Non-Fungible Tokens: Opportunities and Concerns Regarding Authenticity
Our recent blog posts about non-fungible tokens (“NFTs”) describe NFTs, identify what buyers obtain when they purchase NFTs and discuss how NFTs affect musical artists. This post further explores how the issue of authenticity (or the mere perception of authenticity) creates both business opportunities and legal concerns in the emerging market for the sale of NFTs.
We are regularly reading and hearing about NFTs as a potentially huge opportunity for content creators to make revenue by minting tokens and for NFT purchasers to earn money by acquiring and then reselling unique collectors’ items. One who looks past the hype of this perceived potential digital gold rush will quickly realize that there are many unresolved legal issues to be considered before purchasing NFTs.
Boiled down to its essence, NFTs are merely digital files purchased with cryptocurrency and with the sale being recorded on a blockchain. The blockchain is an immutable digital ledger that records any changes in ownership of the NFT. NFTs are created or “minted” by using an online sale platform that generates a “smart contract” between the seller and the buyer. The smart contract includes information regarding the digital asset being sold. In addition to the smart contract, the platform on which an NFT is sold provides additional terms and conditions of sale.
Authenticity Concerns
The purchaser of an NFT may think s/he is acquiring rights to the work that is the subject of the digital copy, but that is not the case. A seller who mints as an NFT a digital copy of a work of visual art or music is only selling rights to the digital copy, not any rights to the underlying work. All relevant copyright, trademark and contract laws still apply to this exchange. Unless otherwise agreed, the owner of the underlying work retains its ownership of the underlying work and has the right to pursue claims against any infringers.
Before buying an NFT, a prospective purchaser should seek to understand the scope of legal rights associated with the digital asset to be purchased. S/he should consider whether the NFT is an authorized copy of the original work, an unauthorized copy of the digital work, whether the identity of the NFT creator is known and whether the NFT creator also created the underlying work. Without reading and understanding the fine print, an NFT purchaser could easily purchase an authentic but unauthorized copy of an original work. A purchaser also runs the risk of buying an NFT from somebody who purports to be the creator of the underlying work but is an imposter or a fictitious person or company. These challenges will make it extremely difficult for purchasers to seek remedies against sellers who violate the terms of the smart contract.
In addition to reviewing the terms of the smart contract, a prospective purchaser should review (or ask counsel to review) the online platform’s terms and conditions of sale. The terms for one such platform, Foundation Labs include clear representations from the NFT creator regarding ownership of intellectual property rights in the digital copy and a disclaimer to the purchaser that the rights associated with the NFT do not include any rights in the underlying work. These terms and conditions also confirm that the platform is merely serving as an online marketplace and it is not validating the authenticity of any of the digital assets being sold by creators on the platform. Such terms and conditions may also limit the buyer’s right to make use of, and even to sell, the purchased NFT.
Authenticity Opportunities
We can and will develop new commercial and legal solutions to help our society move beyond this “Wild West” phase of NFT sales, which currently has many unresolved legal issues. Potential solutions include having the platforms on which NFTs are sold play an active role in verifying that sellers are not imposters, requiring a seller to make representations and warranties with respect to the seller’s creation of an NFT, and providing a formal process for NFT purchasers to take legal action against the sellers of NFTs that infringe on the works of others, such as mandatory arbitration by an arbitration company that understands smart contracts. A new online platform for the sale of NFTs states in its terms and conditions that it requires all sellers to sign contracts with the platform to verify their claims of authenticity. These terms do not state whether an NFT purchaser can pursue a seller that breaches its contract with the platform. Over time, the platforms might also develop and adopt a standard form smart contract that addresses the above-noted concerns regarding authenticity and remedies in the event of default. Presumably, the platforms that can provide the best legal protection for both sellers and buyers will in time become the most popular (and therefore the most profitable) companies in this space.
Stay tuned for follow-up posts on additional legal issues raised by the ever-changing developments in the creation and sale of NFTs.
If you want to discuss this issue or any other intellectual property topic, feel free to contact me.
Contributing Advisors
