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(In Clockwise Order: A still from the NFT video that included unreleased The Weeknd music; One of the NFT Birkins that has sparked a lawsuit from Hermes; An NFT from renowned artist Takashi Murakami; An NFT from the NFT sneaker company RTFKT which was recently acquired by Nike; One of the first tweet from Twitter co-founder Jack Dorsey that has been sold as an NFT.)
The keys to answering this question are the phrases "reason to know" and "strict liability."
Before delving into how sanctions programs may apply to the cryptocurrency space there must first be a clear discussion of what an NFT is. Non-Fungible Tokens (NFTs) can be any digital file such as artwork, sounds or unit of data that is turned into an asset by being stored on a blockchain system. Artwork has been the most popular medium for NFT creation but NFT's have ranged from unique art pieces to tweets or even entire albums. Once stored to a blockchain system of a cryptocurrency such as the currently most popular currency Etherium. Just like any asset, NFTs can be bought, sold or gifted and their value fluctuated depending on the blockchain system that they are stored on.
NFTs have had an exponential increase in popularity and pervasiveness in both business and media. Many fashion brands such as Burberry, Louis Vuitton and Balenciaga have delved into the NFT space with digital clothing and campaigns. Nike recently acquired the digital sneaker design company RTFKT that has risen to notoriety for their NFT sneakers.
These ideas present a host of legal questions such as Hermes' challenge to an artist that created his own version of Birkin Bags as NFTS, but the question here is how do sanctions and compliance programs work around this new digital space? There is no direct answer, but through piecing together the fundamental structure of sanctions programs along with FAQs released by the Office of Foreign Assets Control (OFAC) we can offer guidance to lessen the risk of being sanctioned for an NFT transaction.
In the applicable instances, OFAC treats NFT transactions as "deemed exports," meaning that the transfer of an American's digital asset to a foreign national is considered an export. Subsequently, that distinction introduces the authority of the OFAC's sanction regulations to these exchanges. OFAC has a strict liability standard for any violator of their sanctions programs and may increase penalties if it believes that the exporter had reason to know that their transaction was being facilitated with a blocked individual or someone from a blocked country. The issue here is that a transaction can be facilitated with nearly complete anonymity as the only identifier needed by a buyer and seller are the other's digital wallet address which offers no information about the individual's personal identity.
OFAC has offered an FAQ in which they pledged to began posting the digital wallets of sanctioned individuals when applicable. This introduces the first step in building a compliance program around your management of digital assets, making sure that any blocked digital wallets have been noted and are checked against any future transactions.
The next step in avoiding sanctions is understanding the programs broadly and introducing guidelines to your business that make a reasonable effort to sort through any auxiliary information that may signify a blocked individual. This information may stem from any contact that you may have with the other individual outside of the transaction in itself. For example, if OFAC can determine that due to your negotiations with an individual over the price of an NFT you were able to reasonably determine that they reside in Iran, this will be more than enough for OFAC to impose penalties on your company.
Do you need further guidance on building your digital asset-sensitive compliance program? Are you confused by OFAC's authority over NFT transactions? Do you want to stay ahead of the regulations that are surely coming regarding NFTs? Feel free to connect with us using the contact form at the bottom of the Home page or send us an email at contact@clarkespositolaw.com.
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