granted an unlimited worldwide, exclusive license to use, copy and display the purchased art.

You Own the NFT. Each Hashmask is a NFT on the Ethereum blockchain. When you purchase a NFT, you own the underlying Hashmask, the Art, completely. Ownership of the NFT is mediated entirely by the Smart Contract and the Ethereum Network”Hashmask, Section 3.A.i. of the Terms and Conditions
Subject to your continued compliance with these Terms, The Company grants you an unlimited, worldwide, exclusive, license to use, copy, and display the purchased Art for the purpose of creating derivative works based upon the Art (“Commercial Use”). Examples of such Commercial Use would e.g. be the use of the Art to produce and sell merchandise products (T-Shirts etc.) displaying copies of the Art.” Hashmask, Section 3.A.iii. of the Terms and Conditions

Even where the creator and the buyer explicitly agree on the transfer of the copyright or the granting of a license, the token does not necessarily reflect the exact terms. Written in natural language, the terms do not become part of the code. To ensure that all parties are always fully aware of the rights represented by the NFT, it is advisable that the NFT points to the respective terms and to store the terms on the IPFS. In this case, the NFT would not only serve as a track record of ownership but also bring more clarity with respect to the rights represented by it.

Crypto regulations and custody

According to the Japanese Financial Services Agency (FSA), NFTs are generally not considered securities or crypto assets. Trading, intermediary services for the trading, as well as the provision of custody services is therefore not regulated and may be performed without a license.

If a platform accepts BTC, ETH, or some other crypto asset as payment and manages the funds on behalf of the artist, the platform would however have to register as a crypto asset service provider with the FSA as it would engage in regulated activities – here the provision of custodian services.

BTC, ETH, etc. can be used for payment. There are no legal or regulatory limitations.

Consumer protection

Consumer protection laws only apply if the artist sells his artworks as a business. This must be assessed on a case-by-case basis. Where the pictures are sold by a platform, consumer protection laws generally apply.

AML/CFT Regulations

Since art dealers are not regulated, they do not have to comply with AML/CFT regulations.


Gains from the sale of NFTs are classified as miscellaneous income under Japanese tax law. As such they are subject to a progressive tax rate of up to 45% plus a fixed local inhabitants’ tax of 10%.

[1] In many cases, it is still possible to change the metadata in the smart contract. It is therefore advisable to analyze each smart contract carefully.

It is one of the basic principles of capital and financial markets regulation that the same rules apply to the same business and the same risk. In the age of DeFi, this does not seem to be the case anymore. A second look shows, however, that nothing has changed but that the results have become far more difficult to predict.

To assess whether regulations apply, it is generally necessary to assess (1) whether the activities are regulated and (2) identify the entity/person engaging in such activities.

Until more recently, it has been relatively easy to identify both the regulated activities as well as the relevant actors. For DeFi protocols, the answer is not always that straight forward. In the absence of legal documents, it is often unclear how the services are structured (e.g. lending vs. investing). And even where it is possible to classify the respective activity, it is still necessary to analyze whether the activity is performed by a person (regulated) or a piece of software (unregulated).

This brings us to the question of when a project is sufficiently decentralized.

While there is no general answer to this question, there is a distinct set of factors that must be considered when answering the question. The most important factor is the degree of control the team retains over the project after it is launched. In many cases, the team retains admin rights to fix bugs or to upgrade the protocol. This alone may, however, not be enough to establish a sufficient link between the team and the regulated activity. In fact, a comparison with the traditional financial and capital markets shows that the regulations do not apply to the technology providers but those using the technology, in other words, banks, exchanges, and other financial intermediaries. Nasdaq, for example, is not only a registered exchange in the United States but also a software company providing its matching technology to more than 70 markets globally. This does, however, not make Nasdaq subject to regulations in all these markets. Instead, the regulated entities are those providing the marketplace.

If financial and capital markets regulations are meant to be interpreted technology-neutral as claimed by regulators around the globe, nothing different can apply to DeFi protocols. Just because the smart contracts are publicly available on the blockchain does not justify different results in the case of DeFi.

Something different applies, of course, if the team does not only develop and maintain the smart contract but also engages in the listing of tokens or provides the GUI for interacting with the protocol. In this case, there is a clear link between the regulated activity and the team, and registration becomes necessary.

If the GUI is provided by someone else, it is likely that this person becomes subject to regulation as this person opens the marketplace and facilitates trading, etc.

As can be seen from these examples, it is not always possible to draw a clear line. To avoid the risk of becoming subject to regulation, the best way is still full decentralization. In other words, the team must deploy smart contracts without admin rights or transfer the protocol’s governance to the community. While still untested, it is highly likely that this provides an effective shield against regulations.

The trade-off of this approach may, however, be a lack of institutional investment/usage. It is, therefore, necessary to consider the implications of a fully decentralized strategy holistically and not solely from a regulatory point of view. What works for one project might not necessarily be ideal for others.