What are the legal implications of non-fungible tokens (NFTs)?

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Non fungible tokens (NFTs) are digital assets that represent real world objects like art, music, in-game items and videos. As the world becomes more and more virtual, consumers are looking for new ways to purchase transferrable items. Legal implications arise with the implementation of blockchains, smart contracts and cryptocurrencies.

Image courtesy of Takashi Murakami

Key points to remember

  • When you buy an NFT, you do not have full ownership rights to change or modify the object.
  • NFT’s are unique and cannot be replaced so if the blockchain server fails, the NFT may be unrecoverable.
  • NFT’s are transferred through blockchain, and royalties are written into the code to distribute payment of royalties every time the piece is resold.
  • The world is quickly moving towards 

What are non-fungible tokens (NFTs) and how do they work?

Non fungible tokens, or NFT’s are unchangeable digital ledgers that are written in computer code that are time stamped and linked together. They are digital assets that represent real world objects like art, music, in-game items and videos. When you buy an NFT, you do not own the physical digital file, you own a small digital record that you can store in your digital wallet. NFT’s are gradually gaining popularity because they create “digital scarcity” in a world where everything is so easily accessible and instant through the internet. 

NFT’s are built on blockchains that are time stamped and linked together, showing the origin of the digital asset. Because blockchains also reveal the transactions of the asset, it is impossible to pirate, modify or delete. These assets are digitally transferable between parties in the form of ‘tokens’ and these tokens can be purchased and owned. The world’s most expensive NFT sold for $69 million and it was called Beeple’s  Everyday artwork series.

Now let’s talk about the legal implications of NFTs.

Legal implications of non-fungible tokens (NFTs)

Data hosting and storage 

An NFT and the digital asset it represents are stored separately. The NFT is stored on the blockchain and contains information of the location of the digital asset. Therefore, if the server fails or otherwise goes offline, the link will break and the NFT that remains will be worthless because it will not be attached to any digital asset. Because an NFT is unique and cannot be replaced, this can leave the NFT purchaser with no means of returning it or seeking compensation.

Privacy

There are privacy issues at play because if someone purchases an NFT from another, the purchaser will be able to see the seller’s digital wallet address and can have visibility into what transactions have occurred in person A’s digital wallet.

Intellectual property

Possession of an NFT does not automatically grant a purchaser the ownership of the artwork or digital asset. An NFT merely grants to the purchaser the right to use the object that the NFT represents for their personal use. The NFT purchaser will not have the rights to reproduce, create derivative works, or sell prints or copies of the artwork.

An NFT is simply a digital receipt indicating ownership of a particular version of an artwork. There have been cases in which people have attempted to steal the intellectual property of artists by selling their artworks as NFT’s without the original artist’s permission. The inherent difficulty in providing the place of origin of a piece of digital art places NFTs in a legal gray area for non-experts.

Royalties

Smart contracts are written into the code of NFTs to allow for the distribution of funds for the payment of royalties to the creator every time the piece is resold. However, smart contracts operate by being automated and self-execute. Therefore, unless the NFT is sold through the same platform, then the automated resale royalty payments do not occur. 

NFTS provide for the improved ease of transferring digital assets, and allow for greater security for artists as it reduces the risk of piracy and plagiarism – but there are still legal grey areas and legal implications that must be considered in the transfer of an NFT. Because there is not much legal research completed into the transfer of NFT’s and many lawyers are not equipped with knowledge or experience in this area, it becomes a vulnerable area where protection of rights are unclear. 

Legal advice​

If you or your business need assistance with legal matters relating to NFTs, you should contact the Legal Kitz team today. Legal Kitz can assist with ensuring that all your legal obligations are met to assist in the timely and risk adverse manner to achieve your business objectives.  

Click here to book a FREE consultation with one of our highly experienced solicitors today or contact us at info@legalkitz.com.au or by calling 1300 988 954. 

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