In the public eye – NFTsOverview and legal challenges of the crypto-asset NFT
We live in interesting times where digitalization has become the norm.
The rise of crypto economy is a social and financial phenomenon that has grabbed a firm hold of various participants – developers, investors, financial institutions and governments. Non-fungible tokens, or NFTs, may appear as a more entertaining part of these processes but are yet another recent proof soaring high. To illustrate, a digital art collage by an artist called Beeple, the CryptoPunk characters and the first tweet ever are among the most popular (and expensive!) NFTs that have fascinated the crypto market so far.

What are NFTs?
Nature and legal rights associated with NFTs

Simply, NFTs are unique digital units on DLT linked to digital or physical, real-world assets.

Considering what a recent and booming trend NFTs are, there is no uniform definition, albeit a legal one. Nonetheless, here’s a humble try to encompass some of the specificities of NFTs, non-exhaustively:
- Every NFT is unique and not interchangeable with any other NFT, in contrast with BTC (Bitcoin), for example, which is fungible;
- Recorded on blockchain or another type of DLT;
- NFTs are used to create a tokenised proof of title to a digital version of the respective underlying asset, be it physical or digital. Bear in mind that NFTs are still scarcely regulated and there might be jurisdictional and regulatory discrepancies, including about licensing requirements;
- NFTs can ensure the provenance and history of ownership of the respective underlying asset.

Concerning the legal rights associated with NFTs, an immediate question is “What do you actually get to own when buying an NFT?”. The purchaser of an NFT owns the purchased token (the specific, authentic digital representation or version of the underlying asset) and, typically, receives the right to use the underlying copyrighted asset linked to the purchased NFT for personal use (hold, lend, transfer, sell). Bear in mind that usage rights vary from token to token and might be broader or more limited depending on the terms set out in smart contracts, the terms of NFT marketplaces, etc. What about copyright? The original creator of the NFT is the copyright owner (see further below).

Scope and types of NFTs

Practically, the world crypto community is assuring us that everything, digital or not – starting from an audio clip to paintings or video games to real estate, can be an NFT. Some illustrative cases include various collectibles like CryptoKitties and sports cards, music albums, tickets, artwork, real estate, in-game assets, Internet memes and GIFs and many more.

Thus, NFTs can be put into two categories:
- Digitally native NFTs;
- Tokenised physical assets.

The technology behind NFTs

NFTs are created (minted) using a smart contract protocol and exist on blockchain or another type of DLT and are usually held in a digital wallet. Smart contracts on blockchain govern the transactions with NFTs. This novel technology determines how NFTs are created, acquired, transacted, used, etc. One of the well-known perks of blockchain technology, including for NFTs, is that a complete and transparent record of transactions (time and price of transfers, wallet addresses) is maintained and cannot be changed.
Regarding smart contracts, they are computer protocols intended to digitally facilitate the execution of an agreement. The contractual terms are encoded on blockchain and whenever the set of pre-determined conditions is met (aka the triggering event like, for example, a payment), the “digital contracts” are automatically executed. In the case of NFTs, various features, requisites and/or limitations might be coded – for instance, regarding intellectual property – payment of royalties to the creator of the artwork upon resale of the NFT.

For more clarity on crypto terms see our Crypto Glossary:
Crypto Terms and Abbreviations

Legal challenges

Every potential investor in NFTs must be aware of the fact that there are quite a few legal concerns surrounding NFTs (many remain open to theoretical and practical debates) as well as risks involved in any NFT-related activity.

Intellectual Property (Copyright)

Although there is still no designated regulation of NFTs, scholars and practitioners agree that ownership of an NFT does not inherently grant copyright to the underlying artwork or another asset the NFT represents, unless validly stated otherwise. Hence, purchasing an NFT is pretty much the same as purchasing a physical work of art like a painting – the original creator retains the exclusive right to copy, distribute, modify, publicly perform and display the artwork (unless specifically granted to someone else). The smart contract which governs an NFT and its transactions could specify how proprietary rights, including copyright, are transferred upon sale of this NFT. It is possible to use a combination of smart contracts and standard written terms governing the transfer, or other formal legal agreements.

Data Privacy

The main data protection concerns relating to NFTs naturally stem from the technology behind NTFs, namely blockchain. Its specificities like being immutable may prevent data subjects from exercising their data privacy rights like the right to erasure or the right to rectification.

Others

Other areas of law that are or may be facing legal issues regarding buying and selling NFTs are, without limitation, AML/CFT, taxation, business and financial law, traditional contract law and real estate, litigation.

NFTs - what’s the hype really for?

A truth universally known is that practically everyone nowadays is fascinated with crypto and finding new ways to experiment and monetise. NFTs are an exciting sign of the times that takes the interplay between digital and physical worlds to another level. NFTs present new creative business opportunities like creating digital property and tokenising physical artwork and other assets. At the same time, however, numerous legal questions and disputes are bound to arise surrounding NFTs like ownership, enforcement rights, counterfeit, infringement of legal rights associated with the work an NFT is linked to, unauthorised minting of multiple originals and consumer protection, etc. Interested parties should conduct due diligence before minting or investing in NFTs. Some key issues to consider are the legal nature of the underlying asset, specific features of the NFT linked to the underlying asset, terms and limitations of NFT marketplaces, what risks are involved, jurisdictional and regulatory issues, etc.

This analysis is not exhaustive and does not constitute legal or financial advice. For legal assistance in connection with NFT projects, do not hesitate to contact us here.

Pavla Tsvetkova

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Tags: Cryptocurrency