Non-Fungible Tokens: A Look at the Various Forms of Ownership and Possible Legal Issues Associated with Their Rise

April 18, 2021

A look at the various forms of ownership and some of the issues associated with the rise of Non-Fungible Tokens

Background on NFTs

Nonfungible tokens (NFT) are driving the latest wave of interest in the blockchain space. An NFT is an asset verified using blockchain tedchnology, “in which a network of computers records transactions and gives buyers proof of authenticity and ownership.” The transaction becomes part of the permanent public record and serves as a certificate cannot be altered or erased. However, where a cryptocurrency like Bitcoin is fungible – one bitcoin is the same as another—each nonfungible token is unique. An image gets “tokenized” and becomes verifiable as the one and only ‘original.’

The NFT is a digital certificate of ownership; it is a way to verify who owns a particular digital asset. In theory, purchasing NFTs is one of the most secure transaction methods available right now because each NFT can be traced back to its origin. The technology for NFTs has existed since the mid-2010s, but grew in prevalence with CryptoKitties, a website that allowed people to buy and “breed” limited-edition digital cats using cryptocurrency.”

Different Industries’ Use of the Technology

However, over the past few months, NFTs have exploded in popularity. Most famously, a JPG file made by artist Beeple was sold by Christie’s Auction House for $69.3 million with fees. Entire NFT marketplaces exist just to facilitate these types of transactions. For instance, an NFT of a digital Banksy piece sold for more than $350,000 on NFT Exchange Opensea. Creative entrepreneurs are applying NFT technology and ownership practices to several different types of intellectual property, and are tokenizing everything from sneakers to music to individual tweets. 

NFT proponents hope to capitalize on the scarcity element that drives economic activity in the marketplace.

At the nexus of the sports and collectibles world, the National Basketball Association has partnered with Dapper Labs to create a digital trading card business that utilizes NFT technology known as TopShot. Top Shot encourages people to collect individual “moments” from professional players. The owners of these moments can then “own and show off” the highlights that matter. Of course, Top Shot emphasizes the safety and security of the transaction: each moment is marked with a unique serial number, guaranteed scarcity and protected ownership guaranteed by the blockchain. The owner is “the only person in the world who owns that particular moment – unless they choose to trade or sell that moment to another collector.”

Musical artists have utilized NFTs in an entirely different way than sports companies and visual artists. For instance, 3LAU sold an NFT album in March, and generated over $11.6 million under 24 hours in the process. Grammy winner RAC plans to launch an NFT creative agency to help artists realize the full potential of NFT transactions. Kings of Leon generated $2 million in sales by bundling NFT’s with their new album. Disclosure recently debuted a song on Twitch and sold it as an NFT on the spot.

Other musicians plan to sell portions of rights to future songs. Taylor Bennett has agreed to sell 75% of the rights to an upcoming recording via NFT while holding onto 25% of the copyright for himself. After the songs have been recorded and released, NFT owners will be able to collect digital royalties from their share of the music. From there, NFT owners can even trade their share of the purchased copyright on the NFT exchange where it was purchased. NFT proponents hope to capitalize on the scarcity element that drives economic activity in the marketplace. The purchase of a video of a LeBron James dunk from NBA Top Shot for $208,000 doesn’t give the owner exclusivity—it can still be watched for free by anyone. Just like anyone can look at a picture of a valuable trading card online. However, Rachel O’Dwyer, a research fellow at Trinity College Dublin, noted the distinction between the commodification of a piece of art and its financialization. The free video or song is the commodity, available to everyone.The scarce element, unrelated to the viewing right, is the newly created digital asset.

Sounds Great; What’s the Catch?

There are a few foreseeable legal issues associated with NFTs. First, new players in the space are susceptible to fraud. Due to NFTs international reach—an artist in Iran or Moldova is free to tokenize their work and sell it to a collector in Alabama— as well as the anonymity that the blockchain ledger provides, a defrauded American purchaser might not have the jurisdictional reach to successfully prosecute a fraudulent defendant in a foreign country. However, by sticking with trusted platforms that prioritize safe transactions, inexperienced buyers and sellers should feel comfortable trading NFT’s. The unique nature of each NFT is one of the technology’s biggest selling points, but all of the activity surrounding the purchase and sale of these tokens is still murky and unpredictable.

For instance, an uninformed buyer could think they’re buying an NFT of a Mickey Mouse print from one exchange but receive a tokenized image from a different exchange altogether. While they now own that Mickey Mouse NFT, how much value does it have on an unpopulated exchange? Put another way, what value does an oceanfront property have in Antarctica? What options for legal recourse does that uninformed buyer have? Even worse, it might not be an NFT at all; the purchased image might only be an image without the accompanying certificate of authenticity. As NFTs start to move out of walled-garden environments like NBA Topshot, concerns about possible fraud will only grow.

Related to this issue is a problem that plagues most content creation on the internet. Parasitic bad actors that look to cash in on the work of others are a major concern for NFTs. This has already happened to artists who post their creation online and to influential social media users whose posts go viral. These creators’ posts are being made into NFTs and immediately sold by strangers. While they’re able to file legal notices with the NFT exchanges that are facilitating these sales, this theft-prevention method does not feel sustainable or fair to the artists who hope to capitalize on their own work. Oftentimes, the artists aren’t even seeking to tokenize their work, but since nearly anything can be tokenized on the blockchain by anyone, internet trolls don’t have to worry about these creators. Fortunately, it is in the NFT marketplaces’ best interest to cooperate with these legal notices and prevent counterfeits or thefts from being sold, but it is not clear that this market-reliance is sustainable as NFTs grow in popularity. This NFT technology is new and growing. Even though some NFTs have been sold for mind-numbing sums, substantive adaption is still a very long way away. These concerns about intellectual property, what purchasers are actually buying, and the long-term viability of this speculative endeavor are certainly worth monitoring.

Zach Corenblum