Emerging Legal Issues Surrounding Non Fungible Tokens
After some Non Fungible Tokens (NFTs) were recently auctioned for millions of dollars - like Twitter founder Jack Dorsey’s first tweet which is currently valued at US$ 2.5 million dollars (GBP 1.82 million), and Beeple’s artwork which sold through Christie's for a stunning US$ 69 million (approximately GBP 50.3 million) - this emerging digital market has taken the cryptocurrency world by storm. NFTs are art, gifS, and other collectible unique, singular, authenticatable digital assets that are uploaded to various trading websites and can be tracked over blockchain, a platform that records the movement of NFT’s and other cryptocurrencies. The primary difference between NFT’s and other cryptocurrencies like bitcoin or ethereum is that they are not fungible, meaning they can not be replaced or exchanged with other items of equal value. Instead, they are singular, one-of-a-kind pieces that can be authenticated.
As with any market that is too new to have real regulation, there are several legal questions surrounding NFTs and where these assets fall in existing legal frameworks. One primary concern is where these digital assets lie in the scope of intellectual property law as well as the possible consumer protection issues that may arise from the trading of these items. NFTs do not behave in the same way that traditional initial coin offerings (ICOs) do, and therefore do not fall neatly under securities law, even though there is a crypto-component to them. Rather than a consumer having ownership of the intellectual property, or copyright, consumers are essentially buying a digital print in the form of an NFT that only they have access to. In this way, they act more as digital collectibles than traditional currency.
NFTs also raise questions regarding the rights of sellers and artists who are creating each token. When an NFT is uploaded to a blockchain, it is almost impossible to edit the graphic. It is also important for creators to understand the risks associated with this. Since anyone can make and upload an NFT, artwork not done by the seller can also be minted into tokens. This may have unforeseen copyright implications. Another issue that could arise in the future is counterfeit NFTs. Fake tokens may fool young or naive buyers who do not realize they can check the authenticity of their NFTs through blockchain. They may ultimately be scammed because they are not familiar enough with blockchain technology in order to authenticate their purchase.
There are also questions regarding the market regulations put in place by various NFT platforms and whether their terms and conditions are contradictory. For example, the digital real estate NFT platform, Decentraland, purports that the platform is a “virtual world owned by its users”, while the fine print of its terms and conditions states that its parent corporation owns “all title, ownership, and Intellectual Property Rights”. One of the first NFT platforms called Crypto Kitties, where each buyer owns a unique digital cat, has further outlined the rights of both artists and consumers in what they call the NFT license. It says that consumers cannot modify the art. Instead, they can commercialise their “kitties” as long as they do not exceed 100,000 in yearly revenue, among many other clearly outlined stipulations. Countries such as Malta and France have already taken legislative steps to help create a regulatory framework for NFT platforms, but most other nations are still far behind in imposing general rules that all service providers must follow.
Because NFTs are a part of an international market, there are also concerns for United States residents trading NFTs across US sanctioned nations and how the Office of Foreign Assets Controls could be involved in the future. Sanctioned countries could use NFT’s to raise money with malicious intent, just as North Korea previously did with Marine Chain ICO. In this instance, they were able to launder US$100 million (about GBP 72,7 million) over the course of three years. The same may be possible with NFTs if they are used as a front for money laundering. The platforms on which NFTs are traded must therefore be prepared for this possibility and the legal ramifications that may follow.
It remains to be seen how the market will develop and whether or not NFT’s will create a long-term impact on the way we look at the art world as well as collectibles. However, what is certain is that there will be a plethora of legal issues to come until the NFT digital service providers can create a comprehensive and standardised legal framework for the buying and selling of these assets.