The NFT and its seven legal implications

How to get more than a serial number loosely attached to a jpeg

Non-fungible tokens (NFTs) have taken the world by storm. They are blockchain-enabled, highly centralized, smart contracts and defined as digital assets that hold different functionalities and characteristics and are indivisible. NFTs can be produced for digital assets like photographs or non-digital assets like paintings. NFTs can also represent a song, a patent, or another intellectual property right. Other use-cases are tokenized real-estate, precious items, vehicles, and all other property.

The world of non-fungible tokens is international and legal issues must be assessed in an international context. Currently, creators, collectors, and also marketplaces are mostly located in the U.S. American area. However, blockchain technology is not bound to a single jurisdiction and for international transactions, the applicable laws and principles need to be assessed on a case-by-case basis.

The legal framework is largely unresolved. The following comments are intended merely to provide an initial insight into the state of the discussion. They only scratched the surface. With all these legal reservations, seven different issues can basically be distinguished:

#1. Legal aspects of the token creation: Digital tokens are subject to the jurisdiction in which they are created. The applicable legal system may lead to the characterization as a security token and place legal restrictions on this.

#2. The legal position of the NFT creator: The right to create non-fungible tokens primarily vests in the legal ownership of the underlying asset. There is potential for conflict in the case of multiple owners or unclear ownership structures Finally, piracy cases are also to be expected in which publicly accessible assets – for example digital content from the Internet – are misused to create an NFT. The blockchain is typically resistant to change. Created blocks cannot be subsequently modified or deleted. In the case of illegal tokens, it must be assessed whether the owner of the underlying assets has a right to transfer the NFT instead of a claim for extinction.

#3. The underlying asset: Legal ownership basically gives a comprehensive power of disposal within the framework of the traditional applicable laws. The creation of an NFT does not change this legal framework. Thus, the creation does not involve a split into NFT rights and the naked, rightless property. Asset and NFT coexist indepedently forever. Legal or de facto dispositions of the property – also in the case of a digital asset – have vice versa no impact on the content of the token. Although the NFT might represent the real-world asset to a certain extent, it is not really a digital certificate of ownership, but merely a certificate of sponsorship.

#4. IP rights in the asset and in the token: As soon as a work of art in any medium is created, the creator owns under many jurisdictions the copyright in that work. Purchasing a piece of physical or digital art does not include the copyright in the piece of art. The creation and transfer of work of art or other assets that can be subject to a NFT has to be in compliance with a basket of IP rights. The tokenization does not change anything in this situation. Owning an NFT neither grants nor restricts the IP rights in the underlying asset. The same work of art can be subject to hundreds of different NFTs on several blockchains, there is no legal right of exclusivity. The artist might be free to go to Instagram, etc., and file a copyright takedown notice if the NFT owner publishes the art there.

#5. NFT transfers and marketplaces: The current NFT market thrives on the marketing efforts of the major marketplaces and auction houses. NFT transactions are governed by the smart contract and the house rules of the marketplace. Depending on the type of asset, the marketplace might allow that the asset is transferred in a double transaction simultaneously with the NFT, especially in case of jpeg art works.

#6. Collector’s rights: The term “collector” instead of “buyer” already predetermines the focus on “pride of ownership” instead of the active use of the rights associated with the NFT. This approach may not prevail in the long term. The commercialization of NFTs is only a question of time. The size and scope of the collector’s rights to use, reproduce, modify, publish, display and distribute your “content” on a worldwide, non-exclusive, and royalty-free basis has to be carefully evaluated.

#7. Subsequent dispositions: The underlying asset may be intentionally destroyed by the creator of the NFT, perish by force majeure, or otherwise be lost. In addition, an alternative NFT can be created on another blockchain that devalues the initial NFT. Measures by third parties are also conceivable, for example, accusations of IP right violations for which the non-fungible tokens collector must then also be legally or at least morally liable.

NFTs follow general tokenization principles. The sale or other disposition of gold, real estate, patents, image files, and works of art follows traditional civil law rules, which do not include special rules for the case of NFTs or other forms of tokenization. NFTs, like fungible tokens, represent only the asset. Just your NFT, not your asset.

PUGNATORIUS Ltd. advises and assists to get NFT projects successfully done. FinTech, crypto ventures, and digital asset businesses are one of its core business and competence areas of the Bangkok-based law firm. t is available to support and assist ventures in the crypto and blockchain area as lead advisor or as part of a multi-industry team.

Disclaimer: A little knowledge is a dangerous thing. This low-resolution high-level outlook constitutes neither legal advice nor an attorney-client relationship.

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