Manoug Alemian & David Oram

NFTs: The Legal Implications of Whatever the Hell You’re Buying

Not long ago, what seemed like the entire world became inundated with a new term that remains foreign to the vast majority of people: the illusive NFTs. From major news outlets to irrelevant tabloids, NFTs have been the flavor of the month, but it seems that they will also be a flavor that will remain for a very long time.

Not long ago, what seemed like the entire world became inundated with a new term that remains foreign to the vast majority of people: the illusive NFTs. From major news outlets to irrelevant tabloids, NFTs have been the flavor of the month, but it seems that they will also be a flavor that will remain for a very long time. They have taken the art industry by storm following the auction of a piece of NFT digital artwork at a Christie auction for $69 million. Yes, that’s right, $69 million.  

 

So, what exactly are NFTs? NFTs, or non-fungible tokens, are a cryptographic asset found on a blockchain network, namely the Ethereum blockchain, with unique digital codes that make them identifiable and therefore special digital assets. Basically, an NFT is a special digital token whose ownership can be traced back to a source in a digital ledger and tracked through smart contracts. The difference between an NFT and another form cryptocurrency, such as Ethereum or Bitcoin, is that cryptocurrencies are fungible, or in other words interchangeable.

 

Now that I was able to confuse you even more about what NFTs are, let me give you some examples. Today, NFTs that are being sold vary from tweets, music, artwork, photography, books, texts, athletes, and so much more. Currently, the NFT market is penetrating, and might even dominate, the art industry soon.  

 

Though, some might ask when you buy an NFT, what exactly are you buying? Is it considered an instrument under securities law? Will you own the NFT? The answers to these questions are not as simple as they might seem. Seeing as the purchase of NFTs basically also entails ‘owning’ a piece of art, an NFT would not be considered an instrument under securities laws. However, this conclusion varies in every circumstance, of course. Another way to think of it is like putting your name on a piece of art in a museum. Do you truly own the art? Not really. You just get "bragging" rights over it and the right to resell the art at times for non-commercial purposes.  

 

As for the ownership of an NFT, if you, as a regular consumer, decide to purchase one, chances are you won’t actually own the NFT itself. When an NFT is created, a record of creation is produced and transcribed in the requisite smart contract. The creator of said NFT may even receive “royalties” from every use of it. So, if you purchase an NFT and then resell it, the creator is the one who stands to make a profit from those actions that would automatically provide them with their royalty payment through the smart contracts.  

 

So, what are you if not the owner of the NFT? Simple. Chances are that the NFT that you ‘own’ is being licensed to you while the creator holds all copyright and intellectual property rights on the piece of digital artwork itself. This should thus be a major consideration during NFT transactions and even later when ensuring who retains its full intellectual property rights.

 

Finally, if you’re the one creating NFTs, remember to consider all the intellectual property rights attached. Think of what would stop someone from taking the same JPG file or MP4 file and creating the same NFT? If you’re purchasing an NFT, know what you’re purchasing. If you wish to operate a business relating to NFTs? Make sure you’re compliant. We’re in the wild west of digital assets over here as if things weren’t already wild enough. Make sure you do it the right way to the best of your abilities and consider consulting with legal counsel regarding all the various avenues that might end up affecting your business.

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