What Are NFTs and What Are the Legal Considerations?

by Rowan O'Neill

Australia’s first Non-Fungible Token (NFT) gallery recently opened in Hobart with an exhibition showing digital artists from around the world. NFTs have exploded in popularity during the COVID-19 pandemic. In Australia, platforms such as OpenSea and Nifty Gateway are becoming much more popular for selling and purchasing NFTs. So you might be asking, what exactly are NFTs? And what is all the hype about?

 

This article will explore what NFTs are and some legal considerations for this new digital asset. The legal considerations are relevant to anyone interacting with NFTs, whether it be trading platforms, creators, buyers, creators or sellers.

What Is an NFT?

An NFT is a non-replicable digital certificate of a digital asset. ‘Non-fungible’ means unique and cannot be exchanged on a like for like basis in contrast to fungible assets like money. Each NFT cannot be divided or replaced but can be re-sold. In some ways, it is similar to Bitcoin. However, Bitcoin has units that are infinitely divisible, but NFTs do not. NFTs are created using a smart contract on a blockchain and are stored in a blockchain-based wallet with a unique address. A blockchain is a digital ledger that tracks ownership and records the transaction history of each unique NFT. Unlike Bitcoin or other cryptocurrencies, NFTs are not represented as a store of value in and of itself. Instead, the value comes from the rights concerning the asset it represents or the value perceived by the buyer.

NFTs can be either:

  • digitally native NFTs, meaning they are digital in nature and do not rely on real-world assets for their existence; or
  • related to other assets, meaning they are linked to real-world assets.

Some examples of NFTs include:

Collectibles

Such as online card-based games and postage stamps.

Art

Artists sell drawings, paintings or sketches as NFTs.

Memes

Famous memes have been sold as NFTs.

Music

Musicians have sold songs and soundtracks through NFTs.

Videos

Highlights of sports games have been turned into NFTs and bought by fans.

Legal Implications

What Exactly Is Being Bought and Who Owns the NFT?

Consumers usually sell and buy NFTs through online NFT trading platforms. Often the terms of use or terms of services on the platform outline restrictions on the rights or restrictions associated with the NFTs.

It is important to understand there is a distinction between ownership of the NFT as a unique token and ownership of the content or asset that the NFT may be associated with.

Usually, in purchasing an NFT, you buy some right to use the original asset. However, each trading platform may outline the seller and buyer’s rights differently.

Unless otherwise agreed, the pre-existing copyright owner will continue to be the copyright owner and have certain exclusive rights. For you to assign the copyright to the NFT buyer, there would need to be an agreement outlining this, and the assignment does not automatically occur simply due to the purchase of an NFT.

 

The rights to use the original asset may be by way of a licence. Some examples of licences a buyer may be given (while they are the owner of the NFT) include:

  • to display artwork and use it for personal purposes only;
  • to listen to the soundtrack on their personal device.

There may also be some restrictions on the licence, for example, you cannot:

  • distribute the NFT;
  • take pictures of the work attached to the NFT and replicate it;
  • use it for commercial purposes; or
  • display the content on third-party websites or platforms.

Terms and Conditions

Creators, sellers and buyers of NFTs must understand what rights they may be relinquishing or what they are and are not allowed to do when selling or buying NFTs over a trading platform. Although there is a smart contract, it would be best practice for a legal contract relating to the transfer or licensing of the original asset to exist. You would need to include any requirement to transfer ownership of the original asset or license the original asset from a creator on the sale of an NFT in the legal terms of the contract.

 

If the NFT is being onsold from the original buyer, then the original creator is not a party to the contract between the original buyer and the new buyer. They may have difficulty enforcing a term when they are not a party to the contract. For this reason, sellers should ideally enter a contract with the new buyer. The platform’s terms where the NFT are traded should provide further insight into the onsale of NFTs.

How Can You Verify the True Owner of the NFT?

There is no automatic matching of an NFT with the creator or owner of an NFT in the physical world. There have been concerns around the counterfeiting of NFTs. Some trading platforms use manual verification to verify the identities of creators. Other trading platforms include a disclaimer that before buying an NFT, the buyer should do their research to ensure they are buying a genuine NFT. As a buyer, you need to be aware of whether it is your responsibility to confirm the authenticity of the NFT.

Tax Implications

There may also be tax implications for the purchasers of NFTs. The Australian Taxation Office (ATO) has grouped NFTs into the same category as cryptocurrencies for tax treatment.

Key Takeaways

NFTs are a growing area, and the legal considerations, especially intellectual property, are essential for both the creator, seller and buyer. If you are trading on an NFT platform, you must understand the terms and conditions you accept when selling or buying NFTs. If the terms and conditions are not suitable for the sale or purchase of the NFT, you can have a more detailed set of terms and conditions prepared. Otherwise, you should have the trading platform terms and conditions reviewed, so you know what rights you will have concerning the NFT, especially regarding IP ownership and licence rights.

 

If you need assistance with NFTs, contact LegalVision’s commercial contract lawyers today on 1800 534 315 or fill out the form on this page.



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