NFTs (Non-Fungible Tokens) – Introduction
By this point, I am sure that you have heard the term NFT passed around in casual discussion. It is one of the most hot-button topics of current conversation and debate. You may have heard of individuals investing in or purchasing NFTs, perhaps others stating that they have made huge profits in doing so. New NFT-centric businesses are popping up daily and artists of every variety are announcing that they too have decided to enter into the world of NFTs.
But what exactly are NFTs? How does one go about getting into the ‘NFT world’? Also, what are some of the important legal considerations to be aware of when discussing and working with NFTs? This blog aims to provide an introductory discussion to NFTs with a particular focus on relevant legal considerations.
The Non-Fungible Token
Non-Fungible Tokens, also known as NFTs, are a type of digital asset with associated rights. ‘Fungible’ means that the item can be replaced with something else of equal value. Money, for example, is fungible. A five-dollar bill can be freely exchanged with another five-dollar bill. However, a ‘non-fungible’ good, like a rare trading card for instance, is a unique, one-of-a-kind item that cannot be equated with any other trading card because the value varies between them.
The authenticity of NFTs, and the non-fungibility of them, occur through a foundation in blockchain (often the Ethereum blockchain, which is based upon the Ethereum cryptocurrency) that provides a digital ledger of ownership. Each transfer (i.e., the initial ‘minting’ when the NFT is created, and any subsequent sale and purchase) is recorded through the blockchain and can be viewed publicly. As such, at any time, one can view who the current owner of an NFT is as well as any previous owners and associated transfer prices.
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Copyright, Trademarks and NFTs
The relevance of copyright to NFTs is of particular importance. Many NFTs are based upon artistic digital works, and it is becoming increasingly easy for anyone to create a new NFT and upload to a marketplace online. However, similar to artists creating works elsewhere in the universe, both digitally and in the non-digital world, what is important to keep in mind for creators of NFTs is that you must have the proper rights to the works being dealt with, or you may be in violation of copyright law.
There have already been countless stories of individuals creating NFTs based upon already trademarked and copyrighted works of others (one example is here), from famous Nintendo characters to previously made and marketed NFTs that became huge hits. Fashion brands have gone to the extent of creating NFTs in the form of digital clothing for characters in the Metaverse to protect their trademarks in the virtual space.
For this reason, someone creating an NFT needs to make sure that the work being turned into an NFT is either an original work they created and for which they fully control all decisions, including regarding distribution of the work, or is a work that they have received proper clearance or license for from the original rightsholder.
NFTs (Non-Fungible Tokens) – Rights Associated with Buying
Like all purchases and transfers of goods, there are certain rights that, along with the good itself, also transfer from purchaser to buyer. Those rights are not always uniform. They may transfer ownership, or only a license to use. And they may or may not transfer intellectual property rights with respect to the works. This is why transfers are governed by way of contract, in order to identify in clear language the exact terms of the transfer, including what rights (if any) are included in the transfer.
Similarly, transfers of NFTs are governed by ‘smart contracts’ that are often embedded within NFT marketplaces online. In most cases, if you know where to look, you can view the smart contract that applies to the NFT you are looking to purchase. Although smart contracts read more like a piece of code, if you consult with someone or take some time reading up on them online, you can learn how to read the terms of the smart contract.
Third Party Rights
Many works being turned into NFTs are ones that already exist in other forms. These may be a recorded song, an oil-based painting, or a character, all protected by copyright. Obtaining the proper clearance(s) to use these works as an NFT may involve dealing with third parties who own and/or control such works.
Let’s say an artist writes a song, and this artist has an exclusive recording agreement with a record label and a co-publishing deal with a publisher. If the artist wants to convert the song, or an aspect of it, into an NFT, depending on the agreements with the artist’s label and publisher, the artist may need to negotiate with the publisher and label to receive their consent to having the composition (the publisher) and the recording (the label) incorporated into an NFT.
The sharing of the revenue from the sale of the NFT depends on the deals in place between all stakeholders and rightsholders – to both the compositions and recordings at issue. Also, if there is artwork incorporated to the NFT, does the artist own the artwork outright, or perhaps not have the right to incorporate the artwork into the NFT if the agreement between the musical artist and the graphic artist did not provide sufficient rights for the artwork to be included in an NFT.
NFTs (Non-Fungible Tokens) – Conclusion
The world of NFTs is exciting in its innovate technologies and ability for creators and entrepreneurs to reach a global audience. It is also still only in its early stages and many of its operations and the complexity of its underlying technological foundations mean that there are still many questions to be asked by users as well as lawyers and lawmakers. Legal questions about how NFT transactions take place and are regulated are beginning to emerge, however, it will likely still be a while before we have determinative answers. For this reason, whether you are a business, a creator, or a user looking to invest in NFTs, it is important for individuals to do their due diligence before embarking into this new world.
If you are in the entertainment industry and have questions about NFTs and legal considerations to keep in mind when working with NFTs, we encourage you to speak with Edwards Creative Law or another entertainment lawyer.
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Updated to February 9, 2022
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* This blog is for general informational purposes only and is not to be construed as legal advice. Please contact Edwards Creative Law or another lawyer, if you wish to apply these concepts to your specific circumstances.