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Non-Fungible Tokens (NFTs): what are you actually buying?

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We sat down with Sean Mitra, Technology Lawyer at Caravel Law, to discuss Non-Fungible Tokens (NFTs) and what potential investors need to know about ownership and security risks of these cutting-edge digital assets. 

The popularity of Non-Fungible Tokens (NFTs) has exploded in recent months, with some of these digital assets fetching eye-watering sums. From a sale price of $2.9 million for Twitter founder Jack Dorsey’s first tweet to a staggering $69 million at Christie’s for a painting by Beeple titled ‘Everydays – The First 5000 Days’, NFTs are quickly becoming a hot commodity.  

These tokens represent one-of-a-kind digital assets that can be bought and sold like any other piece of property, but they are unique, cannot be interchanged and have no tangible form of their own. Contrary to popular belief, they usually work as a sort of certificate of ownership for both virtual or physical assets rather than digital assets in and of themselves. While these unique digital assets can take on many forms (such as images, music or videos), a lot of the NFT buzz currently is around using this tech to sell digital art.

But while the market for these cryptographic assets continues to heat up, there are many legal issues that potential buyers need to be aware of before they take the plunge.

The regulatory environment around crypto is changing rapidly, and regulatory bodies – especially security regulatory authorities in Canada and the US – continue to keep a close eye on the NFT market. 

In this post, we outline some of the legal risks and what we think is in store for these digital tokens in the future. 

NFT ownership and intellectual property 

One of the most pressing legal questions about NFTs currently is ownership. For many NFTs, the purchasers don’t actually own the intellectual property (IP) of the asset they’re buying., Instead, the buyer acquires the right to display that piece of copyrighted IP on an NFT platform, usually tied to their account. 

Take the Bleacher Report, for example. To coincide with NBA All-Star Sunday this year, they capitalized on the red-hot NFT market by selling digital collectible basketballs. However, their terms & conditions explicitly state that the purchasers are not actually buying the IP for the digital art rather the right to display the art.  

From their website

2. Ownership. You acknowledge and agree that Bleacher Report, Inc. (“Bleacher”) (or, as applicable, its licensors, such as individual rappers, influencers, athletes, and/or celebrities) owns all legal right, title and interest in and to the Art, and all intellectual property rights therein

3. T&Cs. Subject to your continued compliance with these T&Cs, Bleacher grants you a worldwide, non-exclusive, non-transferable, royalty-free license to display the Art for your Purchased NFTs

[Bold added]

While some NFT sellers are open about the terms of their agreements, there isn’t always a clear indication about who owns the copyright or IP of a digital asset once it’s purchased. 

ERC-721 is the underlying smart contract for NFTs on OpenSea (one of the largest NFT platforms). But while the language used in this open-source code covers changes of ownership, it doesn’t explicitly cover ownership of copyright or other IP. This would suggest that unless an NFT seller explicitly states otherwise in their own terms and conditions, the owner of an NFT owns only the token itself – nothing more.

For many collectors, simply owning the official digital rights to an exclusive and highly sought-after item (and the associated bragging rights that come with it) is worth the price tag. But if you’re looking to buy an NFT to fully own a piece of art or a collectible, you’ll want to make sure you read the NFT merchant’s terms and conditions carefully before parting with your cash.

Insecurity in the NFT market

There are inherent risks that come with any new technology, especially relatively unregulated and ungoverned ones like NFTs. 

Earlier this year, there were reports of expensive NFTs mysteriously disappearing from digital wallets. These NFT certificates pointed to a URL to confirm ownership of the digital asset. Without notice, those URLs were subsequently taken offline by the NFT platform, which meant any record of someone purchasing or owning the NFT was gone, along with their money. 

This seems especially damning given the golden promise that NFT assets are logged ‘immutably, and irreversibly, onto the Ethereum blockchain.’ Even ardent NFT investors can get caught out by the complex and murky rules currently governing NFT platforms and end up losing their investment. While there are few reports on legal action being taken against these NFT platforms, it seems it’s only a matter of time before it happens.

Much like the art world, if you have a solid understanding of the trends and the market, there’s money to be made. But for the average person, it’s challenging to know which NFT assets will continue to appreciate over time and which won’t (not to mention whether NFTs will continue to live on after the hype dies down). This means there’s a considerable amount of risk in the NFT marketplace currently that will make it hard to realize a guaranteed return on your investment over time. 

Where NFTs add value 

While there are certain legal drawbacks to investing in NFTs, there are a few areas where this cutting-edge technology can be especially useful.

NFTs give smaller artists greater outreach to make actual money. In the same way that platforms like Patreon or Buy Me A Coffee allow individuals to provide direct financial support to local, emerging or small-scale artists, NFTs also offer a way to pay an artist in exchange for authentic digital ownership of their work. 

Another area where there is potential growth for NFTs is to tie these digital tokens to a physical object. Say, for example, you purchased a physical rare baseball trading card. An NFT could be connected to that purchase so that you own both the physical baseball card and its corresponding digital asset certifying its authenticity as well. This is where blockchain technology, which prevents an NFT (remember, this is the token or ‘certificate’, not the actual digital asset) from being duplicated, is especially valuable.

There’s no doubt the NFT market will continue to capture headlines and lure in investors in the coming year. But right now, with a lack of regulation, platform instability and issues around ownership, NFTs present a number of legal risks to buyers. Conversely, they also provide an excellent opportunity to help support artists and certify the authenticity of collectibles, making the future of NFTs both promising and precarious. 

Caravel Law is an alternative legal firm with over 60 qualified and experienced lawyers to help support your legal needs – including cutting-edge legal concerns like setting up an NFT platform! Get in touch with our team today to find out more.

The information provided in this article is not intended to be legal advice. Many factors unknown to us may affect the applicability of this content to your particular circumstances.

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