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NFTs: Unique Assets Spur Legal Questions of First Impression

Philip R. Stein

Non-fungible tokens (NFTs) have gotten a lot of media attention of late, with breathless reports of multi-million dollar purchases of items one might never have expected to command such staggering sums. The objects sold have included digital artworks (such as drawings, music, and short videos) and even an autographed tweet by Twitter’s founder. Talk of an NFT “gold rush” abounds and does not seem overstated at the moment. But perhaps just as intriguing and unsettled as this new marketplace are the many legal issues that it raises.

Most NFTs are part of the Ethereum blockchain. Ethereum is a cryptocurrency. Its blockchain supports NFTs (as can some other blockchains), which store certain information that makes them unique or non-fungible. As a recent NPR article characterized what is being conveyed in an NFT sale, as part of the acquisition of (for example) a digital artwork, “you are also purchasing a kind of bar code, almost a certificate of authenticity that serves as proof that a certain version of something is uniquely yours.”

That’s where the legal questions begin to arise, however. Even assuming that NPR’s characterization  is agreed upon by all parties to an NFT transaction, what is the legal effect of the transaction? Has the purchaser acquired a copyright? Bragging rights? The right to re-sell the digital artwork without paying royalties to the artist? (Note that NFTs can be designed to pay the artist a percentage of any re-sale proceeds). More fundamentally, has the purchaser acquired an original artwork? A derivative of an original artwork? An image of an artwork?

The questions by no means end there. Is the purchaser’s contractual counter-party the company that facilitated the sale, the digital artist, or both? Plainly, contracts can be (and already have been, for many or most NFT transactions consummated to date) drafted to identify counter-parties, detail performance responsibilities, and pinpoint the forum in which disputes must be heard. We are still at such an early stage of this marketplace’s development, though, that there are no “industry standards,” “best practices,” or generalized commercial expectations about how legal risks, rights, and responsibilities should be allocated and enforced. Litigation will likely need to be commenced, and court decisions interpreting and applying applicable principles and contractual provisions published for there to be better guidance on these and other critical issues. Legislation and regulatory agency oversight may also be forthcoming in the coming months or years to provide some direction.

As we await such guidance, it would seem prudent for would-be purchasers of NFTs to be particularly wary of two ways in which this exciting new marketplace could be exploited by the unscrupulous. First, the fact that NFTs have actual authenticating data does not mean that fraudsters won’t try to hawk via the internet supposedly “authentic” digital artworks that are nothing of the kind. Second, NFTs must presumably be stored by their holders in what are essentially digital asset wallets — and such assets, like virtually all digital data, are at least potentially vulnerable to being hacked and misappropriated. There is thus a critical need for especially robust data security systems to protect these expensive purchases.

As both the NFT arena and resulting legal developments evolve, we will be providing further commentary and legal analysis.

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