NFT law and the future of the crypto market – The Rise and Rise of NFTs
The first question that arises is what are NFT? NFT’s stand for Non-Fungible Tokens.
The word “Fungible” means that which can be traded or exchanged for one another for example a dollar bill or a Bitcoin or an Ada coin. Therefore, by definition something that is “Non Fungible” is unique and cannot be exchanged with another token.
The token is a unit of data which is kept on a digital ledger called a “blockchain.”
Most NFT’s are currently supported by the Ethereum. Other blockchains such as “Flow,” “Tezos,” Polygon and increasingly Solana have their own standards in order to support NFTs.
Whilst NFT’s have been around for over a year or two, they have become especially popular in the last few months. It appears that the lack of physical art events during the lockdown meant that a great deal more attention was paid to digital ones and in fact 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 backgrounds of graphic design and digital design became involved.
Further, digital galleries such as “Nifty Gateway” and “Super Rare.”
Where Does One Buy NFT’s?
NFT’s are now available through various sources. This now even includes eBay. However, in relation to digital art there are at least two very well-known digital art galleries called SuperRare and Nifty Gateway. However, some of the significant sales have been carried out through recognised auction houses for example the Beeple sale above. The most popular exchange though is OpenSea. A great deal of transactions happens on that site on a daily basis. The data from Dune Analytics shows that the amount of $105 Million was the amount of Ether traded on OpenSea on 14 November 2021. Some of the most popular works are: Crypto punks and the Bored Ape Yacht Club. These are limited series, and each image will have specific distinguishing features not always visible to the naked eye. They are extremely sought after and have achieved. In September, this year a Bored Ape Yacht Club were sold for $24 million at Sotheby’s.
Another new entrant in this market is Reddit which now has an NFT market place but its main site is used as one of the main hubs for NFT artists and collectors to interact.
In What Other Areas Have NFT’s Been Used?
Now one can find NFT’s in the domain of games, music, film, sport, fashion, and collectables. Other uses have been rather sensationalist for example, Jack Dorsey, the CEO of Twitter who minted an NFT of his first tweet which was sold for $2.9m! This happened a few months ago and since then NFTs have been embraced by many commercial organisations making different uses of them: This includes the NBA, Dolce Gabbana (who set a staggering $ 6 Million record with their NFT and many other commercial businesses.
NFTS and Gaming
Increasingly NFTs are being used in gaming. Play to earn games such as Axi Infinity allow gamers to earn NFTs as they play. Axi Infinity also has its own coin “Axi Infinity shards “. There are other gaming NFTs such as the Matic Verse Superhero game. This are a is likely to grow a great deal bigger.
As with all innovation, there are legal implications to NFT’s. Of particular importance is laws which refer to any rights which are (or are not) transferred from the owner of the artwork (or any underlying asset) to the holders of the NFT. It is important to note that a mere transfer of an NFT by the owner does not necessarily give any intellectual property right to the buyer. Effectively, in most cases all the buyers of the NFT will own is a digital receipt showing that the holder owns a version of the work.
What Does the Owner of the NFT in the World of Digital Art Receive?
- The owner of the NFT will be given a token of authenticity to their digital art.
- Secondly, for the buyer the NFT creates a potentially useful online canvas
- In the case of digital artist, they are given the opportunity to share a new genre of performative artwork.
What about Royalties?
A smart contract written in the code of the NFT’s allow for the distribution of funds for the payment of royalties to 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.
Further, in the EU and the US the laws do not recognise resale rights relating to created work, so the law provides no recourse for unpaid resale royalties.
This use of NFTs is gaining popularity amongst musicians who are able to monetise their work on a peer to peer and trustless basis. Audius the leading streaming platform providing this service to musician’s.
This is the main data protection law in the European Union, and it gives an individual the right to the erasure of his/her personal data. Therefore, appears to be a direct conflict between that and the immutable nature of the blockchain. This therefore means that any NFT which contains any personal information may violate data protection rights.
At present there is nothing stopping a person to purchase NFT’s off the blockchain which can lead to some form of conflict between what the NFT holder has and what he/she believes they have
There are also issues for example if there is an original piece of work which was minted onto the blockchain was never belonging to the person who pretended to the owner, this could raise issues for the purchaser of the token.
How about Money Laundering Issues?
As with many areas where there are interactions between the physical world and the virtual one there are many potential pitfalls. This is particularly the case with money laundering: here is the crux: the payment for NFT is often made by using digital currencies. The better platforms provide the users with such currencies would ask for some KYC but that is not always the case with all of them. Even with the better platforms what they tend to ask for is for a copy passport to be downloaded onto the website, but 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 intrinsic value of the NFT and the limited rights currently conferred on the buyer there has been criticism levelled on NFTs as a potential means to facilitate criminal behaviour such as money laundering.
This could also apply to sanctions and embargoes. Theoretically a person living in a sanctioned country can use a wallet unlawfully to purchase coins which in turn is used to buy NFT’s. OFC has recently issued a great deal of guidelines in this are which are to be found under:
The Biden Administration’s Plans for Crypto Regulation
Whilst currently this might not be considered to be a major issue as the size of transactions are so far comparatively low compared for example with the traditional art market, it is now increasingly likely that new legislation will be introduced. In fact, the Biden admin has already started to move towards that direction with cryptos generally and there is a huge amount of lobbying going on by the bigger players in the crypto space to try and influence the shape of the legislation to come. How these regulations will affect NFTs will remain to be seen. Whatever steps are taken in the US in terms of regulation will no doubt influence other jurisdictions in this regard. The Infrastructure Bill that was recently passed by congress now creates a reporting obligation for buyers of NFTs regarding any work that has a valuation of over $ 10000.00.
The Importance of Local Copyright Laws
Copyright law and NFTs are likely to interact a great deal. For example, a photographer who decides to exploit photographs he has taken of a person by minting it as NFT must be conscious of the image rights granted to that individual (the subject of the photograph) under the law of the country / state where the photograph was taken. Minting an NFT regarding such pictures may lead to the photographer in question being sued in relation to any profit he makes and the whole exercise would be rendered pointless.
Further it’s important to point out that the purchase of an NFT will only confer personal non-commercial use and resale rights in the NFT to the owner who has no right to license, commercially exploit, reproduce, distribute, prepare derivative works, publicly perform, or publicly display the NFT or the music or the artwork. The creator of the art will retain all copyright top the work.
Do Not Mint What You Do Not Own!
There have already been cases involving people who had minted photographs owned by a third party without that person’s authority. This could give rise to all sorts of claims such a s misrepresentation, breach of contract etc.
Is There Anything Written in Stone? Will the Rights Conferred by NFTS Remain as 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, and 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 contract with the artist to get ownership of the piece of art and not just the NFT’s. The terms of the NFTS to come can in future be expanded. There are already some NFTs which allow commercial exploration of an image by the buyer. There is here plenty of room for innovation. Currently there are a lot of players in the market who are selling works of art or music but with no contractual terms at all. This can lead to a great deal of confusion. Whilst the NFTs are governed by the smart contracts embedded in the tokens bought it is essential that appropriate terms are drafted specifying what rights are received by the buyer of the token.
How about the future?
Going forward NFT’s could be used increasingly in much more mundane and everyday areas: sale of property, purchase of a train ticket, buying or selling collectibles, jewellery etc. As with many other areas of law, the way in which the law interacts and regulates this area now will no doubt influence the use of NFTs in relation to its future applications.