You’ve probably heard NFTs mentioned as an internet trend – cat pics selling for millions of dollars. But now that major auction houses like Christie’s are hosting NFT auctions and at least one startup allows borrowers to use NFTs as collateral for loans, it’s worth taking a few minutes to understand the technology and be aware of the potential legal issues that are presented when investing in NFTs, including NFT rights.
What is an NFT?
NFT stands for non-fungible token. For a token to be non-fungible, it must be unique and unable to be exchanged for a similar item.
A single bitcoin is fungible – it is the same as any other bitcoin and can be swapped interchangeably. The same is true of a dollar bill. Real estate is non-fungible as each piece of land is unique.
The NFT itself is not a physical item – it exists only on the internet, as a piece of code stored on the Blockchain. Essentially, an NFT is like a digital certificate of authenticity.
Consider a painting or piece of art – say, Vincent Van Gogh’s The Starry Night. The original painting is currently owned by the Museum of Modern Art, New York (MoMA). You can travel to the museum in Manhattan to view the original, but you can also find reproductions on the internet, on t-shirts and coffee mugs, prints, posters, or even lookalike canvasses. If the MoMA wanted to sell the original, they would provide prospective buyers with paperwork verifying the provenance and authenticity of the painting.
NFTs provide a similar function for digital items. When an artist wants to create an NFT, they “mint” the work by creating a new token on the Blockchain. The Blockchain is a public ledger, visible to anyone with an internet connection. Once the NFT appears on the Blockchain, it can be bought and sold, and its transaction history is publicly available.
NFT ownership: How do you purchase an NFT?
Most NFT transactions are conducted using cryptocurrency. Ethereum is the most popular cryptocurrency used by NFT marketplaces.
Before you can buy an NFT, you’ll need to have a digital wallet to securely store your cryptocurrency. That same wallet can be used to sign in and create accounts on NFT marketplaces.
Coinbase, Metamask and Rainbow are all examples of digital wallets that can be used to purchase NFTs on most of the major NFT marketplaces.
Once you set up a digital wallet and purchase cryptocurrency, you need to connect your wallet to an NFT marketplace like Rarible (one of the largest NFT marketplaces). NFT marketplaces host auctions where you can bid on NFTs. If your bid wins, you are the proud owner of an NFT, and the transaction is recorded on the Blockchain.
You can store your NFT in your digital wallet, but any application that is connected to the internet is theoretically vulnerable to an attack from a hacker. The NFT marketplace Nifty Gateway was hacked last year and several users reported losing thousands of dollars of digital artwork. If you plan to invest heavily in NFTs, it is worth exploring more secure offline storage options, such as a cold storage hardware wallet.
What NFT rights do you have as an owner?
When you purchase an NFT, you do not acquire a physical copy of the item. Instead, you are acquiring a unique piece of code that establishes you are the owner of the item.
To many people, this sounds absurd, but think back to the example of the Van Gogh painting. The canvas, paint, and frame do not have much inherent value. However, if the original artwork were to be sold at auction, it would surely fetch millions, despite the ubiquitous availability of cheap copies.
In most cases, the purchaser of an NFT does not acquire any copyright or trademark rights in the item. The NFT owner cannot sell copies of the work, nor can they sue a company or individual who displays the NFT without authorization.
Under US Copyright law, the creator of a work owns the copyright in the work, even if they sell copies of the work. For the copyright to be transferred, the author must sign a written contract. (See 77 USC 204(a)). These issues are currently being litigated in a case involving NFT pioneer Larva Labs, creator of the popular Crypto Punks NFTs.
What’s next?
The NFT market continues to grow and evolve daily. In following posts, I will explore NFT rights and additional legal issues with respect to NFTs, including whether and how they are regulated and recent litigation involving NFTs.
If you are considering purchasing NFTs, or you already own NFTs and have questions regarding your NFT rights, please reach out to me.
Katherine Silverman is a business litigator with a unique depth of experience in handling commercial real estate disputes.
