Non-Fungible Tokens: Boom or Bust?

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Non-Fungible Tokens: Boom or Bust?

Key Contact: Phil Pugh

Author: Michael Hinder & Tom Geen

Non-fungible tokens (NFTs) are the new craze. But are they just a fad, or do they offer a glimpse into the future?

What are NFTs?

An NFT is a crypto asset with unique properties. Most NFTs are powered by Ethereum blockchain technology; in simple terms, an NFT is a digital token or a digital record that represents ‘ownership’ of a specific digital item using a unique code that verifies authenticity (it essentially points to where the associated digital item / asset lives on the internet).

Unlike many other cryptocurrencies, the unique properties of a NFT means that they cannot be traded as currencies in a like-for-like fashion (hence the ‘non-fungible’ part!). NFTs can also store a large amount of information, meaning they lend themselves to the digital storage of anything holding value.

Already in 2021, digital artist Mike Winkelmann sold an NFT of his artwork, in the form of a jpeg, for $69 million. Jack Dorsey, the co-founder of Twitter sold a tweet for just shy of $3 million. A digital home has also been purchased for a whopping $500,000.

NFTs and the Law

Demand for NFTs is growing rapidly as a result of the wide range of potential uses and lots of celebrities and public figures are getting in on the action. But the regulation and legal protection surrounding them is yet to be tested – we’re essentially applying historic concepts of intellectual property rights to new technologies and this often leads to problems. We consider some of the legal issues that may arise as a result of the growth of NFTs below.

The rise of NFT usage is likely to cause a hotbed of intellectual property issues stemming from basic copyright law. It is important to distinguish between the ownership of the NFT and the ownership of the underlying asset. For example, in the absence of an agreement to the contrary, the original creator of a NFT would likely still own the copyright (or other such intellectual property rights) in the underlying asset. The owner of a NFT typically holds rights to the NFT itself (essentially the link to the digital representation). Common misconceptions arising from the ambiguity of ownership is likely to promote a swell of litigation and it is important to read the small print to understand exactly what you are acquiring when buying a NFT.

There could also be cases where authors, such as artists, can have their work created as a NFT without their consent. This highlights the issues surrounding infringement and the process of authenticating (and distinguishing between) the author and the NFT creator. A creator of a NFT will likely commercialise the rights in respect of the NFT by selling it to a buyer, but that creator may not actually be the actual author of the asset offline (or the underlying digital asset).

Another potential legal issue surrounds Data Protection. The current laws permit individuals to erase their personal data. The immutable nature of blockchain technology means that any personal data held on a NFT will never be erased. Therefore, there is potential for a data breach on the sale of a NFT.  

The Future of NFTs

At the moment, the Ethereum blockchain is typically the host of NFTs, and smart contracts can be used allowing for the distribution of any royalties that are due to the original creator of the NFT each time the asset is sold. The expansion of NFTs onto alternative blockchain platforms may complicate the payments of such royalties in its current format.

Like many other uses of blockchain technology, NFTs offer huge possibilities, but with environmental and volatility issues casting a grey cloud over the take up of these technologies, it remains to be seen whether widespread adoption is on the immediate horizon and whether the law can catch-up.

For more information, please contact our Commercial and Technology Team.

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