NFTs bring new possibilities and new concerns


lcmm@melchionnalaw.com
NFTs bring new possibilities and new concerns

The convenience and security of non-fungible tokens (NFTs) are shaking up the art world. As this new form of digital ownership takes off, so are many legal questions about their purchase, sale, trade, ownership, and tax consequences.

NFTs are blockchain-based digital assets that take the form of virtual media and/or art (e.g., memes, music, digital pictures, video clips, and digital creation in general), whose ownership can be easily transferred through blockchain. Unlike digital coins that use the same blockchain technology, NFTs are said to be “non-fungible” because each contains a unique identifier that makes it one of a kind. An NFT’s chain is easily traceable because each transaction is recorded on the blockchain on which it was originally minted. Thus, even if an artist creates several copies of the same piece, each copy retains its value because it is a unique asset and its provenance can be verified.

Blockchain technology also makes NFTs secure. Blockchains are decentralized public ledgers that rely on network consensus to verify transactions. Thus, it is extremely difficult to change ownership of an NFT because there is no centralized database someone can hack or change. These attributes make NFTs relatively safe, although there are still concerns regarding network security and fraud.

While the security, convenience, and novelty of NFTs may make them an attractive investment, their newness also means that laws or regulations are still to develop. Areas like consumer protection, securities, IP, and tax will soon adapt to include legal classification, analysis, and treatment of NFTs.

In the area of IP, for instance, it is unclear what exactly a collector buys when he purchases an NFT, particularly if the virtual content is subject to copyright. Although blockchain can verify the provenance of an NFT, it cannot verify the authenticity of the content contained on the NFT; that is, although a blockchain can guarantee who minted the NFT, it cannot guarantee that a seller is the true creator of the NFT’s content. The terms governing two large NFT marketplaces, Topshot and Rarible, illustrate the tension between digital ownership and copyright ownership. Collectors must be aware of what they purchase and which rights are attached to the NFT. The terms and conditions of the selling platform are only a starting point for learning more about NFT transactions.

Stay in touch

Subscribe for Melchionna PLLC newsletter