NFTs have gone mainstream. But what are NFTs? Should your business develop its own NFT? How are they regulated? In The NFT Collection series of alerts, we will delve into these questions to help your business understand this new technology.
What are NFTs?
Non-fungible tokens, or NFTs, are digital certificates of ownership over certain, usually digital, assets that are held on a blockchain. Most commonly, NFTs are being sold in relation to digital artwork, but the underlying items could also be a video, music file, in-games items, tweets, or physical items like trainers or even property. Using blockchain technology, each NFTs contains transactional data that is open to the public and allows the owner to verify ownership of the NFT.
Since NFTs relate to a particular underlying item, each NFT is unique and cannot be swapped for another, hence the name non-fungible (meaning non-changeable). However, an important thing to note is that users are not buying the digital work itself. What you are buying is merely a collection of code known as metadata, which links to the ‘true’ version of that work. This means that owning it might not prevent anyone else from downloading, viewing, or commercializing the digital artwork.
Last year, NFT or ‘non-fungible tokens’ sales skyrocketed so much that the term was awarded Word of The Year by Collins Dictionary, and some of the highest value brands are exploring the potential of NFTs. According to the Financial TimesNFT sales in 2021 totalled over $ 40 billion with the most expensive NFTs to date being Pak’s ‘The Merge’ NFT selling for $ 91.8 million price tag, and Beeple’s digital art work, Everydays: The First 5,000 Days was sold for over US $ 69.3 million.
There are currently multiple online platforms where users can sell or purchase NFTs, the largest is OpenSea. NFTs are purchased using cryptocurrency such as ether (ETH), the default currency on the Ethereum blockchain. Unlike NFTs, cryptocurrencies are fungible, or interchangeable (but only in respect of that cryptocurrency, so, one bitcoin could be swapped for another bitcoin, but that bitcoin could then not be swapped for an ether). On the other hand, an NFT is valuable because it is non-fungible, as every NFT is unique and cannot be directly replaced by another NFT. It is in effect the digital signature of an artist, and is a means of authenticating the artwork and your ownership. Valuable, the company that minted the NFT of Twitter CEO Jack Dorsey’s first ever tweet, encapsulated the true meaning of the value behind NFTs:
“Owning any digital content can be a financial investment, hold sentimental value, and create a relationship between collector and creator. Like an autograph on a baseball card, the NFT itself is the creator’s autograph on the content, making it scarce, unique, and valuable.”
Jack Dorsey, CEO, Twitter
Interestingly, in May 2022, the UK’s High Court has recognized NFTs as “property” in a legal sense. The legal counsel on the case said the ruling “removes any uncertainty that NFTs are property in and of themselves, distinct from the thing they represent, under the law of England and Wales. ”
NFTs present an interesting opportunity for businesses to monitor their intellectual property rights alongside other companies in the latest investment trend. The most obvious way is to sell your NFT to a third party, but further revenue can be generated by creating smart contracts which automatically make royalty payments equal to a percentage of a subsequent sale, to the original NFT seller (ie, your business). For instance, this continuous revenue stream would be a useful avenue to explore for businesses in the gaming sector who may wish to move their digital content to a decentralized sphere, reducing their overhead while still deriving a benefit from subsequent sales.
However, when an individual purchases an NFT they take on risk as an NFT is simply unique metadata about an asset added to a blockchain – not the physical asset itself or any intellectual property rights associated with it. By way of example, the sale of Beeple’s digital artwork mentioned above did not give the owner any rights over the artwork itself, only an authorized certificate – the copyright itself remained with Beeple. It is possible to go one step further in NFT sales by simultaneously transferring the intellectual property rights associated with the underlying asset to the NFT purchaser.
It is possible to own a short text address via the Ethereum Name Service, which functions similar to the internet’s Domain Name Service. This short address can be used in place of a crypto wallet address, which are long alphanumeric strings. We would recommend that any brands considering entering the NFT space immediately register using their brand name, as there is currently little way for a brand owner to complain of a third party doing so, and this could prevent issues with consumer confusion further down the line.
Another thing to consider is the permanence of the blockchain, once an NFT exists it exists in that blockchain forever. This has several consequences the first of which being truly deleting a NFT will be impossible although it could be moved to a wallet with no or little access permissions.
Businesses can leverage the sudden popularity of NFTs to create new financial opportunities for themselves, as long as they understand the potential risks. It will be important for businesses to understand any local regulatory concerns and what the role of IP rights will be in the sale of NFTs. To assist, in our next bulletin, we will consider the regulatory considerations, or lack thereof, for a number of key jurisdictions.