If COVID was the buzzword for 2020, early money must surely be on NFT as the buzzword for 2021. The recent frenzy over non-fungible tokens (NFTs) has illuminated that value is truly in the eye of the beholder given what some people are willing to pay for a one-of-a-kind 'work'. Whether it be $411,000 for the viral 'overly attached girlfriend' meme, 1 $3.8 million for Twitter CEO Jack Dorsey's first ever tweet 2 or $69 million for Mike Winkelmann aka Beeple's digital collage of 5,000 futuristic images. 3 NFTs add a new level of value and provenance to digital assets (particularly those that are generally susceptible to online piracy) and offer an alternative means for artists to collect royalties and monetise their works. However, NFTs also raise a myriad of potential legal issues, particularly when viewed through the prism of intellectual property law.
What is a NFT?
NFTs are in some ways reminiscent of digital assets such as Bitcoin or Ethereum. These crypto-currencies, however, involve fundamental units that are indefinitely divisible. One can exchange an arbitrarily small fraction of a bitcoin, but NFTs cannot be directly exchanged with one another. This is the essence of "non-fungibility".
Typically, NFTs are used to represent rights in relation to an indivisible asset, either tangible or digital such as visual artworks, music or literary works. Proof of relevant rights is demonstrated by ownership of the associated NFT. Like crypto-currencies, NFTs make use of block chain technology to establish a decentralised shared agreement about the vesting of NFT ownership and are stored in digital wallets. Unlike crypto-currencies, a NFT is not purported to be a store of value in and of itself, but value instead derives from the value of the rights in relation to the asset it represents or the value perceived by the buyer. For example, some sporting teams are selling NFTs linked to player cards or highlight videos, which are appealing to diehard fans.
What rights do you receive when you purchase a NFT?
A purchaser of a NFT essentially receives the right to claim ownership of the NFT associated with the asset (but not always the asset itself). Just as purchasing a song on iTunes confers certain rights in relation to that song (typically the right to store the song in your library for personal use, but not the right to resell or distribute the song), purchasing a NFT can confer rights that do not necessarily involve full control or ownership of the asset. Unlike the iTunes song example, one typically is able to on-sell the NFT and associated rights to the assets.
Purchasers of NFTs should be aware that rights conferred by ownership of a NFT can be mutable or immutable. For example, ownership of shares in a company can sometimes confer certain rights in relation to the actions of that company, where those rights are mutable and subject to change at the discretion of the company or its directors. Similarly, rights conferred by ownership of a NFT can be defined outside the environment of the NFT trading platform, 5 and may be subject to change. In other cases, the rights conferred by ownership of the NFT may be immutable, sometimes defined in terms cryptographically bound to the NFT itself.
There are various online platforms that allow users to mint, buy and sell NFTs, which are similar to marketplaces for goods such as eBay or Etsy. It is important that buyers and sellers of NFTs understand the rights they may automatically be relinquishing, or the acts that are not permitted (even if you own the NFT) when they use these platforms, which may include a 'gas' fee to process the listing.
Short falls of NFTs
Benefits of NFTs
Despite the apparent shortfalls of NFTs, there are also some benefits, such as:
- Increasing traceability of ownership, which could be used as evidence in the context of legal disputes (similar in some aspects to WIPO Proof).
- Allowing artists to receive royalties automatically and accurately, thus eliminating royalty losses. However, given the non-fungible nature of NFTs, they are unlikely to be traded regularly so the opportunity for royalties from NFTs, while secure, are limited.
- Offering an additional revenue stream for artists/brand owners if they decide to 'mint' a NFT linked to their digital assets or to accompany a tangible good, like the band Kings of Leon did with their most recent album.
While the technology underlying NFTs seems to have the capacity and capability of providing the broader 'art' world with an alternate means of digital distribution, dissemination and revenue, it will be extraordinarily interesting to see whether NFTs maintain their speculative momentum and extend beyond the digital gold rush of these initial applications to alternate uses (such as verifying a winning lottery ticket) or will be as short-lived as other digital frolics.
1. Saman Javed, ''Overly Attached Girlfriend' Sells NFT of her meme for $411,000', UNILAD (online, 7 April 2021) (https://www.unilad.co.uk/news/overly-attached-girlfriend-sells-nft-of-her-meme-for-411000/).
2. CNN, 'The first-ever tweet sold as an NFT for $3.8 million' 9 News (online, 24 March 2021) ( https://www.9news.com.au/technology/the-firstever-tweet-sold-as-an-nft-for-29-million/736d3f94-b43d-4be7-a041-b8d4fc7b4ed2#:~:text=Twitter%20CEO%20Jack%20Dorsey%20has,liked%20more%20than%20160%2C000%20times.).
3. 'A digital artist just sold a JPG file for $69 million' Mint (online, 12 March 2021) (https://www.livemint.com/news/world/this-digital-collage-of-5-000-individual-images-fetches-rs-500-crore-11615516650126.html).
4. "Minting" is the term commonly used to describe the creation of a NFT.
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