Discussion Post: A Stable Legal Framework for Digital Uniqueness

thanks for this summary @Larry_Bates .
The value of NFTs often must suit financial, lawful, and contractual guidelines, that differ relying on where the deals are struck. In most cases, jurisdictions base their NFT copyright policies on European Research Council rule no. 721 (ERC-721) blockchain smart contract standard. Under this standard, creators and owners of unique crypto assets (UCAs) can verify the digital scarcity of their possession by recording it on the Ethereum public distributed ledger, where UCAs can be stored and transferred.
Regardless, some questions linger over the relationship between artists, collectors, investors, and licensors.Since these artworks have subjective value and cannot be sold off in pieces (the essence of “non-fungibility,”) the question of how NFT transactions should be controlled, taxed, and policed remains unanswered(if there has been a change kindly correct me). Other questions surround the affinity between an NFT backing an asset and the asset itself. Unlike cryptocurrencies, which are regulated by financial regulations, the asset itself. Unlike cryptocurrencies, which are regulated by financial regulations, the assets associated with NFTs contain aesthetic value as well as monetary clouding the regulatory waters and subjecting them to consumer protection, truth-in-advertising, and other aspects of the law in addition to IP and investment law.
Got a couple of questions :

  • Can, and if so, how, can an NFT’s asset value be distinguished from its inherent value?
  • How should the transfer – sale, donation, inheritance – of NFTs be regulated and * treated for tax purposes?
  • What rights do NFT owners have, vis-à-vis the original creation on which the NFT is based?
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Thank you for these questions! I will start in reverse order to address the foundational issues that affect the rest of the questions. That is: what rights do NFT owners have? The answer is relatively none. Unless there is an explicit statement of licensing agreement or some statement of explicit transfer of intellectual property; the purchase of an NFT does not grant any rights beyond those that are granted with purchasing anything from a third party. The transfer of NFTs should be treated as property and should be regulated as such, in that they are explicitly not transmitting rights of ownership over the license with a general NFT purchase.

Can an NFT’s asset value be distinguished from its inherent value? Technically they are already distinguished from each other in that the asset from which an NFT is derived will ultimately be able to be leveraged separately from the NFT itself. Suppose you are talking about speculative value vs. value on the market. In that case, an NFT listing price will not necessarily reflect the last market sale of an identical or similar NFT and thus the market value should be assessed by the last sale and not the list price.

A great example of the confusion that initially surrounded the rights associated with NFT purchases is in the SpiceDAO. Due to the confusion surrounding rights associated with NFT sales, the SpiceDAO was formed with the intention of purchasing a physical copy of Jodorowsky’s planned Dune film to procure funding to make the film and then digitize and burn the physical copy to increase the value of the NFT. Since the people involved failed to understand copyright law and IP law associated with the purchase they were making, ultimately the SpiceDAO significantly overpaid for a physical copy of a book that had already been digitized for public access. To make matters worse, simply purchasing the book did NOT give them the rights to make a film based on the book. This becomes the prime example of what NFTs do NOT represent when purchased. A purchase does NOT necessarily transfer ownership of the license, does NOT give the buyer the capacity to make derivative works of the NFT, and ultimately does not necessarily represent ownership of the IP associated with the NFT.

The same holds true for physical art works. Purchasing a physical artwork does not give the purchaser the right to make derivative works without express permission of the creator. In example, I cannot buy a comic book off the shelf or from an auction and go make a movie or television show based on that book simply because I own it. This is not an exhaustive example, but it gives a tangible piece of media that is also intellectual property that shows why a simple purchase of property does not equate to the purchase of the rights to the intellectual property from which that work was derived.

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Thank you @Larry_Bates for this wonderful summary. I believe that treating NFT as a personal property doesn’t take it away from the ambit of intellectual property and the copyright and royalties that follow. This is because, intellectual property from my understanding is a special kind of personal property albeit intangible ( these types of personal property are called choses in action). I am

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Right, OpenSea is not a “broker” the same way that Uber is not a “taxi” company. It wouldn’t surprise me if SEC and probably the FTC will soon be giving DEXs the evil eye based on the concept of functional equivalence. There was a case where a DeFi protocol attempted to waiver all liability but SEC pointed out that the smart contracts could only be executed via their UI/UX. As Gesler says, if you look like a duck, walk like a duck and quack like a duck, claiming to be a chicken is not going to cut any feathers with him. Even if you get every legal adult to sign in triplicate and swear on their mother’s grave that they are using it as 3rd party platform, competition law might infer implied terms , impute vicarious liability, or have courts bring in equitable restitution (unjust enrichment etc). In short, when playing regulatory chicken in the gray zone, someone is going to get run over sooner or later without clear safe habors and some decent caselaw.

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Just like @Larry_Bates has said, when it comes to legal treatment, a purchaser’s rights depend a lot on whether the NFT in question has an underlying physical asset. Where there is an underlying physical asset, a purchaser’s rights will be limited by the existence of the physical version.

Concerning NFTs existing solely in digital form, I would like to say that the problem is not that it is impossible for digital assets/content (which mostly embody intellectual property) to be transferred in the same way as tangible goods are, but that it had unfortunately become conventional for such transactions to be treated as licenses rather than sales transactions even where the circumstances suggest otherwise. This indiscriminate use of end user license agreements (EULA) is therefore the first impediment to the application of the first sale doctrine in digital asset/content transactions.

The decision in ReDigi is another hurdle because it holds that the first sale doctrine does not apply to digital subject matter. This means that even if a transaction was couched as a sale rather than a license, the doctrine would not apply as long as its subject matter is digital. This decision was based on the technology available at the time and will become unjustifiable if it can be proven that there are effective ‘forward and delete’ or similar technologies which ensure that once a digital work is forwarded, it is irretrievably deleted form the sender’s device. In the case of NFTs, this problem is solved by the digital uniqueness provided by blockchains, along with their consensual nature.

It is generally necessary and particularly in relation to NFTs, that the indiscriminate use of licenses be discouraged and contracts be treated like sales transactions where the circumstances suggest so. Since blockchain technology guarantees digital uniqueness of NFTs, a digital first sale doctrine should apply. This would make NFTs sui generis (of its own type).

Property is described as a bundle of rights comprising of different individual sticks (privileges). The wholesale use of licenses therefore entails the risk of permanently eroding the possibility of enjoying full property rights.

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Concerning NFTs existing solely in digital form, I would like to say that the problem is not that it is impossible for digital assets/content (which mostly embody intellectual property) to be transferred in the same way as tangible goods are, but that it had unfortunately become conventional for such transactions to be treated as licenses rather than sales transactions even where the circumstances suggest otherwise.

Property theory (anglo-saxon) has two major branches, choses in possession (real-prop, chattels etc) and choses-in-action (court enforced privileges and immunities). The first sale doctrine came about because copyright fixes the IP into a tangible work so then people treated it like choses-in-possession, with all the ancillary rights like rental, etc. However due to its underlying intangible nature, courts and later legislation had to enumerate fair dealings and customary practices (backups etc). The underlying IP is still a contractual “license” which has morphed from shrink-wrap to click-wrap to now touch-wrap (for smart-contracts by mere act of interaction). So the sales analogy is flawed because if you presume the NFT is a limited edition of some sort, what happens during the transaction is a change of control via a unilateral novation agreement. I believe there’s an EIP standard which attempted to define change of control rather than a token flow. This resolves your conundrum between sale and relicense. The usage/derivative rights are fixed upon minting, but the control rights can be onsold (eg one-off right to convert limited edition to print-version … perhaps on payment of another royalty). This makes it analogous to the Canadian (electronic) exhibit and subsequent purchase of fine art.

It is generally necessary and particularly in relation to NFTs, that the indiscriminate use of licenses be discouraged and contracts be treated like sales transactions where the circumstances suggest so. Since blockchain technology guarantees digital uniqueness of NFTs, a digital first sale doctrine should apply. This would make NFTs sui generis (of its own type).

Here I refer you to evolving theory of a new root of property … choses- in-rem which UK has issued a consultation paper (they label it data objects). In my mind, it has close analogies with international law of the sea where you can staple writs to the ship which otherwise moves between jurisdictions. Data Objects can be seen in proto-forms, eg the ICOTERM paper based terms of carriage. I believe caselaw consistently refer to rights over the documents rather than the goods in question. So rather than sui generis, you’d just elaborate on an imperfect usufruct (google roman law) for avatar celebrity rights or exhibition of collectables.

If interested in discussing the refactored legal property theory, jump onto LexDAO #ip-*** channel. You’d find that the new pluri-national nature of choses-in-rem can solve a lot of conflict of laws (fair-use/dealings EU limits, etc)

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Thanks @drllau. You are right about my sales analogy missing the distinction between control rights and usage/derivative rights. I think the analogy would be limited to instances where control and usage/derivative rights are bundled together. I hope we can have further engagements on this topic.

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I hope we can have further engagements on this topic.

Let’s also keep in mind that I come from the Anglo-saxon jurisprudence PoV whereas the US has gone on a different emphasis (Hohfeld analysis = bundle of interests) plus the liability regime. Whereas property rights (of which digital have distinct non-rival economic aspects) in Commonwealth follows Yanner v Eaton in

“property” does not refer to a thing; it is a description of a legal relationship with a thing. It refers to a degree of power that is recognised in law as power permissibly exercised over the thing.

recognising 3 elements

  1. First, the existence of an asset, thing or resource to which a power or right can relate.
  2. First, the existence of an asset, thing or resource to which a power or right can relate.
  3. Third, the right of a person either to exclude or allow access by another person to that particular asset, thing or resource

wrt digitalisation, for 1. we need some degree of persistence, and identity/naming (eg URI)
2. can be relaxed, with human liberty constrained by agency theory and thus dematerialised / delimited by control aspects within unilateral contracts
3. digital rights can be non-rival and either excludable or not unlike choses in possession.

So rather than argue the techicalities of IP vs license vs personalty, digital property is reasoned from the social value and legitimate power in a network of relationships. That’s why I call avatar NFTs an imperfect usufruct because you have the tree (creator crafting a set of accepted usage) and the fruit (trading of avatars and self-identity). Which is distinct from art collecting and separate again to hash certification. NFT is a mere technical standard but you need to study the customary usage of any choses in rem (digital objects), rather than treating NFTs as a single class.

And let’s not forget EU civil law and PRC has their own property definitions/doctrines (eg collective rights). India seems to be a hodge-podge to my eyes (God’s have legal personality?) so perhaps a local might be more qualified to speak.

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Wearing my finance hat, I am not convinced that NFT has an intrinsic value. The process for analyzing an NFT valuation is not predetermined. Simply put, NFTs cannot be evaluated using the same parameters that you would use to evaluate private companies or traditional investment vehicles like shares where the last buyer’s payment typically provides some indication of the worth. However, with NFTs, it can be challenging to predict what the subsequent buyer may pay based on their predictions. As a result, estimating the value of an NFT is based on speculation.

Recently, the market has developed a number of algorithms and metrics to determine the worth of an NFT, including its rarity, tangibility, social proofs, creator’s history, etc. These measurements, in my opinion, are subjective and serve only as a means for the market to assign a value to something that has little to no intrinsic value, which may suggest that an NFT’s value is significantly influenced by the health and strength of the community (market) that supports it. It will be fascinating to know that, according to Adam Smith’s inquiry into the wealth of nations, an asset’s worth is determined by the labor utilized in the asset’s production and the accessibility of the market where the value will be distributed and utilized.

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It will be fascinating to know that, according to Adam Smith’s inquiry into the wealth of nations, an asset’s worth is determined by the labor utilized in the asset’s production and the accessibility of the market where the value will be distributed and utilized.

So if you deduct the sale price of say a Gucci bag (or Porsche) from the raw time & materials, then what do you call the “gap”? You can buy (donate) your way to a knighthood but can you purchase a nobel laureat title? There is a class of economic goods (Veblen/Giffen) which are not governed by supply/demand and totems (general class of symbols, identity socio indicators, etc) fall into this. If you strongly identify as a cyberpunk, or dumb apeshit or whatever, then it is worth whatever you think it is to belong to that group? Every parent probably been pestered by teens wanting to own the “in-crowd” knic-knac of the month.

Now the price discovery mechanisms are fascinating because it is inherently non-linear dynamics, eg the halo effect of wanting to imitate your “hero”. So some things are “kool” until they are not. This is not the normal “price” of supply/demand of commoditities/goods but of personalty & intangibles. Adam Smith neo-classical theory did not factor in celebrity because apart from pope/royalty it just wasn’t on the table his century.

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Veblen analysis strikes me as correct. The economy dynamics associated with them are “strategic sabotage” not value maximization.

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Could you expand on the idea of strategic sabotage here? Are you suggesting that the game here would be to drive the price down to achieve the status without the high price of that status? Would it be possible to engage in a market manipulation to do this also, something like a negative wash trading?

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@Larry_Bates I delved deeper into your discussion post. I made a brief summary of it and further the discussion by contending that it will be impossible to treat NFT as personal property in a bid to circumvent certain obstacles that flows from intellectual property, because intellectual property right is a fundamental right which inures naturally to an owner of artwork. This is in fulfilment of my cohort assignment.

In this research, the author argues that Intellectual property arrangement for non-fungible token does not provide purchasers with sufficient ownership interests that have been promised. It is always a bad buy by them and this may be a result of the technology power of the vendor or its legal power through a license claw back. The author thus, contends that the best legal characterization of Non-Fungible Token is as a sale of personal property since it matches the commercial expectations of Non-fungible Token consumers.

The author referred to several cases such Rensel v. Centra Tech-where a Southern District of Florida attempted to determine if a buyer who had purchased a cryptocurrency by paying Ether into a smart contract was bound by the terms of agreement in arbitration that appeared on the seller’s website. The court ruled that since the buyer interacted with the smart contract directly, the terms of arbitration on the website did not apply to the agreement between buyer and seller since smart contract was the point of sale. In Capitol Records v ReDigi - A case in which a website attempted to create an aftermarket for used digital audio files under the condition that the original user gave up ownership of the original copy. The court ruled that the website did not have the license to resell the audio files and were thus violating the IP rights of the license owners. The court ruled that the destruction of the original copy did not negate the process of copying and transmitting the file, which violated the copyright agreement associated with the original IP.

The author also cited several sections of the Uniform Commercial Code to support his discussion of Non-fungible Token as personal property such as article 2, section 204 of Uniform Commercial Code which outlines regulation for sale of goods, warranties and how exchanges of goods and services in the United States are regulated amongst others.

While the author’s arguments and suggestions are creative and disruptive, the author failed to establish how and to what extent the recognition of Non-Fungible Token can extinguish the intellectual property rights of the owner which inures naturally as a compensation for effort, creativity and originality injected into making the Non-Fungible Token. The author also did to consider the economic and creative implications of not recognizing Non-Fungible Token as personal property, and the fact that intellectual property is also recognized as a personal property.

It is my considered opinion that recognizing or treating intellectual property as a personal property does not and will not extinguish intellectual property rights that naturally flows from a Non-Fungible Token to the vendor. A sale of personal property is a sale of goods not the intellectual property in the goods and will be counter-productive if the court were to turn blind eyes in making this distinction since doing so will amount to deny of fundamental huma right. Intellectual property rights are recognized as a fundamental human right which cannot be wished away at whims.

Further, treating Non-Fungible Token as a personal property instead of intellectual property may impact creativity and innovation deployed in making it which may have consequences to the market.

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I think there may be some misinterpretation of what was said and claimed. NFTs are NOT by default an assertion that the person selling or minting an NFT is the owner of the intellectual property associated with the NFT being created. This inherent lack of congruity or necessity of congruity creates a marketplace in which many NFT sellers do not actually have the rights to the intellectual property they are selling in the form of an NFT; and further the brokers that facilitate the transactions were not doing the due diligence to ensure those trading, selling, or minting NFTs had the license to do so.

That is the root of the conflict as to why NFTs cannot be automatically treated as intellectual property and should be considered to be personal property at the least; and intellectual property when the license is legally transferable. Otherwise, the notion that IP is natural and not a function of regional law would be a highly debatable and contentious point to make. Intellectual Property Law is artificial and man-made; and is most definitely not a natural right. Whether it “should” be a fundamental right is another debate. Inherently, it is not a natural law and is completely dependent upon capacity to enforce; in that IP law with no enforcement may as well not exist.

The argument was not being made that “NFTs cannot function as IP”. Rather, the argument that was being made is “The current marketplace treats NFTs as personal property in the way they are traded, claims it is intellectual property in the way smart contracts are meant to function, and the reality is incongruous.” Another issue is that the incongruity in understanding of the terms of a contract can cause a misunderstanding of terms; and in that context the agreed terms of the contract that both sides agree upon become the legally binding terms in the context of personal property exchanges.

A further example that has not seen the investigation completed is that of the art collector that turned a Frida Kahlo painting into an NFT and burned the original painting. This case will be important to the NFT legal framework in that a person who purchases a piece of art purchases it under a personal property contract unless there is an explicit intellectual property transfer. To be clear, buying an original artwork does NOT guarantee the complete transfer of ownership over the license associated with that work. Especially in the context of art prints being a fairly common practice in which the creator of a work may retain the license over a work to distribute prints while the original work may be sold in a completely different transaction without the original artist losing control of the IP rights associated with the original work.

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@Larry_Bates i didn’t mean natural law, when i used naturally, i meant it’s a fundamental right. I agree it is debatable anyways.

Thanks for clarification and I agree with your last paragraph.

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Even then, I would assert that there is an appearance of being a fundamental right; but actually being a benefit reserved for individuals and organizations with the capital to procure legal protection. Filing a patent costs money. Getting a copyright costs money. Suing to protect a work costs money. While the laws protecting IP are meant to be all-encompassing concerning their applied protections; in reality it is unfortunately not as equally applied as it should or could be.

As a musician that has had my work stolen and sold by a company in a different country; I can personally attest that IP protection enforcement is not nearly as accessible for the poor artists and creators looking to protect their works and that the capital to procure legal protection often can come to usurp who is the “technical creator” of a work. This is routinely an issue with musicians that record a work, own the intellectual property contained in the work, but do not own the master recordings. While Taylor Swift owning the intellectual property but not the master recordings may seem tangential; it’s actually a very important case concerning the congruity of protections on a work when there is both intellectual property and physical or in some cases digital property both present.

At the core, it is clear that intellectual property also must be a person’s “personal property” in order for them to be able to legally sell it; but this is not the case when IP provides licensing terms that are associated with copies of the original property. Distribution license, reselling license, modification license, or any other type of license that is granted is not necessarily going to be held by the same party that holds legal control of the personal property. In some cases the holder is congruous, but there are enough cases of incongruity in ownership that it is not a clear issue and ultimately why the most relevant nuances should be pointed out for discussion.

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This points to a flaw in the ownership-possession-control triangle of IP

  1. as creator the copyright automatically devolves to you by act of law … but
  2. the studio possess the master recordings which are needed to produce derivative works (or commentary or other downstream compilations)
  3. control of the work is effectively split. Without creators having the capital to own their own recording studios, the control effective shifts to later stages of the value-chain, in this case the platforms like iMusic or spotify which sets the market prices and basically treats artists as un-unionised suppliers

We also have the trend in that previously the creator economy was dominated by a few major studios and they were big enough that whilst bullying new artists, at least the set of copyright infringers was small that it made sense to go through centralised bargaining. With modern rip-mix-burn and AI synth and generative music, the control becomes more decentralised and the bargaining power of individual artists is sharply reduced.

There are 3 possible solutions (in no particular order)

  • artists band together in coop-style DAOs to own the platforms, buy the upfront studio capital equipment and seize control back from distributors
  • we have better smart contract tainers which correctly stream the royalties including tips, micro-subscriptions and merchandising
  • new forms of artistic organisation which builds audiences which are sticky (tours, franchises, memes etc) which self-identity with the artist who becomes more celebrity rights (cf K-pop)

NFTs if correctly designed, can form a partial solution to the 2nd item.

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About summary .

In these threads, we attempt to further the discussion of a key problem in this category and evolve our understanding of the domain space where research work has not yet answered the specific problem or question being considered. These posts are living documents, and we hope that the community will continue to contribute to their structure and content.
The author identifies existing legal frameworks through which NFTs can be adjudicated as personal property instead of intellectual property.

Top discussions.
This summary has 18 comments and 985 views.

  • Wearing my finance hat, I am not convinced that NFT has an intrinsic value. The process for analyzing an NFT valuation is not predetermined. Simply put, NFTs cannot be evaluated using the same parameters that you would use to evaluate private companies or traditional investment vehicles like shares where the last buyer’s payment typically provides some indication of the worth. However, with NFTs, it can be challenging to predict what the subsequent buyer may pay based on their predictions. As a result, estimating the value of an NFT is based on speculation.

    *co-author’s response: Thank you for these questions! I will start in reverse order to address the foundational issues that affect the rest of the questions. That is: what rights do NFT owners have? The answer is relatively none. Unless there is an explicit statement of licensing agreement or some statement of explicit transfer of intellectual property; the purchase of an NFT does not grant any rights beyond those that are granted with purchasing anything from a third party. The transfer of NFTs should be treated as property and should be regulated as such, in that they are explicitly not transmitting rights of ownership over the license with a general NFT purchase.

Similar threads.
*Research Summary - A Decentralized Framework for Patents and Intellectual Property as NFT in Blockchain Networks - #4 by Henry
*Research Summary: NFT Wash Trading: Quantifying Suspicious Behaviour in NFT Markets - #17 by Hermes_Corp

To see similar posts use any of theses tags: non-fungible, data, discussion

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I recently encountered a legal article proposing framework for division of “virtual currency” (meant to include NFTs) in divorce proceedings. Doesn’t necessarily advance the conversation but it does serve to highlight the many pitfalls surrounding intersection rule of law, rule of code. NFTs vary tremendously in type, value and complexity - can link to jpeg, can ‘wrap’ other tokens and investments (liquidity positions) and can relate to data for environmental and decentralized science applications, and as ticket for access/privileges, etc. But forewarning, the law might not necessarily care, and/or be prepared to pay gobs of money for legal counsel if you need litigate concerning ownership, characterization of your NFT collections. Prevention worth ounce of cure here :)

Article sets forth a proposed framework for identifying, characterizing, valuing, and dividing virtual currency in dissolution of marriage cases. The framework follows four primary steps: (1) adopt uniform discovery requests tailored to uncover virtual currency, and review concurrently produced discovery for evidence of virtual currency transactions; (2) consult with financial experts and review existing virtual currency exchanges for transaction history and inception of title for virtual currency; (3) value the virtual currency as of the date and time of dissolution separate from the rest of the marital estate and address any future marital earnings received from virtual currency or assets; and (4) encourage like-kind division or immediate sale of virtual currency upon divorce.

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@Larry_Bates
The terms of service agreements for many of the centralized NFT merchants specify certain legal requirements for customers. There hasn’t been much investigation into whether NFT buyers’ expectations match up with these regulatory requirements.

The rights and obligations that buyers have when acquiring NFTs from a centralized merchant may not always be clear to them. Furthermore, some centralized merchants could not be clear about their terms of service, which could cause misunderstandings and conflicts between customers and sellers.

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