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Non-fungible tokens – looking at the legal issues

Non-fungible tokens (NFTs) are big news. NFTs are special types of cryptographic tokens. Unlike cryptocurrencies, such as bitcoin, that are fungible (i.e. one bitcoin can be exchanged for another), NTCs are not interchangeable. Each NFT is a unique token on a blockchain, but unlike crypto, they store extra information which provide collectors the opportunity to build a digital collection where each item can be traced back to the original issuer. Because of this, NFTs are increasingly used in applications that require unique digital items such as crypto art, digital collectibles, and online gaming.

Crypto art

NFTs can be used to give an artist more control over their creations making it easier for them to monetise their work. For instance, Grimes recently sold about $6m worth of digital artworks via auction on the Nifty Gateway marketplace. Nifty Gateway allows users to buy, sell, display and create a collection of ‘Nifties’, NFTs which are maintained on the Ethereum blockchain. One short video, ‘Death of the Old’ set to an original song by Grimes, sold for nearly $390,000. However most of the $6m in sales came from two pieces — ‘Earth’ and ‘Mars’ — with almost 700 copies being sold between them. NFTs also allow artists to take a future cut when digital artworks changes hands – a so-called programme royalty.

Digital collectibles

An early example is NBA TopShot, which was developed by Dapper Labs in partnership with the National Basketball Association in the US. NBA TopShot is a collectable and tradable NFT-based app which sells tokens in packs containing multimedia and data ‘smashed together’. Dapper describe the collectibles as ‘Moments’ - each Moment is comprised of a photograph and a video of a NBA player and a set of associated statistics. Each Moment is a NFT on the Flow blockchain. Collectors purchasing a Moment own the underlying NFT, giving them the right to trade, sell, or even gift the NFT. Ownership of the NFT is mediated entirely by the Flow network. At the end of February, Dapper Labs reported over $230m in gross sales in the app – pretty impressive given that it was only released from beta in October last year.

Online gaming

The gaming industry has been quick to incorporate NFTs, with many popular “crypto games” such as CrytpoKitties, Axie Infinity, Gods Unchanged, and TradeStars, a fantasy stocks trading game which uses the Ethereum + Matic Layer 2 blockchains. An exciting function of NFTs is to enable a game’s features (e.g. weapons and skins) to be easily transferred and used in different games.

Other creative industries are catching on to NFTs as ways of unlocking revenue. For example, when stadium rockers Kings of Leon recently released their new album ‘When You See Yourself’, fans were given the chance to buy it as NFT version via the YellowHeart platform. In fact the album came in three types of token–a special album package; exclusive audio-visual art; and live show perks (e.g. front-row seats for life).

What are the legal issues?

Creation, distribution, ownership and trading in NFTs is an emerging market. As the NFT market develops, it is clear that there are a number of issues which will need to be resolved. Some countries, such as Malta and France, have already taken steps to implement new laws intended to regulate so-called digital assets service providers. Elsewhere, issues will fall to be resolved using existing laws in particular copyright, as well as requiring buyers and their advisors to navigate often complex, and sometimes contradictory, terms and conditions published on the various marketplace’s websites, which are often located in foreign jurisdictions. Verifying authenticity, selling, purchasing and storing NFTs needs at least a basic understanding of blockchain technology. And before dropping some serious money on NFTs, undertaking due diligence and taking legal and tax advice is recommended.

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