NFT law and the future of the crypto market – The Rise and Rise of NFTs
The Rise & Rise of NFTs
Whilst NFT’s have been around for over a year or two, they have become trendy in the last few months, and with that, they have made their mark on the legal profession. NFT law, NFT copyright, and NFT ownership issues and intellectual property rights have become hot topics with the boom in blockchain-based NFT art’s popularity.
It appears that the lack of physical art events during the lockdown meant that a great deal more attention was paid to digital ones. An auction curated by Christie’s took place in February 2021, where the artist, Beeple, sold a staggering $69m worth of NFT. This led to an explosion in digital art NFT’s and many other artists coming from graphic design backgrounds, and digital design became involved. There have been further auctions organized by Sotheby’s.
As with any other topic deserving an in-depth look, the first thing we have to do is to find out NFTs meaning.
What are NFTs?
NFT’s stand for Non-Fungible Tokens. The word “Fungible” means that which can be traded or exchanged for another—for example, a dollar bill or a Bitcoin or an Ada coin. Therefore, by definition, a “Non-Fungible” token is unique and cannot be exchanged with another token.
A token is a unit of data kept on a digital ledger called a “blockchain”. Most NFT’s are currently supported by Ethereum. In addition, other blockchains such as “Flow” and “Tezos” have their standards to support NFT. Furthermore, digital galleries such as “Nifty Gateway” and “Super Rare” have been marketing NFTs applying rather stringent curating criteria.
Where does one buy NFT’s?
NFT’s are available through various other sources now, and this is expanding daily. This now even includes eBay. However, the relation to digital art is at least two very well-known digital art galleries called Super Rare and Nifty Gateway, which work professionally. However, some of the significant sales have been carried out through recognized auction houses, for example, the Beeple sale above.
In what other areas have NFT’s been used?
Nowadays one can find NFT’s in the domain of games, music, film, sport, fashion, and collectables. Other uses have been somewhat sensationalized, for example, the NFT of Jack Dorsey’s first tweet, which sold for $2.9m!
NFT’s Legal issues
As with all innovation, there are legal implications to be had from NFTs’ rise in popularity. Of particular importance, however, are laws that refer to any rights that are transferred from the owner of the art to the holder of the NFT. It is important to note that a mere transfer of an NFT by the owner does not give the NFT’s intellectual property right to the buyer. Effectively, all the buyer of the NFT will own is a digital receipt showing that the holder holds a version of the work.
This might seem like very little for the time, effort, and money that goes into the minting and sale of an NFT, but there are certain benefits, namely that the buyer will receive a certificate of authenticity for the NFT art they purchase.
This certificate of authenticity is issued based on the fact that the token minted for that NFT art is unique. The artist and the buyer or buyers can then utilize this uniqueness in different ways. Since the uniqueness of the NFT creates scarcity, the owner can hold on to it as an investment. Furthermore, the artist can generate income for themselves based on the NFT art’s circulation volume, which is, in essence, a form of royalties.
NFT Smart contracts and royalties
A smart contract written in the code of the NFT can allow for the distribution of funds for the payment of royalties to the create each time the work is resold. However, these automated resale royalty payments might not occur unless the NFT is resold through the same platform.
Unfortunately, in the EU and the US, the law does not recognize resale rights related to created work, and as such it provides no recourse for unpaid resale royalties.
The General Data Protection Regulation is the leading data protection law in the European Union. It has overarching requirements regarding an individuals right to privacy on the internet, and is quite strict when it comes to people’s ‘right to be forgotten’, i.e. the right for a user’s data to be permanently deleted from the internet.
From an NFT law perspective, the fact that what is recorded in the blockchain is immutable, there is a direct conflict between NFT’s meaning and essence and GDPR. This, therefore, means that any NFT containing any personal information may be in violation of GDPR’s data protection rights. This is an important area of NFT law to keep an eye on, since both the GDPR and NFTs are and can be some of the most important development in humanity’s relationship to the digital world.
NFT money laundering
As with many areas where there are interactions between the physical world and the virtual one, there are many potential pitfalls, and the usage of novel technology for criminal activity is one of the more important one of these.
Since NFT art transactions use digital currencies such as Bitcoin or Ethereum as tender, and since these digital currencies are untraceable by nature, this can facilitate money laundering using the purchase and sale of NFT art.
Some more reputable NFT art auctioning platforms demand identifying information from purchasers, but what they tend to ask for is a digital copy or scan of the purchaser’s passport. The issue with this method is that, usually, no one checks whether the user is, in fact, the owner of the passport. Many people set up wallets in countries that they do not even live in.
Given the lack of the intrinsic value of the NFT and the limited rights currently conferred on the buyer, there has been criticism levelled on NFTs as a possible means to facilitate criminal behaviour such as money laundering.
Another NFT legal issue is the one with countries that are under international sanctions. Theoretically, a person living in a sanctioned country can use a wallet unlawfully to purchase coins, which is used to buy NFT’s.
The Biden administration’s plans for crypto regulation
While NFT law might not currently be considered a significant issue due to the relatively low volume of transactions when compared to the traditional art market, it is now increasingly likely that new legislation will be introduced regarding NFT intellectual property, NFT money laundering, and NFT copyright issues. The Biden administration has already started to move towards that direction with general regulation on cryptocurrencies.
There is a tremendous amount of lobbying going on by the more prominent players in the crypto and NFT art space to try and influence the shape of the legislation to come. How these new regulations will affect NFTs will remain to be seen. Whatever steps are taken in the US in terms of regulation will undoubtedly influence crypto and NFT law in other jurisdictions as well.
The importance of local Copyright laws
NFT copyright law is an area that deserves special emphasis. Copyright and NFT intellectual property laws will definitely be in play in a majority of scenarios. For example, a photographer who decides to monetize photographs he has taken of a person by minting it as an NFT art piece must be conscious of the rights held by the photograph’s subject under the law of the country/state where the photograph was taken. Minting and NFT art piece without considering the Intellectual property and copyright law can lead our photographer into a costly and time-consuming legal battle, and the whole exercise would be rendered pointless.
What is the role of contracts in all this?
Is there anything written in stone? Will the rights conferred by NFTS remain insignificant? What is the role of contractual drafting in this?
A significant body of jurisprudence is likely to result from issues such as the ones outlined above. These would, to a great extent, depend on which laws govern the various relationships at play. There is, in fact, nothing written in stone. Even now, it is possible, for example, for a person to make a contract with the artist and get ownership of Not only the the NFT art piece, but also the actual, digital art.
The terms of the NFT smart contracts to come can be expanded in the future. There are already some NFT smart contracts that allow commercial use of an image by the buyer. There is plenty of room for innovation. Currently, many players in the market are selling works of art or music, but with no contractual terms at all. This can lead to a great deal of confusion. While the NFTs are governed by the smart contracts embedded in the tokens bought, appropriate terms must be drafted specifying what rights the token’s holder receives.
We’re seeing some interesting developments in this field. Case in point is the latest sale of an NFT art piece known as CryptoPunk at $ 11.8 million by Sotheby’s. This was bought using bitcoin, and no physical artwork changed hands. The collection of 50 CryptoPunks was fractionalised, and each token was called a Wrapped CryptoPunks. Each token constitutes a small and specific percentage of the one. In effect, this would mean that even smaller investors were able to get involved in the purchase, and if the Cryptopunks NFT art were to become more valuable, so would the value of the shares purchased.
Also, interestingly now DAOs (Decentralised Autonomous Organisations) can buy NFTs as a collective.
How about the future?
As we advance, NFT’s could be used increasingly in more mundane and everyday situations; situations such as the sale of a property, purchase of a train ticket, buying or selling collectibles, jewellery etc. We will see a lot more innovation in the areas of fractionalised ownership. However, advancements in NFT law may start biting, as the SEC have said that fractionalised ownership may be treated as “unregistered securities“. As with many other areas of the law, how NFT law interacts and regulates this area now will no doubt influence the use of NFTs in relation to its future applications.