NFT's and the law

Cosgrove Gaynard Solicitors

Non-fungible tokens (NFTs) are really taking off in mainstream markets. An NFT is, essentially, a digital collectible. They can represent things, like real-world assets, or they can be things in themselves, like music or art. Their value comes from the fact that they are digitally unique. They exist on a blockchain and, whilst music as an example can be downloaded by anyone, an NFT is explicitly recorded as having a single owner.

NFTs and the law

NFTs are making a lot of headlines at the moment, however there are some considerations to take into account before deciding o buy and sell these assets. Various legal and regulatory matters may apply . Our Fintech lawyers have decided to briefly look at how they fit into existing legal and regulatory frameworks to set out the issues which may arise.

The background

Non-fungible tokens (NFTs) are really taking off in mainstream markets. An NFT is, essentially, a digital collectible. AN NFT is a way to tokenise an asset and record it on blockchain.They can represent things, like real-world assets, or they can be things in themselves, like music or art. Their value comes from the fact that they are digitally unique and can identify as an independent unique asset. They exist on a blockchain and, whilst music as an example can be downloaded by anyone, an NFT is explicitly recorded as having a single owner.

Recent areas where NFT's have become popular are digital art, Music and Twitter 'tweets'. The image or file can still be downloaded even though it is an NFT. Likewise a tweet sold as an NFT can still be seen on twitter and seen by all. A good analogy are signed autographed cards popular in the States. A football player signs only one yet you can print as many copies as you like. Ultimately the value will be in that signed copy. This is where value is now being attributed to NFT's.

Digital art is the area where NFT's have exploded. Recently the digital artist Beeple sold a collage called "Everdays: The first 5000 days" for a staggering 69.3 million through renowned auction house Christies. It appears that authenticity is the key here regarding NFT's and digital art. The value of art appears to rest with the creator and their value and reputation rather than the work itself. A similar example would be Jack Dorsey's first tweet which is being valued at over 2 million.

It is early days and presently it appears that we are just scratching the surface regarding the potential of NFT's.

Their exploding popularity raises questions about their place in the existing legal and regulatory frameworks that govern finance, technology and cryptocurrency. Unlike ICOs, NFTs are unlikely to be treated like a security, and while laws exist that govern the activities of NFTs, consumers need to be aware of what they are doing and how the law impacts transactions.


From a legal perspective, the following legal considerations arise:

Consumer protection
One issue with NFTs is that some buyers may not know what they are actually purchasing. Furthermore, there are questions about:

- Who is conducting anti-money laundering and know-your-customer procedures ?

- Is any party recording the NFT sale?

- Does another party have predetermined rights over the asset?

- Trade sanctions depending on where you or the seller resides?

Copyright and intellectual property
The buyer's perception of what they are buying may not match the legal reality. NFTs being sold should contain exactly what they want to sell, as an NFT cannot be edited easily once recorded on a blockchain. An NFT does not grant ownership of a piece of work. It is in reality a digital note which verifies that you own a version of the work.

There are concerns about how NFTs fit into current copyright law. For example, with regards to music, no artist would be selling the rights to the master version of the music. Those rights are retained by the artist, even as they sell a kind of licensed content to consumers.

However, people can mint NFTs of work they didn't create. This is where we believe the largest legal issue lies. For instance what happens if someone mints NFT's of heavily protected music such as the Beatles or Elvis or NFT's of long established Disney characters? One assumes copyright infringement lawsuits will be plentiful and it appears that the market may not yet be prepared for the eventuality that a work's original creator may claim copyright infringement

Whilst it is easy to point out the legal issues with NFTs and copyright law, the reality is that these tokens are hugely popular and potentially are here to stay. IP law and indeed lawyers will have to deal with these and perhaps rapidly.

Counterfeiting
Many NFTs are representations of real-world items. This means it is possible that the link between an NFT and the item it represents might be broken. In other words, a seller could claim an NFT exists on a blockchain when, actually, it does not. Most consumers lack the understanding to check the veracity of an NFT and could fall victim to a counterfeit.

Securities and tax laws

Securities laws could be another issue for NFTs, though it seems less likely than some of the other concerns listed above. However regulation may need to be reviewed to apply existing laws to NFTs.

Additionally, NFT buyers may have to deal with the tax regimes of different jurisdictions. By their very nature, NFTs are international transactions, but sales tax has to be paid somewhere.

It remains to be seen whether NFTs are here to stay however will the prices being fetched for certain NFTs in the millions, it is something Fintech lawyers cannot overlook for now.

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