NFT legal issues and considerations

NFT legal issues and considerations

7 important questions on NFT

NFTs (non-fungible tokens) are digital assets; a non-replicable digital certificate of ownership of a copy of a digital creative work. They represent a market that is growing fast. In the second quarter of 2021 NFT transactions already were worth 2.4 billion USD. A digital artwork NFT was auctioned for nearly 70 million USD in March 2021. This phenomenon brings a lot of questions, especially from a legal point of view. In this blog we share more information on NFT legal issues and the considerations when dealing with them.

NFT legal issues

What are NFT’s?

A NFT is a unique and non-interchangeable unit of data stored on a digital ledger (blockchain). Wikipedia mentions the following on NFT: NFTs can be used to represent easily-reproducible items such as photos, videos, audio, and other types of digital files as unique items (analogous to a certificate of authenticity) and use blockchain technology to establish a verified and public proof of ownership. Copies of the original file are not restricted to the owner of the NFT and can be copied and shared like any file. The lack of interchangeability (fungibility) distinguishes NFTs from blockchain cryptocurrencies, such as Bitcoin. NFT is a digital asset, a piece of software code that is entirely unique, yet transferable. That software code usually is a form of smart contract, and it is stored in a blockchain.

Ownership of digital media

NFTs were created as a way to make sure the original artists can benefit from their artwork. When you buy a NFT, you get an authenticated replica of a digital medium that is unique. It is a smart contract that contains certain terms and condition. To make sure that the original artists gets a royalty when the NFT is sold. The smart contract is executed automatically each time there is a transaction, that is registered in the blockchain. For example when an NFT is sold to a new owner. In other words, a NFT is a non-replicable digital certificate of ownership of a copy of a digital creative work.

It is worth repeating that while the NFT gives you ownership of a copy of a digital artwork, it does not transfer any intellectual property on the original digital artwork to the owner of the NFT (other than the license to own a copy of it). So, why do people by them? Because they are collector’s items that are authenticated and unique, that cannot be modified or amended, yet are transferable. As such, they can also be used as investments.

NFT legal issues; 7 important questions

NFTs are fairly new, and legislation worldwide still has to catch up with the phenomenon. There are 7  legal issues and questions that have to be considered.

  1. How about NFT and legality?
    The legality will vary from country to country. But if there are no laws in place, they should be considered legal. Some countries have already enacted some legislation. Other are likely to follow. This may change what is legal and what is not.
  2. How do you get a proof of ownership?
    This happens through the Blockchain. The combination of a public key and a private key allows the NFT to be decrypted and provide the necessary information.
  3. Where is the data hosted and stored?
    The NFT functions as a certificate of ownership of copy of a digital artwork that is stored somewhere, and typically the code of the NFT links to the stored copy. Problems can arise if the storage ends. Or the link to the storage changes because it is not possible to update a blockchain entry. The smart contract code has to explicitly allow transactions to modify the location of the digital artwork.
  4. How about royalties?
    Since an NFT is a smart contract, it is possible to include code that a fee is automatically paid to the original artist each time the NFT is sold. The code is not included when sold on a different platform than the one where the smart contract originated.
  5. Data Protection Laws, how does it work?
    Personal rights to be erased or to modify or correct personal information appear to be incompatible with the immutable nature of the blockchain. In other words, NFTs that contain personal information may violate data protection laws. It may be wise to include non-executable code in the smart contract that clarifies that the people involved have agreed to have their personal information included as it is.
  6. Who has the intellectual Property?
    As mentioned above, the buyer of an NFT by default does not acquire the intellectual property rights that are associated with the digital artwork. The buyer may not be fully aware of this or its implications. For example that they are not allowed to make copies of the digital artwork or to use it in a publication, which may then constitute a potential intellectual property infringement liability.
  7. Are NFT part of estate and succession?
    NFTs are typically linked to specific individuals. What happens to the NFT when the owner of the NFT dies? The immutable nature of the blockchain will not allow to recognize the heirs as new owners.

The market of NFTs is expanding faster than anybody predicted. NFTs offer great opportunities, both for the creators of digital artwork, as well as for collectors and investors. But clearly, there still are multiple legal issues that need to be addressed.

More information?
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