With a lot being said and done around non-fungible tokens (NFTs) lately, questions have arisen in relation to what they really are and how they fit in the legal landscape. For the uninitiated, NFTs are digital assets that represent a wide range of tangible and intangible items. They are not interchangeable like currency, they are verified on a blockchain and cannot be modified or removed, unless programmed to do so. Each token is governed by a smart contract (software code) executed exclusively on a blockchain, the most well-known being Ethereum with its ERC-721 and ERC-1155 standards.
Art as NFTs
Digital artworks minted as NFTs and traded on a blockchain, though not new, have become popular lately; their attractive characteristics include digital uniqueness and the ability to be traced back to the original creator, giving them the valued attributes of certain provenance and predefined scarcity. Further, the owner of a NFT can also be verified on the blockchain at any given time, leaving no room for title disputes.
It is important to make the distinction between the NFT and the content minted as NFT. Contrary to what we read frequently, a NFT is not the artwork (content) but the token that represents the digital artwork and is proof (similar to a deed) of ownership of the latter. Anyone could still copy and download the digital artwork file (subject to contractual restrictions – see below) but the proof of who owns the wallet address exists publicly on a blockchain.
NFTs & Intellectual Property
Another important distinction is between ownership of the NFT and ownership of the underlying intellectual property rights of the content. Considerations around copyright will be central here. In European jurisdictions, the creator of a work of art is also automatically the copyright owner and is granted a number of exclusive rights, both moral and economic. Transfer of any of the economic copyrights (moral rights cannot be transferred) require an express, written license granted by the creator. The sale of an artwork does not transfer all copyright to the buyer; the buyer can usually display but cannot reproduce, make derivative works of, perform or distribute copies of the artwork. These activities remain the exclusive domain of the creator, unless such assignment is expressly granted by the latter.
The same principles apply to digital artworks minted as NFTs. Buying the NFT does not grant ownership to any underlying associated IP rights, unless those are expressly assigned. This is one of the functions of a smart contract which governs an NFT: it may expressly lay out how it can be used and which rights are granted to the buyer. Absent such express assignment of IP rights, the purchaser of an NFT acquires an implied non-exclusive license to display the related media for personal purposes only.
From the Perspective of the Creators & Buyers
The role of marketplaces becomes key here. Although in theory anyone can mint a NFT and create the underlying software code (its smart contract), in practice, most creators upload their digital creations to marketplaces which offer the services of providing the smart contract, minting the NFT and putting it up for sale in their platform. This way the creators avoid the inherent technical complexities and benefit from an increasing global exposure. A mix of (a) the terms & conditions of the specific marketplace and (b) the smart contract governing the specific NFT will determine which rights are granted by the creator to the buyer and the marketplace. Already, there is a considerable divergence between marketplaces in the rights and terms being granted. Some marketplaces prohibit commercial use, while others grant commercial rights for earnings up to $100,000 in gross revenue per year. Other marketplaces offer a royalty to the creator every time their artwork is re-sold; depending on whether the royalties are programmed into the smart contract, they are paid automatically with the transaction and the percentage cannot be changed.
It becomes clear that, as each NFT is unique, anyone who is creating/minting or buying an NFT should consider the legal rights and implications of each platform and each specific NFT before purchasing.
From the perspective of the marketplaces
Apart from the above, marketplaces trading NFTs have an array of legal considerations to make. Hosting and/or selling content from creators that infringes third-party IP rights is one such consideration; policies and procedures addressing such scenarios must be in place, whether in the form of disclaimers, notice & takedown procedures etc.
Although relatively new to be expressly included in relevant legislations, it is likely that marketplaces will need to address know-your-customer obligations and other anti-money laundering procedures, as well as any applicable sanctions law. For example, they will probably have to make sure that for purchases above a certain value, the digital wallet (private or via a wallet service provider) to which they transfer the NFT, is not owned by or associated with a person or entity in a geographic area that is the target of sanctions or embargoes imposed by the EU, the UK, the UN or the US.
Further, where payments in cryptocurrencies take place, the marketplace will likely have to accept payments only from digital wallets maintained with wallet providers that are subject to and adhere to certain regulations; what’s more, payments above a certain value may need to originate from KYC’ed wallet addresses (wallet service providers) vs self-custody wallets. Restrictions may also apply for receiving payment for a single lot in multiple parts from different wallet addresses.
Clearly, these considerations are not exhaustive. It remains to be seen how the legal and regulatory landscape concerning NTFs will shape in the future. At the moment, stakeholders must make sure they address key legal issues and keep in mind that this is a new market with great opportunities but also risks.
