Legal Meets Technology: NFTs and their Legal Considerations

In an increasingly digital world, the new age of valuable digital assets has emerged through the rise of non-fungible tokens (NFT). “NFT” is the new buzzword in town and with so many people getting in on the NFT craze (including some of your favorite celebrities). Questions about them loom around every corner but the key set of questions that remains dormant are the legal considerations.  

What is an NFT?

Non-fungible tokens are digital certificates that represent ownership of digital assets (or even physical assets) which are stored on the blockchain. NFTs contain a unique identification code and metadata that distinguishes one NFT from all others, and hence, makes them “non-fungible”. 

It is important to understand that NFTs are different to cryptocurrency such as bitcoin. Each bitcoin is divisible and identical to another, which makes them fungible. NFTs on the other hand are irreplicable, indivisible and are considered a unique representation of the underlying asset. 

To avoid confusion about how NFTs interact with the blockchain, it should be noted that if an NFT is minted in representation of a digital artwork, the artwork itself is not stored in the blockchain, just the NFT representing it.

Who legally owns the NFT? What about the underlying asset?

When you purchase an NFT, you purchase a digital certificate that represents your ownership of the underlying asset. However, if the underlying asset is a replica of an asset such as an imitation of an existing artwork, the ownership rights to that original asset is not transferred along with the NFT. Your NFT only certifies your ownership of the replica.

For Example:

If someone takes a picture of the Mona Lisa with their camera, uploads it onto their computer and mints an NFT representing the picture, and you purchase that NFT, you will not receive any ownership rights over the original Mona Lisa. Your NFT will only represent the uploaded picture. 

It should be noted that many NFT marketplaces contain original pieces of digital artwork, in which case purchase of the representative NFT would assign ownership of the artwork to the purchaser. 

If someone had put up a copy of a digital artwork (for example, by saving the original and uploading that download to the marketplace), then the NFT minted would only represent that copy and not the original.

Who owns the copyright with NFTs?

A key question that has arisen from the advent of NFTs is whether the purchase of an NFT also automatically transfers copyright to the purchaser. The most likely answer at this point is ‘no’. The copyright relating to the underlying asset would generally be held by the original creator of the asset, whereas the rights being transferred in the trade of NFTs would be the ownership of the NFT itself and the right of resale of the NFT. As copyright is not transferred, the owner of the NFT would not have the right to reproduce the work or claim copyright over the asset.  

The sale of NFTs can more expressly assign copyright if the smart contracts executed when processing the trade provide for such assignment. NFT sales can be accompanied by a deed of assignment of intellectual property which transfers the copyright of the underlying asset to the purchaser. 

How exactly copyright is dealt with regarding NFTs is yet to truly be known given how new it all is. At this point we can only speculate as to how the law will deal with NFTs moving forward. 

The NFT's Terms and Conditions

The trade of NFTs on the blockchain is made possible through smart contracts that are digital contracts which put the terms and conditions into lines of code. Instead of transactions occurring through the execution of traditional contracts, smart contracts exist as the blockchain counterpart. Smart contracts will often have certain conditions embedded in them where if such conditions are satisfied, the smart contract is triggered allowing for the trade of NFTs and the application of the relevant terms and conditions coded in the smart contract. 

Many providers of NFT and NFT marketplaces will have their own platform terms and conditions made accessible on their website. This provides the standard terms that would apply to the trade of NFTs and to some extent may reflect the terms that are put into code in the smart contract. 

It is common for the smart contracts that deal with NFTs to include royalty terms that ensures that a percentage of the sale price of every future trade of the NFT is allocated to the original creator of the NFT. This feature makes the act of minting an NFT very attractive given the potential for ongoing income with minimal effort in the future. The self-executing nature of smart contracts allow for this to happen seamlessly whenever a trade occurs. You will often see the platform terms linked to the NFT marketplace websites illustrate the royalty terms as a means of being transparent regarding the functions of the smart contract

Talk to a Technology Lawyer Today!

The novel nature of NFTs means that there is little to no legal precedent or legislation that directly addresses legal considerations.

The legal considerations revolving around NFTs will evolve with time and talking to your technology lawyer to understand the legal side of things will be an important step in entering the NFT world. Reach out to us today!