What is an NFT?

A non-fungible token, or NFT, is a digital asset capable of authentic ownership similar to physical assets. The term “non-fungible” indicates that these digital assets are unique and not replicable. Individual ownership is verified via the immutable blockchain. NFTs utilize smart contract technology for transference that is recorded and established on the blockchain.

Smart contracts allow for specific conditions and terms to apply when a wallet purchases, transfers, stakes, or performs any other action with a NFT.  The terms are coded into the smart contract and carried out automatically by the wallets involved in the transaction.   A NFT is arguably more authentic than its non-digital analogues due to the ability to publicly track the chain of custody on the blockchain (e.g. etherscan.io) and reduce the possibility of fraudulent transactions. Instances of — and opportunities for —  fraud are reduced with the involvement of blockchain technology due to its immutable nature and public accessibility.  

What are the various types of NFTs?

ERC-721 is the current and most popular token standard for NFTs, with ERC-1155 gaining traction particularly in blockchain gaming.  NFTs can be a digital translation of a real-world asset, a digital-only access pass to online communities, a simple reflection of a JPEG file, and anything in between. NFTs gained early popularity as forms of art with ownership (i.e., collection) trackable and documented despite the digital nature of the pieces.  Current movements and releases see more utility for holders cooked into ownership:  Artists and musicians are beginning to include opportunities for meet and greets and royalty percentages to go alongside token ownership. Some NFTs also include promises of future free “airdrops,” “mints”, or other incentives.  NFT technology is still in its infancy and use cases will continue to be explored and will develop over time.

NFTs have expanded beyond digital art, with all eyes looking toward ownership of digital property and virtual experiences in the metaverse.

What is the metaverse?

Long before Facebook changed its name to Meta, the metaverse stood for the concept of an increasingly digital presence in a world trending toward the virtual.  The metaverse in its simplest form is the merging of the physical world with the virtual one.  It is hardly a “new” place.  We exist there now through emails, virtual meetings, and the like.  As holdings and property become more available there, and less available in the physical world,  the metaverse will continue to grow indefinitely.  Many will seek an escape from their normal lives in favor of creating a new persona in the metaverse filled with limitless possibilities.

Legal Implications of NFTs

NFT technology is still new and builders have yet to show us the full unleashed potential of what this modern day invention has in store for our future.  Equally true is that legislators, jurisdictions, and legal practitioners have yet to receive guiding precedent for how the rights of holders fit into our current legal structure.   It is exceedingly likely that the first major NFT cases will involve Intellectual Property rights, areas in which NFTs cross into and become securities subject to SEC rules and regulations, or both.  

We are certain that many courts will soon find themselves grappling with the terms and performance under smart contracts much like analog contracts written on paper. Smart contracts can execute quickly with the removal of third-party intermediaries and delay times. The transactions are instant, and there is no need to wait for a third-party to verify and validate a transaction, pay, or even discuss.  Smart contracts and the terms and provisions delineated within will be interpreted in the context of blockchain technology, coding and development, while courts attempt to adhere to “old school” contractual principles.  

Theft & Fraud

Recently, actor Seth Green tweeted that he was the victim of NFT theft when a phishing attack caused him to lose his ownership and Intellectual Property rights for his Bored Ape Yacht Club, Doodle, and other NFTs. The theft was alarming and reflects the needs for cybersecurity to remain a top priority for owners and NFT creators.  Phishing and hacking attacks have obvious financial implications for holders, but also foreshadow what is to come in the legal system. The crimes and related repercussions for theft of an NFT have not been dealt with by our courts but will be on the rise in the coming years. The damages associated with the loss of the Intellectual Property rights granted via NFTs are yet to be seen: Seth Green, for example, had written that he was utilizing his Bored Ape for an upcoming television show. As he no longer has the Intellectual Property rights to Bored Ape #8398, he will be presented with challenges in moving forward with the television show which featured the Bored Ape as the star.

Need legal support regarding NFTs and the metaverse? Contact KVK.

Blog by Tiffany Gruenberg, May 27, 2022

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