Blockchain webinar series | NFTs: Why a picture is worth a thousand bitcoins

Michael Garellek: Okay, so I think we're gonna get started, we have quite a bit of ground to cover. So thank you everyone for joining our webinar. On behalf of Gowling WLG. Let me welcome you to this session called NFTs, why a picture is worth 1000 Bitcoins. There's a Q&A function, so please feel free to add questions and we'll address them at the end of our of our webinar. My name is Michael Garellek. I am the CO head of the Financial Services regulatory group at Gowlings. Usman Sheikh, who couldn't join us due to an urgent matter. He's head of our blockchain and smart contract group, and I work with him closely. So I have big shoes to fill. But I certainly can assure you that you'll find the content of this set this session fascinating as I do. So just by way of background on our blockchain and smart contract group, it's been immersed in this area for four to five years now. We have around 30 to 40 professionals at the firm, who practice in this space, and they are involved in all sectors. So capital markets, IP advertising privacy litigation, we represent some of the co founders of Aetherium. Some of the larger crypto asset trading platforms, banks, stock exchanges, pioneers, startups, and many others in the crypto space. We also do quite a bit of speaking around the world on the topic, including to educate governments and regulators. And so whether it's addressing member states of the IMF, the Monetary Authority of Singapore is another example. Or assisting domestic regulators and governments. We've been quite active. Our group is also authoring a book called the law of blockchain technology. And a couple of us including Huisman teach at the University of Toronto Faculty of Law on blockchain. So if you wish to learn more about our group, please visit our website which is linked within the invite that each of you received and will also be linked in the email you'll get at the end of the program. So before diving into the substance of this session, I should note that this webinar is the second in a series of webinars on some of the hottest topics in the blockchain space. The first session was on crypto asset trading, and crypto asset trading platforms. The next session will be on stable coins and central bank digital currencies. And that's going to take place on June 17. Then we have on July 15, a session on defy or decentralized finance. And that's followed by intellectual property and open source on September 16. And the final session we have planned is on blockchain litigation, so civil, criminal and regulatory matters. And that's scheduled for October 14. So to sign up to those, just click on the invite link in the email you received for the relevant session. Or you could just send us a follow up note to our from the email link on our website to express an interest to join any of those sessions. Before diving into the substance also just wanted to mention that this program is eligible for up to one hour of substantive seat CPD credits. That's with the Law Society of Ontario, the Law Society of BC and in Quebec, it may also be eligible for up to one hour of CLE credits in other jurisdictions. So just a quick disclaimer also, the presentation today is not intended as legal advice. For specific legal advice on matters to be discussed. Please contact legal counsel to get that get that advice. Okay, so with that background out of the way, let's get to the topic at hand.

And I am honored and privileged to be joined here today for the session and FTS by a picture's worth 1000 bitcoins by today's panelists, and these panelists include a number of my fellow colleagues at geldings. The first is one of the world's leading entertainment lawyers. In our Toronto office, it's Susan Abramovich partner and head of the entertainment and sports law group at Gowling. Next is Waterloo partner Tom Hunter. He has spent more than 30 years helping entrepreneurs successfully navigate the challenges and opportunities of technology and commercializing that technology. And we also have Dan Cole. Dan is the partner and leader of the advertising and regulatory group at Gowling WLG. And he's also works in Toronto and his department head of the intellectual property group. So thrilled also to be on a panel with Vinay Gupta. He is the founder and CEO of Mattereum. Vinay is a leading figure figure in the blockchain space, having contributed the release of the blockchain platform Aetherium in July 2015, and was the strategic architect for the Connexus consensus sorry systems, a technology hub focusing on Ethereum blockchain and related applications. He helped arc to architect the national blockchain strategy for Dubai. He is working on a very interesting project in the NFT space, and you will hear more about it. The project is with none other than Canada's own William Shatner of Star Trek. And he'll describe more of that in our discussion. So let's jump into questions that we are going to look at with this panel. First and foremost, what are NFT and FTS non fungible tokens? And why are they so popular? So looking at a dictionary definition we find on the web and NFT, a non fungible token is a unique digital identifier that cannot be copied, substituted, divided. That is, it is recorded on a blockchain and it's used to certify authenticity and ownership of a specific digital asset. So these are important components that we'll look at also later in considering the question of securities law. And I guess I turn to Vinay and in a practical sense, aside from the dictionary definition, in your view, what are what are NFTs?

Vinay Gupta: So, NFT's are simply transferable property on the blockchain. And I want to stress here property rather than currency. They're typically bundles of legal rights, which are defined by contracts. And usually those legal rights are grants of some kind of license on IP. So I have an artist I bake painting, I take a scan of the painting, I sell the scanners and NFT and I promise I'm only going to scout sell one copy of the scanners and NFT and my agent vouches for the fact that it's really me doing this, you know, on the blog, or whatever it is. So, you know, the components here, the blockchain architecture gives you the transferable part of transferable property pretty easily. The legal architecture gives you the property part of transferable property. And, you know, a lot of this stuff is being done right now rather badly, but behind that you have a very clearly defined bumbled contract, right. That you're buying on chain. It's a it's not a complicated thing in its essence.

Michael Garellek: And is there a type of property or asset that's more conducive to that to NFTs?

Vinay Gupta: So most of the NFT space is basically IP licensing. They don't necessarily call it IP licensing, a lot of it has been done rather implicitly. But for example, if you take the NBA, Topshop, Tata hotdogs, I was getting a hotshots program. You know, they're giving you a sort of limited license to video clip, and it's a transferable license. You buy the transferable license, you have the property, you sell the transferable license, you no longer have the property. So there's lots of stuff like that. Mostly artwork, there's a little bit of music that are some 3d objects. It's a bit of a mixed bag, because everybody's trying everything they can get their hands on right now. But for the most part, it's IP licenses.

Michael Garellek: And they are, they've seen recently quite a rise in popularity, and especially from the, the artwork, the promotional side of things. We saw that Christie's had an auction selling a digital artwork, a non fungible token for I think, was upwards of $69 million. And that really, I think, generated a lot of interest. And so I, I think there's also been possibly possibilities to sell NFTS as an opportunity to meet and greet certain well known celebrities or personalities as well, which is also quite an interesting development. And so we were going to also asked Vinay, a little bit more on how do NFT's work and we are privileged, because VNA will provide us a demo of the mattereum application. And I believe he'll be able to share his screen

Vinay Gupta: With a little luck. Okay. Okay. Are you looking at something that calls itself assigned an authenticated Captain Kirk figure?

Michael Garellek: I could see that. Okay, great.

Vinay Gupta: So good to go. So we're in for sure, very briefly, the website we're on. So this is Opensea which is a very typical NFT marketplace. It's one of the big ones. And you can see the homepage, you know, what you have is a bunch of our objects. You know, here are some digital paintings, I guess you call that new digital sculpture. Sure. So cartoons. So these things are being sold by artists, by cartoonists by digital makers, in a pretty straightforward way. You buy it, there's kind of a standard license that goes with it, you have the right to resell it off, you know, what my company does is we use this same infrastructure, but we use it for selling physical things. So as I mentioned from the blockchain, right for Opensea or rare or any one of these sites, you get the transferable Park. You know, if I want to buy one of these things, you know, there's a button here this is Mako, for me has payments and digital signatures and all the rest of the usual malarkey you would get with what it is that you're being offered then is defined by the text that goes with the asset. So in this case, here is a William Shatner toy there are some pictures, there's a whole bunch of text that defines what it is we're buying. And, you know, when you click Buy, you're basically signing an implicit contract with the seller that the goods are as described. There's your stuff. what my company does, in terms of working with physical assets, is a little cooler if I take the example of gold rather than the infamous Shatner collectibles. So one of our customers is a gold dealer in Singapore, Oracle Wilco, and they're selling gold bars as NFT's. So the physical Bar is located in the vault, you get a bunch of information about the bar when you're going to buy it 10 gram gold bar, Credit Suisse, etc, etc. And when you make the purchase, and this is where we cross over from Jerrick NFT's into the material system, when you make a purchase, a set of people providing legal warranties about the asset, get paid by the buyer for coverage of those specific risks. And I can show you that right here. So what we have here is a sort of set of basic documents that accompany the NFT, you buy the NFT. Each one of these warranties has all the price. So you can see here, this is charging F one half of 1%25 of the marsh sale price, it has an amount of liability, which is 5%25 more than the spot price of gold. And then there are some terms about what it is being vouched for by this party. Each one of these claims could be by the same party or by different party. I myself have a claim on this bar, which is the carbon claim said also here. So this is a claim that the bar has had carbon offsets bought covering not only the creation of the NFT but also the mining of the underlying gold. And if that turns out not to be true, I have to repurchase the carbon credits So this basically takes the very simple framework of the NFT is here is this animated GIF here is a license for the animated GIF, you've paid the money on the blockchain, you bought the license, you're now the owner of that, right. And it just builds on that framework to a much wider class of rights in terms of the sort of reliability of the physical assets being there that are volte reports, and that are also bound to the system by warranty. So one warranty guarantees the information is accurate. And then a second warranty guarantees, for example, there's insurance on the ball. So we're building up layers of additional protection on physical assets. But this is very much a hard case in the NFT space, because the NFT's were not really designed for physical assets. This is an example of us using a lot of lawyer pain, to build a much more sophisticated thing on top of the simple bare basic NFT structure that you can get for free because that's how the blockchain works. In the event of a dispute, one of the tricky things about this is, if I'm buying this bundle legal rights from you, there's some kind of dispute because I do something like buy an NFT from you, and then proceed to commercially produced T shirts of the NFT. And then sell them for profit. One of the tricky things here is figuring out where that will be heard. You know exactly who's who, where. And there's a way of managing that and kind of preserving some of the illusion of board jurisdiction, which goes with the blockchain. We use arbitration clauses in the contracts and show you one here.

Vinay Gupta: So we use arbitration clauses and contracts, which basically pool the dispute into the UK. And because we're hearing this in London, we can use some advanced new digital dispute resolution rules come into force from the UK, Law Society, a high court through an agency called the UK jurisdiction Task Force. And that opens up some possibilities for just very quick, very quick digital dispute resolution. Any questions? Is that cover the essence of what I should be showing people here today? And Susan, you may have not interrupted there. But I guess how is the NFT itself minted?

Vinay Gupta: So what an NFT is in a technical sense, is it's basically just a rule in a digital database. And in that rule, the only information that you have is the private the public key of the crypto wallet that owns the NFT. So when somebody mints an NFT, they're basically just writing a line into a blockchain database. And right, I own this piece of digital property. And there'll be a URL in there as well, which will take you to a file which provides the thing which is being owned, and possibly things like terms of service as well as people over there do. So it's a very, very simple blockchain transaction admin something. In our case, we have to go through a whole bunch of hoop jumping and form filling to kneel down the providence of the asset to get the warranties correctly structured, all the rest of this kind of stuff. But this is because we're doing this physical collectible thing rather than only the digital collectibles. And also, we have ambitions to do things like real estate later on, you can imagine if you're going to take a piece of real estate and represent it as an NFT 95%25 of that work is going to be defining what the real estate is, and assembling all the warranties 5%25 of the work or 2%25 of the work is going to be telling the blockchain to issue the NFT.

Susan H. Abramovitch: Can I jump in with a question, Michael?

Michael Garellek: Go ahead.

Susan H. Abramovitch: So I find I in my world, I've been dealing a lot much more with digital assets that not physical assets. So in the case of the William Shatner doll that we saw, does the person who purchases the NFT to that have access to the physical asset? How do they actually get that doll in their hands?

Vinay Gupta: So what the NFT gives us the right to take the walk the doll from the warehouse doll.So once you've got that, right, it's a transferable, right. But once you exercise the right by pulling thing out of the warehouse, you no longer have the transferable right. So what happens is that we lock the NFT at the point where the goods are taken out of the warehouse. And if somebody wants to put the goods back into the warehouse, we have to modify the asset passport that defines what the goods are with a new condition report from an independent third party that will vouch that the asset that went back into the warehouse is identical to the asset that came out of it. And if there's been any damage or other change of condition, all that stuff has to be documented in the format of an authority or a warranty for any consequential loss resulting from those condition changes if there was documented.

Susan H. Abramovitch: Sorry, Vinay, if I take the doll out of the vault, and that's the end of the NFT, I can still I have the right to sell the doll in this case. And why? Sorry, why would I do it as an NFT as opposed to just buying the doll physically?

Vinay Gupta: So the problem is the condition reporting. So if you take physical delivery of thing, then we have to trust you that the thing is in the same condition it was in when you bought it. And obviously, the entire machinery for example, eBay's dispute resolution, is an endless series of wrangling about inaccurate condition reporting. So if you're a collector, you might buy to take physical delivery of one with the other in the vault. Later on, they become much more valuable because they've become scarce, they've run out of stock. And the only way to get one is to buy one from the vault. And at that point, you can sell the one that you have in the vault as an NFT without raising any questions about condition. And this is all very, very pragmatic. And condition reporting is a very, very hard problem. In the US, the PSA, the thing, which does the grading of things like baseball cards, has just stopped accepting new customers, because they're completely overwhelmed by demand, and they felt the quality. And, yeah, I mean, I don't collect baseball cards. But you know, it turns out that there is a professional ratings agency, which is like a billion dollar company, which has been grown to a whole by the demand for rating as a service. So that step of well, we just leave it in the vault and we trade the token, it solves a lot of pragmatic problems that collectors have right now. But it is a weird use case for NFT's it's an unusual thing.

Michael Garellek: Does anyone else have questions? I had a question on? How, how do NFT's then trade? So you mentioned that with the problem of where the collectible would change hands, but you can avoid that problem because it remains in the vault and you just trade NFT and the most popular places to trade in NFT. Today, is that is that the Opensea is that is it other

Vinay Gupta: Opensea, there's Rarible, there's a there's a bunch of these places. So you know the URL that we have here for this thing is permanent, right? That is that things digital identity is referenced on the blockchain. And then the website basically just points to the blockchain. So what you can see with these objects is all of the transactions which have taken place in the past, and see if I can grab another object actually has some transactions on it. Now this one hasn't sold yet. So the if we take an NFT, that's had a bunch of transactions, all of this will be listed here, all the previous owners of the NFT, we will sit here. And what that gives you is a fairly comprehensive picture of the things heritage, its history, who's owned it. This is very important to some people who are trading digital assets, it's obviously very critical physical assets to although the assets interchangeable and want to change. So as people are buying and selling the NFTs, they're just coming to this web page or an equivalent web page on another site with their crypto wallet. They're making offers or they're putting bids in on auctions, when they when all that happens is that you know, they're the new name on the bottom down here where it says Who owns the thing. You're the owner, if you want to sell it again, you go into the back end, you take you know, I went to auction this reserve prices 2000 euros off to the races. It's a very, very simple system. I mean, it really is basically like eBay but with persistent identities from things being sold.

Michael Garellek: Right. So I think we're gonna move the conversation on to some legal issues. And our first question is for Susan. And so what should an artist be considering when pursuing an NFT project? And what should those contracting with the artist perhaps consider?

Susan H. Abramovitch: Thanks, Michael. So my angle here I'm the head of the entertainment and sports law group. That's my practice. And so what I've been seeing in the last few months a lot actually are both the artists coming forward and saying, Okay, people are trying to acquire rights to my art to sell his NFT's or their record companies are saying we want to make sure that we have the rights to those at FTS and also agents or marketplaces. There isn't really a word for yet These people who acquire the artists rights and then go and mince and fts. And so I've been looking at this from both angles, and the issues are pretty much the same from both angles. The number one issue is, what rights are being granted. And, and I, especially coming from the arts world want to be a little bit more careful about what we consider to be an NFT. An NFT, to us is the digital file that shows who owns a unique piece, or maybe one of 100, or some, some scarce number of digital files related to a, you know, digital piece of art or digital content. So the most important thing is what rights are being granted. And I'm talking about IP rights. So if I represent a musician, they would want to continue to control the copyright in their master recordings and in their musical compositions if they wrote the songs, but they would be granting, if they were entering, entering into an agreement with an agency to sell the NFT the rights perhaps to you know, sell a copy of that master recording and musical compositions in mentioned as an NFT. And sell it that way. But they would want to make sure to retain copyright so that they could exploit the music and in other ways, if I was the agent or the marketplace, taking that right, that might be okay. But I'd also want to control the scarcity, because the whole thing about NFT's is that it creates a world of scarcity in some way, and uniqueness of the NFT. So while the copyright might be retained by the artist, they might want to limit what the artist can do with it, for example, they wouldn't be able to mint another NFT with the same piece of music or the same piece of art. So that's one of the first issues that needs to be considered. Again, within the concert, the question of rights. The second issue is, okay, the artist, or the agent, or the record label has figured out what rights are being granted to mint this NFT? And what comes along with it. But then there's the second question, I'm sure Tom will get into this later of, well, what rights who is the proper person to be granting the rights. So if I represent, for example, a recording artist, and they've done a cover song, so take Cowboy Junkies do sweet Jane, sweet Jane was written by and owned by Lou Reed, or his music publisher, you know, the Cowboy Junkies couldn't just give the rights to mince and NFT of their recording of sweet chain without the involvement of Lou Reed who or whoever owns the music, the rights in that musical composition. So that's one thing you have to look at. The other thing is, even though an artist or a songwriter may, you know, be the author of the rights or even the owner of copyright, they may have granted exclusive licenses to a record company or to a music publisher. So they may own the copyright, but they may not have control over that copyright at this particular moment in time. Another good example, because you know, there are layers of rights and in digital art. I represent a photographer, who has for many, many years taken some very iconic photos of particularly bands, big bands playing live. And when he was approached, you know, it's one thing for him to say yes, I own copyright in the photos and I you can mint NFT's to these photos. But what about the personality rights of the people portrayed in those photos? That's a whole other issue and who grants those rights and who's going to be responsible for clearing those rights. So I think that that's one of the number one sources of confusion in the NFT world is what rights are being granted, who has those rights to be granted. And we'll hear more about Tom and what people are doing to control copyright infringement and rights infringement of the marketplace. Beyond that, obviously, there are the issues of revenue split. So obviously, the artists will want to split revenues from their NFT. But they're, you know, one of the advantages of NFT's is that there can be a secondary market created, which doesn't exist in the real world, in the real world, when I make a piece of fine art, and it gets sold to somebody. The subsequent sales, the artist does not share it. And, of course, there's been a lot of debate about whether that makes sense or not. here because of the setup of NFT's in smart contracts. There can be programmed instructions, that for subsequent sales, the original author of the work will continue to share in the income from the subsequent sales. So that's something that would have to be negotiated. And then, you know, as well, there would have to be issues of cost allocation because there are costs involved in missing NFT's. And who bears though those do they come off the top are they recouped from the artist and so on.

From the people contracting with artists issues? You know, the question is, if you're For example, in the recording industry, if you're a record label, does your recording agreement already provide for the right to make NFT's? Well, none of these agreements until very recently, even conceived of an NFT, in the music industry, we're used to that, because over the 27 years that I've been practicing music law, you know, every couple of years, there's some new animal, you know, an electronic transmission, a download a stream that hadn't been anticipated in the agreements before it. So we're in that phase now, it's part of what makes my job really, really fun. And so but the thing is, the contracts, you know, the record companies aren't stupid. They, you know, anticipate that there may be new technologies that hadn't been thought of and so the rights grants are very broad and say, you know, you're granting us all rights in your recordings, you know, in any media now, or hereafter known. So those contract provisions probably would capture NFT's. But still, we got to be careful. The rights granted are in master recordings. What about in the name and likeness of the artist or in digital artwork that they combine with it? So there are rights beyond just rights in the recordings that, for example, a record label may need to mince an interesting NFT. So that's other legal considerations as well.

Michael Garellek: Okay, thanks. Thanks, Susan. And so you mentioned, Tom, you have a view on things on the contractual side, and one of the questions I have for Tom is, what are the key factors that an entrepreneur should consider when looking to commercialize an NF?

Thomas Hunter: Thank you, Michael. I think like any business, this is a new business, an entrepreneurial pursuit, and a couple of key areas to think about. And the first is the NFT as your product, what is the commercial purpose of the NFT? Is it to address a market problem? Or provide something you would collect like our work? Is it to exchange give you a right to exchange? Something for a fixed value good or service, like a ticket or reward card gives you a right to receive some sort of good or service with a fixed value? Is it really more akin to a stock where you're hoping to buy it for $1? And hold it and sell it for $2 later on? In other words, how will the NFT be used? clearly defining the purpose of your business is essential for the legal and regulatory purposes. Every product or service has creation, marketing, sales, use laws, which govern it and NFT's are no different. So I always start from the premise of what is the commercial purpose of the NFT? What rights does it provide to the owner. And the second part of that equation is depending on the rights you're receiving, and Susan referred to this, who owns those rights to the creative work that you're minting as an NFT and commercializing NFT's do not change the operation of copyright, trademark patent laws. And as we know, rights can be divided in many, many ways. You can receive the right to view you can receive the right to listen to make copies to license to sell, to really commercially exploit the creative work in many, many different ways. So you need to make sure that you end up owning the rights that you intend to mint as an NFT and commercialize. So if you're an entrepreneur getting into this space, and you're going to commercialize NFT's, what will the purpose of the NFT D, a business purpose? And what rights do you need to acquire from the Creator? In order to proceed with that commercialization? We get caught up in smart contracts and minting and into the buzz language of the NFT world. We need to dumb it down and say what is our business? And do we have the rights to carry out that business? And once we understand what the nature of the businesses and those rights, what laws affect our business? And so I spend time with entrepreneurs in the tech space clearly defining their business proposition, understanding what rights they need to hold in order to execute on their business plans, and figuring out what laws affect that business. And in my view, NFT's are no different.

Michael Garellek: Okay, and we actually received an A q&a, a question that I have on the practical side, I think is tied to the risk and dealing with things like ownership and potential for fraud, and maybe Vinay or Susan or yourself, Tom will have a view in answering. So the question is, how can multiple potentially fraudulent NFT's tied to a single copyright or physical asset being sold and traded, traded simultaneously prevented? So if a musician who owns their own copy mitts fives, five NFT's for I guess the same song? And they're sold alongside each other? How is that prevented?

Thomas Hunter: So I might, I might provide a an answer, or a partial answer, I'm sure my colleagues will as well. But if you were buying any asset, or any right, you would go through a process of due diligence to determine that the person selling it to you owns it. Whether it's a car, a song, a painting, you want to know that the person who is selling it to you has the right to sell it. And so, in the NFT space, I act for a company called Eureka, that builds a package of proof that will provide you with comfort, and that the vendor of the NFT actually owns them has the rights to sell it to you. And they will tell you, number one, who was the creator? Number two, does the Creator own the rights? And if not, who does and so when you're acquiring that NFT you're comfortable that you are buying it from someone who has right to sell it to you. And that is essential, because particularly in the tech space, as we know, it's it's so easy to counterfeit, hack, imitate, and con the consumer into thinking they're requiring something that is original from the owner when in fact, it isn't. It's a counterfeit, it's a copy. So you're Rico's one company that's addressing the issue of validating ownership. And I think as the market matures, that's going to become more and more important. And you're seeing all over the all over the web and all over social media people complaining about having purchased counterfeit and fts.

Susan H. Abramovitch: Yeah, but so definitely buyer beware, I agree, Tom. But of course, if it happens, it's just it's in the case of a piece of music. That's the example that's given. That's copyright infringement. When we see you know, counterfeit works being taken down all the time. A recent example was the Jean Michel Basquiat, our piece of art that was being sold as an NFT. On I think it was open sea. And it was taken off the auction on open sea because the person who mentored that NFT didn't control any kind of rights to John Michel baskets, piece of art. The interesting thing, though, is that although copyright law allows for the taking down from an from an auction site, or an NF, any kind of NFT, site of the digital file, if that piece, if that NFT actually had been sold before that happened, the buyer still owns the NFT, which remember is a digital file that shows that they own a unique digital file, that unique digital file was represented copyright infringement, and so is much less valuable. But the NFT the token itself, of course, is not any kind of IP infringement. So the person who bought it would still own the actual token, but the token would link to an asset that now was rendered, you know, meaningless or, you know, an infringing copy.

Michael Garellek: And so, one of the one of the things I was going to talk about are securities laws and whether NFT's are they are securities, how should, how should they be regulated in that case, and sometimes that depends on the type of promises and mode of acquisition of the NFT. But first I'll turn to Dan, because it's interesting, you know, we've seen it NFT is being linked to products being offered in contests and, and things of that nature. And so I stand, you know, how could contest laws or gambling laws apply to NFT projects?

Dan Cole: Yeah, thanks, Michael. And it's interesting, I come at this at a different end of the spectrum, I would say, you know, once all the rights have been figured out, and the NFT's are properly positioned, and all the good things we're talking about here, I deal more with the brands right. And so this is brands trying to figure out how they can capitalize and create buzz. I think everybody wants the newsworthy story or buzz of a vivo type $69 million price tag. So how can you do that, and there are many ways that that's happening. But as mentioned, Michael, one of the things we're starting to see more of is tying it into more kind of traditional promotional metrics. And, you know, Tom mentioned, you know, the same laws kind of apply copyright and trademark. Well, the same is true in advertising and marketing and contest laws. So those same, you know, Criminal Code and Competition Act laws that govern promotions, they still apply in this context. And so I'll give you a few examples of kind of things we've seen are the ways in which contest or the or the Criminal Code bots can come up in this context. So it really depends on how or the manner in which you're trying to dispose of the NFT. Right. So, you know, as has been mentioned, here, I think there's the more traditional approach, which is an auction type approach. So you know, that's likely not going to be an issue, if you know, everyone, you know, everyone participate in the bidding process. But you can imagine, and we've seen circumstances where the ability to participate in the bidding process has been limited in some way, so only a certain group of people. And if that group of people is picked, for example, in a randomized manner of who gets to participate, that could create a contest for the right to bid on the NFT. And so that's, that's one example of something we've seen. Another example is what I'll refer to as fat 50. And so, in my world, in the advertising world of pure premium offers, everybody who does x gets y, right. So kind of gift with purchase by this, get this. And in thinking of a manner of or a way in which you can dispose of an NFT that's not an auction related, you know, we have seen certain clients come out and say, we've created a series of, you know, five or six unique FTEs. And, you know, people that are able to buy them first, you know, are able to get them. So you look at that you say well, is that a limited time offer. And there's an argument that that's the case, but you know, they'll give you an example, to say, you know, if I said the first 20,000 people down to the Scotiabank arena are going to get some NFT, for example, right, so some type of premium, there's a really low element of chance in that type of promotion, right, there's 23,000 seats in that stadium, everybody who's going to go down there, it's very likely going to be able to get one. Now, if I said on the flip side of that equation, you know, be one of the first two people to get down here and you'll get a high profile, you know, moment related NFT I think there's a far likelier or higher likelihood of chance. And when we think about contests and promotions, one of the things we consider is, what's the likelihood of chance, because that is what's turning it into more of a contest than it is into that premium, do X get Y. And so that opens up a whole can of worms, because if you're in that latter vote where you've created basically a chance based race to kind of be one of the first two or five, or however many people to get this, you know, limited edition type NFC, then you could open up contest world, which you know, is regulated said earlier by the Criminal Code, the Competition Act to get into issues with no purchase necessary skill, setting questions, having to file a promotion with the regulator, go back. So that's kind of the second bucket. So you've you've got your auction, you've got what's called your 50. And then what we've seen now, and we're starting to see more of is trying to actually give away NFT as a prize in a contest. And on its face, that's not much of an issue, assuming you've sorted out all of the other rights that everyone else is talking about here. So it's, you know, legitimate, and it's something that can be given away as a prize. But there are a number of kinds of considerations that I don't have answers to because, you know, the law hasn't caught up in this context, you know, certainly in the context of the Criminal Code where you're talking about very archaic language. But you know, one of the big questions we get asked all the time is, we'd love to have a purchase requirement in our contests and the Criminal Code effectively says, You can't do that. But there are limited exceptions, depending on certain definitions. And so some of those definitions are things like you can do that. If the prize is not goods, wares, or merchandise well, isn't NFT goods, where's the merchandise? We have another section that speaks to and this might type something Michael's about to talk about, you know, providing money or valuable security. Again, it's an NFT is defined as valuable security. There could be an issue under a different type. As the Criminal Code, one of the other key things is that the Competition Act as well as the regulators in Quebec require you to barely very clearly define the value of any prize giving away. In Quebec, you have to pay a duty based on the value of that price. So there needs to be a mechanism to clearly value the NFT that you are giving away as the prize in your promotion. So that's what I would say, in terms of contests. As I said, brands are very good at this and trying to capitalize on brand buzz. And so it's just another example of some of the mechanisms we're seeing brands start to play in this space. That will turn back over to you.

Michael Garellek: Okay, thanks, Dan. And so some of the some of the considerations you mentioned, and the way in which the NFT is essentially distributed or up or offered, certainly bring up an important gatekeeper gatekeeping type of issue to understand before issuing the NFT. And in the areas that I work in the question of whether the NFT is a security or derivative, or whether the platform offering the NFT is a marketplace. And whether that whether that platform offering the NFT is, is entering into trading and would need to be registered for trading. So that's whether a securities regulators or being a virtual currency dealer with FINTRAC, these are all important considerations. Because if the NFT is a security, its offering may be subject to prospectus requirements, the persons offering, it may be subject to requirements to register as dealers and securities. And that's if exemptions under those under those laws, providing those requirements are not available. And so the Canadian Securities Administrators in their staff notice, it's a little over a year ago, 46 308. did mention though, that tokens that are not fungible, that is not interchangeable, and where each token has a unique characteristic that results in the purchaser exercising their own personal preference, to value it either as a mode of entertainment, perhaps as a collectible item, that in that case, it may not satisfy the investment contract tests, the investment contract tests is one of the tests to determine whether a token is a security. So it may not end up being a security. However, it's important also to consider whether the token or NFT may have other elements associated with it, whether it's a timing element, whether it's offered in conjunction with something else of value, and to what extent there may be an injection of funds or capital provided that essentially may or may make it fall into the definition of a security. So it's it's important to really do a meaningful analysis of each, each NFT that is being proposed. And so whether that's in a promotion context, or whether that's in a trading type of context, in order to essentially determine whether securities laws apply. So, I think we have on our list here, another question and perhaps DNA has a point of view, you know, what other issues should people consider when looking to generate or issue and FTS and, and one of the hot button issues of late following the views of Elon Musk has to do with energy and environment. And so, you know, I think you have some interesting thoughts there.

Vinay Gupta: Sure. So, right now, the technical situation is very problematic on energy consumption on the older blockchains. So, the kind of first and second generation chains of which Aetherium would is main part from us for NFT's is second generation chain, Bitcoin first generation chain, they only use a mechanism called Proof of Work, which is it essentially just giant computer racing, you know, the every block the system hands out a reward to whoever happens to be luckiest in that round. And the faster your computer is, the more likely you are to be lucky in the case of Bitcoin to offset the co2 emissions from that process with cost, on the order of $700 million a year, for theory, and the offsets would cost about $45 million. In comparison, the third generation chains, which are things like avalanche, to do an offset for all their carbon consumption would be about $20,000. So, individually offsetting the NFT's which are being issued costs a few dollars, it's enough to pay for a carbon offset to cover pretty much any operation you're going to do on the material on the Etherium chain. But in the longer run, third generation, fourth generation change, they're going to run clean, they're mostly going to be carbon neutral. This is one of these problems, which is, you know, insurmountable in the current technology base unless we start doing massive offsetting. But it will be I mean, it will, I always hesitate to be this global, anything to do with the environment. But I genuinely believe that the sun will just sort itself out as the newer technology comes in. And Aetherium is moving to a low carbon data structure structure so that I work a low carbon algorithm later this year. So it should get its emissions right down. And, you know, that's how progress is in the field. step at a time. But if people aren't offset, and you know, it's a couple of 100 kilograms for NFT, which is, you know, that's a few types of gas. It's an expensive process. Offsetting is important.

Michael Garellek: Vinay, I think we had a question earlier, when you were doing your demo, and I and I, I missed this one. But essentially, the question was, and this is from, from Morgan Coats, how does the NFT get locked after the physical item is redeemed.

Vinay Gupta: So essentially, they just send it to us. And we put it under the control of a smart contract, which doesn't permit it to be used, unless we go through a process where we back out of our control. And, you know, that structure right now is just done by material. Relatively soon, there will be a Trust Company in there. And the Trust Company will take care of things like the asset.

Michael Garellek: And is the NFT Locked, essentially forever? I guess it doesn't disappear.

Vinay Gupta: And well, it's, it's locked, because if somebody puts the asset back into the vault, you want to then hand them the F, the NFT. In response, then a fuse can be used like a coat check. For your cool Buchan, we give you back the tag. That's a fairly it's a fairly straightforward approach. I mean, you know, handling physical assets is always much harder than handling IP. But as long as you stick fairly close to the industrial norms for things like gold, so as you follow their procedures, everything's pretty well thought out. And systems actually work remarkably well.

Dan Cole: Vinay, can I ask you a question? In terms you mentioned, I think you mentioned houses is one example. But I'm just trying to think obviously, something that can be put back into a vault that makes good sense to me. What about something that can't be put back into, like a house? Do you see that expanding to that market? Or how do you how do you see that?

Vinay Gupta:  Oh, sure. Sure, sure. So if you're doing something like a house, probably what you're going to do first up is put the house into an SPV. And then once the house is in the SPV, and the SPV can define what the relationship is between the ownership of the house and the SPV. So if the SPV says right, whoever currently owns the NFT has the right to give the NFT to the SPV in return for the title transfer of the house out of the SPV. And to the person that was holding the NFT. You know you we haven't done this yet, right. But you could build a framework of commercial rights, where to get a piece of property into an NFT. You put it into an SPV. The SPV has set of standard contracts that are binding to the ownership of the NFT. And then once the house is taken over the NFT and somebody decided they're going to live in it on thought point VA SPV becomes essentially scrap you might keep it around because you want to use it again. For the most part at that point, it's emptied out Overall now, I think that all of these mechanisms are basically hacks. You know, there are probably 25 different ways that you could take an SPV and bind a commercial right to it to give you meaningful control of a piece of real estate. It doesn't matter which one you pick, as long as you do it in a competent way. Because at the end of the day, all we're doing is buying and selling property. The fact that there's some digital stuff in the middle that it doesn't change what's fundamentally hard. And then the how many ways are there buying and selling property, it's more than two. And when we get to real estate, I expect to spend a lot of time talking to lawyers about all the awful stuff that is in their jurisdiction and nowhere else on earth, you know, this is good, right? Real estate is how?

Dan Cole: Well, by no means the real estate lawyer. But yeah, I find that fascinating, just been so hard to get there. Like it's also an asset that would need to be registered under, you know, a different registry system, you know, quite apart from all of this as well, right. So that that's probably a big piece of that equation.

Vinay Gupta; Absolutely. That's why the SPV is so important, right? So from the perspective of the National Land registers, whoever happens to be in Canada, then the house is owned by the SPV. And the fact that the SPV happens to all the token holder, one house that doesn't show up on the land register that's kept inside of the internal state of the SPV.

Susan H. Abramovitch: Vinay, for those of us who don't necessarily use the nomenclature as easily as you maybe the audience would like to know, is SPV, a single purpose vehicles, is that what we're talking about? corporation or some kind of entity that would, would exist solely for the own the owning of this house?

Vinay Gupta: Exactly, exactly. Which is a very common construct in the real estate world. You know, it's a very, very ordinary thing for real estate to be packaged inside to a company and then you want to transfer ownership to the real estate, you sell somebody company. substantial percentage of the real estate in London is managed on that basis, you know, not like 10%25, but two or 3%25, maybe.

Dan Cole: Interesting, thank you. Very helpful.

Vinay Gupta: You know, sorry, go ahead, Michael,

Michael Garellek: well go ahead.

Vinay Gupta: With all this stuff, like we're all still in the early stages of this. So my expectation is you come back in five years. And, you know, there'll be a bunch of standard templates put or a standard as NDAs, or intellectual property assignments, or whatever they are, every big World Forum will have a couple of standard template contracts for doing things involving NFTs, and it will just be a standard part of the service offering. There's there's no magic here. It's just a bunch of stuff with computers.

Michael Garellek: And I hopefully we have time for just one last question, we received a question, I think it sort of ties to what we were talking about. So, you know, is the NFT considered a digital asset itself? Or is it just the token? As the name suggests? And does the NFT? Can it be used for collateral with a lender? Or rather, does it really have to be the digital asset or the US or even the physical asset behind the NFT?

Susan H. Abramovitch: When it comes to sorry, Vinay, when it comes to the digital asset, like the person who owns the NFT, does not own the digital asset, right. And that that's the whole thing. The recording artists owns the master copyright in the master or the songwriter owns a musical composition, all of the NFT owner owns is that token that shows that they are the owner of a, you know, a unique digital file. But the I think the one of the main points of NFT's right now is to create a marketplace for it, it's not for, it's for the token showing unique ownership of that digital file. And so just like it can be bought and sold in the primary and then secondary and tertiary, and so on markets, I would imagine that it could be used alienated in other ways, like by way of will or, you know, a security for a loan or that kind of thing.

Thomas Hunter: I don't think there's there's any doubt that that will be the case. It's just a right or a bundle of rights. And any rights can be put up as collateral for a loan. It all depends on the perspective of the lender, if they see value in the rights, they'll loan against. They'll figure out a business proposition for financing NFt's just like you and taking collateral on NFT's. So I think as Vinay says we'll, we'll come back five years from now and the market will have matured significantly. And they'll probably be banks who are lending against NFT value in five years. So it's early days. 

Vinay Gupta: But it helps here. If you just translate the word in words NFT for Bill of Sale, you're not a million miles off how it all works. Now somebody's gonna land on a bill of sale. Sure, you know, you pay $25,000 for it, you got the bill of sale? Sure we plan on that. certificate of ownership would be another way you think about it, the NFT layer itself is not magic. It's a digital signature on a trustworthy record. Something to take a little while to get its head or wrapped around that properly. It's not it's all fundamentally complicated, like Bitcoin, Bitcoin, very, very complicated, very, very hard to define lots of horrible questions like who's operating the network? Those kinds of things are very, very murky legally. And a lot of times you just have the law coming along, sort of post facto and approximating an answer about what happened. Whereas the NFT is because they're very clearly defined by digital signatures law. I don't think you've got anything like the same degree of legal ambiguity that you get run feels like cryptocurrencies. The NFT's are just vastly better defined for the most part, because copyright for example, is the basis for nearly all of them, and copyright comes a well formed piece of law for what it's worth.

Michael Garellek: Right. So I think we've reached the end of our session here, I want to thank all the participants for joining and participating. So Vinay, Susan, Tom, Dan, thank you very much. And so please stay. Please join us for our next session. It's June 17 on Stable Coins and CBDCs and have a lovely afternoon, everyone.