Tuesday, May 28, 2024

How-to understand regulation of Non-Fungible Token in Indonesia

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The trend of Non-Fungible Tokens (NFT) is being discussed. NFT is a digital asset that resides in a blockchain. Blockchain is a combination of a lot of data located around the world, which then records the digital footprint of a cryptocurrency and can even record the track record of intellectual property rights that have been created digitally. Blockchain technology utilizes computing to create groups or blocks that are interconnected with each other. As the name portrays its functionality, NFT is a unique token in the form of proof or certificate of ownership of objects or goods or assets that are exclusive. Examples of NFT assets are artworks, paintings, memes, videos, game items and other creative works with a unique digital. 

Governing Law and Regulation

  • Law No. 28/2014 concerning Copyright
  • Law No. 11/2008 concerning Information and Electronic Transactions as amended by Law Number 19 of 2016
  • Law No. 13/2016 concerning Patents as last amended by Law No. 11/2020 concerning Job Creation
  • Law No. 20/2016 concerning Marks and Geographical Indications as last amended by Law No. 11/2020 concerning Job Creation
  • Law No. 42/1999 concerning the Fiduciary Guarantee Act
  • Government Regulation (PP) No. 71/2019 concerning the Provision of Electronic Systems and Transactions
  • Government Regulation (PP) No. 80/2019 concerning Trading Through Electronic Systems
  • Minister of Communication and Informatics Regulation (Permenkominfo) No. 20/2016 concerning the Protection of Personal Data in Electronic Systems
  • Minister of Communication and Informatics Regulation (Permenkominfo) No. 5/2020 concerning Electronic Systems Providers in the Private Sector as amended by Minister of Communication and Informatics Regulation (Permenkominfo) No. 10/2021

Current regulation

Currently, in Indonesia, despite the interest in this new asset type, the regulatory regime for NFTs is uncertain. Until now, there are no specific regulations regarding the NFT industry and how NFTs must be made, purchased, collected, printed, etc. Although there is no clear regulation, there are several NFT platforms operating in Indonesia, such as TokoMall, which is owned by Tokocrypto, and other platforms that are still under development. Although the NFT platform has not been specifically regulated, it is subject to the provisions of the Electronic System Operator (ESP) contained in several regulations. Business actors who wish to create and operate an NFT platform must meet the ESP requirements as stipulated in the above regulations. Their business activities will be included in the Indonesian Standard Classification of Business Fields (KBLI) No. 63122, which includes web portals and digital platforms for commercial purposes. The latest KBLI published in 2020 classifies economic activities in Indonesia by business sector. The classification is then used, among others, to determine the business licenses required for certain business fields. Under the Indonesian regulatory regime, ESPs are subject to various terms and related obligations, including, inter alia: 

  • cross-border transfer of personal data; 
  • electronic data storage overseas; 
  • general processing of personal data and consent of the owner of personal data; 
  • erasure of electronic data; 
  • data encryption and storage; 
  • data storage; 
  • privacy policy; and 
  • registration requirements.

Intellectual property aspect

Intellectual property law provisions will apply to NFT. In addition, based on Article 25 of the Law No. 11/2008, electronic information and electronic documents in the form of intellectual works, internet sites or intellectual works contained therein are protected by intellectual property rights. Therefore, several types of intellectual property rights need to be considered with respect to NFTs. 

  • Blockchain-related invention patents can be protected as patents. Article 19 paragraph (1) of Law No. 20/2016 stipulates that Patents are exclusive rights. The patent holder to take advantage of his patent and prohibit others, without his consent, from: Making, using, selling, importing, renting, handling or providing for sale or rent the patented product; use a manufacturing process protected by a patent to produce the goods or other activities. Article 143 of Law No. 20/2016 gives the patent holder the right to file a lawsuit in the Commercial Court if his patent rights are violated by other parties. 
  • The NFT trademark may also be protected as a trademark. Trademark is a sign that can be displayed graphically in the form of a tool, logo, name, word, letter, number, color arrangement, in two dimensions or three dimensions, sound, hologram, or a combination of two or more of these elements to differentiate goods or services produced by individuals or legal entities in the trade of goods or services. Article 83 paragraph (1) of Law No. 13/2016 provides a basis for registered mark owners or licensees from registered mark owners to file a lawsuit against third parties who unlawfully use the same mark in principle or nature. intact with similar goods or services. They can file a claim for compensation or stop all actions related to the use of the mark. 
  • NFT copyright is closely related to artwork that is subject to copyright and related rights protection. Article 9 paragraph (3) of Law No. 28/2014 stipulates that any party without prior permission from the copyright holder is prohibited from copying or using the copyrighted work independently commercial. And Article 10 of Law No. 28/2014 stipulates that anyone who manages a place of business, including online platforms, is prohibited from allowing the sale or reproduction of goods resulting from infringement of copyright or related rights in the place of business they manage.

NFT asset as collateral

NFT has links to various aspects of Indonesian law, such as the property law. The ownership of NFT as a work of art is closely related to the Intellectual Property Rights contained therein, namely in the form of Copyright. In theory, IPR can be used as a guarantee in Indonesian law. Referring to article 499 of the Civil Code which defines intellectual property rights as movable objects that are not tangible, intellectual property rights are more precisely formulated as fiduciary guarantees. As a relic of colonial times, property law is not meant to cover digital objects. Basically, NFT fulfills the scope of material law in the form of digital assets. IPR as a fiduciary guarantee is possible by referring to Article 1 number 1 of Law No. 42/1999, namely that fiduciary is the transfer of ownership rights to an object on the basis of trust. In its development, Indonesia also recognizes the existence of digital goods which are intangible goods in the form of electronic information, as regulated in PP No. 80/2019. Furthermore, Law No. 42/1999 emphasizes that fiduciary guarantees can be in the form of tangible and intangible objects of economic value. Article 1131 of the Civil Code states that all movable and immovable goods belonging to the debtor, both existing and future ones, become collateral for the debtor’s engagement. In addition, Law No. 28/2014 defines Copyright as an intangible movable object. Furthermore, Copyright can be used as an object of fiduciary guarantee. By referring to the provisions of Law No. 28/2014, a work protected by copyright can be used as a fiduciary guarantee (material guarantee for movable objects, both tangible and intangible). Reflecting on this, NFT as a series of codes that function as tokens, can be classified as digital goods according to Indonesian law and can be used as fiduciary guarantees.

NFT marketplace

Based on PP No. 80/2019, Foreign Business Actors will be subject to Indonesian law if they are actively dealing with Indonesian consumers and meet the following criteria: 

  • transaction volume; 
  • transaction value; 
  • shipping volume; or
  • the amount of traffic. 

Compliance with Indonesian law includes but is not limited to: 

  • obtaining business and technical licenses; 
  • carry out company registration and mandatory taxation; 
  • provide access to electronic systems for the Indonesian government; and 
  • implement consumer protection in accordance with Indonesian law. 

The NFT marketplace often uses the smart contract audit service, CertiK, to assess the level of security and safety of the blockchain. Indonesian law is silent on authentication and verification issues on blockchain. However, the law requires providers of electronic systems to ensure that they can prevent interruptions, failures, and losses.

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