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NFTs, Legally Speaking

The latest blockchain craze is around NFTs. So what is an NFT, how could it be relevant in terms of marketing, and what are some of the legal concerns surrounding NFTs?

What is an NFT?
“NFT” stands for Non-Fungible Token. A fungible asset is something with units that can be readily interchanged – like money. So “Non-fungible” is something that has unique properties and cannot be duplicated or replaced. Therefore, an NFT, by definition, is one-of-a-kind. You get something that cannot be copied. And a “token” simply means some form of digital art or digital asset – it could be a Tweet, a movie clip, a digital drawing, or other type of digital artwork.

With NFTs, the artwork can be “tokenized” to create a digital certificate of ownership that can be bought and sold. There is a record of who owns that particular item, stored on a shared ledger, or blockchain. And now there are marketplaces where NFTs can be gifted, sold for a set price, or auctioned off and bid on. However, these websites are not all created equal, as some are accessible via invite only, while others are open to anyone. Some of the larger traditional auction houses have even gotten involved with NFTs.

Another interesting aspect of NFTs: there’s a feature that can be enabled which will pay the original owner/seller a percentage each time the NFT is sold or changes hands, indefinitely. Digital artists can build a royalty into their NFTs for future sales, which is why many artists see promise in NFTs.

Who Can Create an NFT?
Anyone can create work, turn it into an NFT on the blockchain (through a process called ‘minting’), and put it up for sale on their marketplace of choice. In order to buy or sell an NFT, you’ll need to create a digital “wallet”. And when purchasing an NFT, you are usually not getting the copyright or trademark to the item – just because you own it does not mean there aren’t countless other versions of it on the Internet. (There will be. It’s the Internet.) But like other collectables, having the original makes it more valuable, more special.

How Can NFTs Play Into Marketing
Since NFTs have gained such a global interest, there are now new opportunities for brand storytelling and consumer interactions. NFTs allow brands to provide unique experiences and create awareness. NFTs can also become attractive revenue streams for brands, either through content creation or even new digital products.

One example is Taco Bell, who sold taco-themed GIFs and images on one marketplace to support the brand’s Live Más Scholarship. All 25 images available were sold in 30 minutes. But those NFTs are now selling on the secondary market for up to $3,500, and the whole initiative created a lot of buzz on mainstream and social media, which added even more value for the brand. P&G’s toilet paper brand Charmin released three pieces of digital toilet paper art that will be auctioned off with proceeds going to Direct Relief. The NBA has developed a way to sell digital collectibles in the form of trading cards embedded with iconic in-game moments, like an NFT of LeBron James making a historic dunk as a Laker, which sold for more than $200,000. The band Kings of Leon will be releasing its new album in the form of an NFT. Even social media posts can hold value as an NFT, with Twitter co-founder Jack Dorsey selling off the first Tweet for over $2 million. A digital home, the “Mars House” designed by artist Krista Kim, was recently sold for $500,000. And the auction house Christie’s sold an NFT by the artist Beeple for $69.3 million. The sneaker brand called RTFKT designed an NFT sneaker for the Chinese New Year and sold it at auction for $28,000.

NFTs are a great way to grab attention and build followers. Brands can partner with artists or auction sites and then create an NFT to auction off for charity, or to give away as a prize in a sweepstakes or contest. Taking a risk and embracing innovative technologies and ideas could pay off. NFTs have opened up new avenues for marketers to interact with their audiences and create memorable experiences for them.

NFTs are still new to many companies, but brands that are open-minded and willing to embrace this technology could benefit by discovering opportunities to increase brand awareness, engagement, and incremental revenue streams.

What Are The Legal Concerns?
NFTs are commonly associated with copyright-protected digital art, and are therefore subject to copyright law considerations. While copyright law does not specifically speak to NFTs, there are several clear implications.

Purchasing an NFT does not automatically convey ownership of the copyright in the digital artwork, unless specifically outlined in a contract. Without such a contract, an NFT owner would lack the right to make or sell copies of artwork, transfer the copyright in the artwork, or create derivative works based on the artwork. This may limit the ability of NFT owners to post, share, or publicly display the NFT without exposure to liability for copyright infringement, and could affect their ability to resell the NFT.

Also, due to the fact that anyone can create an NFT, including using images they do not actually own, NFTs may impact the nature and frequency of copyright infringement. People can commodify art by creating tokens without the permission of the original artist. This may lead to litigation for individuals and businesses affected by infringement. Also, NFTs may be entitled to their own copyrights, which may increase the overall value of NFT ownership. This could further complicate infringement proceedings. NFT platform owners such as YouTube may also have obligations under the Digital Millennium Copyright Act (DMCA) or other legislation with respect to removing copyright-infringing content, responding to take-down requests, etc.

Some data protection laws give individuals the right to have their personal data erased, but the fixed nature of the blockchain poses an obstacle to this right. Data protection laws also sometimes provide individuals with the right to rectify inaccuracies in their personal data, and blockchain technology might make this right functionally impossible. As such, NFTs that contain personal information might violate data protection laws.

Contracts written into the code of NFTs allow for the payment of royalties to be distributed to the creator each time the work is resold. However, these automated resale royalty payments might not occur unless the NFT is resold through the same platform. US law does not recognize resale rights relating to creative works, so the law provides no recourse for unpaid resale royalties in the US.

What’s Next for NFTs?
As millions of dollars in transactions pour in for NFTs, enthusiasts say this technology will soon expand beyond the trading of art, music, video clips and memes to things such as collateral for loans. Some say the moneymaking possibilities in the NFT world are limitless. And while there is always the chance that this is all a passing fad, NFT backers say the system’s built-in scarcity should keep values up, as long as the surge of interest persists.

As NFTs further usher in the transition to a more digital world, they have inspired new methods and means of monetizing items that were previously hidden or ignored. However, NFTs are not without risks. As the digital world continues to evolve, so too do the legal and regulatory issues associated with technologies such as NFTs.

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Michelle Komorn

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