The NFT Revolution - Opportunities and Legal Issues
The spectacular rise of non-fungible tokens (NFTs) has created extraordinary new opportunities for the creation, distribution and ownership of digital assets and other creative works. Savvy creators are utilizing NFTs to generate new ways to monetize digital works and other experiences. Sales of NFTs have soared to incredible heights. Recently, the visual artist Beeple sold an NFT based artwork for 69 million dollars. Previously, his art sold for a little as $100. Other artists, such as Kings of Leon music band, capitalized on this trend by releasing a new album as a limited edition NFT, with digital NFT tokens providing lifetime tickets to front row seats to the bands performances. The profitability of NFTs has inspired sports figures and celebrities to create their own NFTs, with collectible digital trading cards being sold for multiple six figures.
The largest U.S. crypto exchange recently announced plans to launch a marketplace for NFTs by the end of 2021. Along with this phenomenal growth has come a plethora of legal issues many of which are still evolving. Discussed below are some of the opportunities and pitfalls which anyone involved in the creation, sale or distribution of NFTs should be aware of.
What are NFTs: To understand some of the legal issues involved it is essential to understand the nature of NFTs and what makes them unique. An NFT is essentially a digitally unique record which authenticates ownership of a particular version of a digital work. They are stored on permanent, unchangeable digital ledgers known as blockchains. Each NFT contains a unique identification code and metadata that cannot be replicated, making it a unique one of a kind asset or collectible. NFTs are also composed of software code in the form of “smart contracts”.
New Opportunities for Artists and Creators: NFTs will have particular value to creators who have built up their own following -perhaps on social media or via the internet- and creates an opportunity to sell their work directly to their audience thereby by-passing traditional distributors.
Robert Alice, a London based artist, recently told Forbes Magazine that “NFTs are the single biggest reorientation of power and control back into the hands of the artist basically since the Renaissance and the printing press.” Whether NFTs are long term game changers or a bubble which may burst remains to be seen. What is undoubtedly true, however, is that NFTs have opened new ways for creators to monetize their creative works. NFTs can take many digital forms, such as, digital tokens to events, art, photographs, trading cards, virtual game meme and even music. Smart contracts written into the code of NFTs allow for the payment of royalties to the creator each time the NFT is sold.
Legal Issues and Concerns:
Copyright Law: Because NFTs are so new, the intellectual property rights involved may be unclear to the purchaser unless carefully provided by contract. Typically, the purchase of an NFT does not include the rights to the underlying work which remain with the creator who is the rights owner under copyright law. These retained rights of the creator include the exclusive right to copy, distribute, modify and publically perform the work. In effect, the only right purchased is the NFT itself with perhaps a limited license for personal use. While the NFT may have intrinsic value as a unique one of a kind collectible, the creator retains all other rights unless otherwise specifically agreed in writing. Thus, NFT ownership rights are limited with no rights to distribute, publically display, perform or make other commercial use or adaptions of the NFT.
Contract and Resale Issues: The creator of the NFT controls the number of copies that may be sold or require automatic royalty payments on all resale transactions as a result of Smart contracts written into the code of NFTs. However, these automatic resale royalty payments may be interrupted if the NFT is not sold through the same platform. There may be no recourse for such lost resale royalties because U.S law, unlike the law in many countries, does not recognize resale rights relating to creative rights unless the claimant is also the copyright owner.
Cyber Security Concerns: Cyber security issues should be of particular concern to both creator and purchasers. NFTs, like other digital assets, are vulnerable to cyber based attacks and inadvertent losses. The NFT is typically stored via a digital link to a hosting services. If the server hosting the NFT fails or goes offline, the NFT can be lost or deleted. In such event, the NFT becomes worthless and there is presently no way to back up the NFT.
Regulatory Issues: While the sale of NFTs are not yet regulated, federal laws and regulations may come into play if NFTs are deemed to be “securities”.
Conclusion: The NFT market is booming but still evolving. However, understanding NFTs is becoming increasing important given the significant business opportunities and legal issues present in the creation, trading and sale of NFTs.
This article is provided for general guidance and is not intended as legal advice. For more information about NFTs, contact me via email: nabesq1@gmail.com
Other intellectual property issues are discussed on my blog at www.neilburstein.com/blog
© 2021 Law Offices of Neil Burstein
