NFT stands for non-fungible token, it is a unique token that is attached to a digital asset be it in the form of an image, a song, an animation or a video. Ownership of NFTs is logged and authenticated using decentralized blockchain technology, mainly cryptocurrency Ethereum. An NFT becomes a digital certificate proving ownership and or rights to a unique asset, Blockchain records the ownership. Every transaction, future sales and transfers are recorded on the blockchain when the token is logged. This therefore creates a record of authenticity and ownership which cannot be deleted or counterfeited and is easily accessible. Through the blockchain technology, there is a creation of a market where NFTs can be sold and resold.
Despite the fact that there might be many identical pieces of an NFT or related assets, the original art can be sold by the digital artist at a high price because of its authenticity. By so doing, “the NFT market mirrors the traditional art market, where original artwork is considered to be worth substantially more than mass-produced prints.” However, there are implications of several laws that come with tokenization, these include but not just limited to licensing, intellectual property, anti-money laundering, etc. The NFT market, the legal and regulatory associated with NFTs and digital assets are still evolving, therefore, NFTs continue to raise some interesting legal considerations, many of which are ambiguous or unresolved by the current laws in place.
License Rights
The first-order problems with NFTs are ownership and license rights. The buyer usually receives a license to the asset represented by the token instead of actual ownership of the token. Usually, the person who created the material or asset will keep the copyright. Different licensing conditions may be used, ranging from limited commercialization rights to personal and noncommercial rights. Whatever the preferred business model, the buyer’s rights must be precisely and clearly stated in both marketing materials and the conditions of the license.
Marketing that is inaccurate or misrepresentation cases where for example, the seller or owner of the asset assures the buyer that they now own an asset which in actual fact the buyer only has a restricted license could result in a number of legal claims as well as other problems. License conditions therefore should explicitly specify rights and what a buyer is and is not permitted to do with their purchase. In order to establish a legitimate contract, it is also crucial to make sure that there is affirmative acceptance.
Ownership Rights
According to several NFT projects, smart contracts can be used to grant copyright to assets. Whether such an assignment is legal is up for debate. A copyright assignment is only valid if it complies with two requirements:
- It is in writing; and
- it is signed by or on behalf of the assignor.
This is stated in section 101(3) of the Copyright Ordinance, which is used by many corresponding copyright statutes in Australia, U.S., UK and other jurisdictions. Transference of NFTs ownership is done through smart contracts which are self-executing computer programming codes. Contrary to the name and what they may appear to be, they are not legitimate legal contracts the traditional contracts we are used to.
As of yet, the blockchain technology together with the system of smart contracts have no effective protocol over the integration of copyright terms to into the token. The reason for this is because the design of smart contracts does not allow or rather humans cannot read them because they are a code run by a computer. The smart contract system lacks in that it is not equipped to deal with actual legal relationship and entitlements.
When an NFT is listed on marketplaces, there is usually no copyright information shown on the listings thus making it difficult to determine what rights the buyer has. In order to find out about the ownership rights, one has to visit the NFT projects websites in order to find out and examine the Terms and Conditions pertaining to the NFT in question published by the project creator. It also crucial to note that they are not signed by or on behalf of the assignor. Therefore, the validity of an assignment of ownership through smart contracts is questionable.
It is of paramount importance to note that one is not buying the digital work itself when they buy an NFT, hence, the selling of the NFT does not immediately transfer the artwork’s copyright. The rights to reproduce, distribute, alter, and perform or publicly exhibit the artwork might be retained by either the artist or the third-party vendor.
Intellectual Property Rights
You may be held responsible for infringing the intellectual property of third parties if you mint an NFT for a digital asset that contains content such as artwork, music, or video clips that you do not own or have a legitimate license to use. Minting an NFT is the action of converting digital data and files into a blockchain-based NFT, or rather publishing your token in a unique manner on the blockchain to make it purchasable. You do not have the right to provide the buyer of your token any rights at all if you do not have the necessary rights to the intellectual property used in your NFT. You could be held liable for more claims if you gave false information about the rights that were transferred along with the sale of your NFT.
Even unintentionally, exchanges or platforms that sell or display digital goods that contain third-party copyrights or trademarks may be subject to IP claims. For example, Jack Dorsey’s NFT, his first-ever tweet was bought for about $3 million, the buyer of the NFT did not obtain IP rights over the tweet itself, thus, he cannot make print outs of the tweet and sell them without Jack Dorsey’s permission as he still owns the copyright to that tweet. Unless there is a separate IP assignment agreement of the NFT, the original creator retains ownership of the artwork and other related rights.
Anti-Money Laundering
In some cases, high-valued NFTs can be used to facilitate money laundering. High-value NFTs can occasionally be utilized to help in money laundering. A study on how the art market aids in the financing of terrorism and money laundering was released by the US Department of Treasury. The study covered a variety of topics, including the dangers of financial crimes in relation to digital art and NFTs. The study discovered that the high-value art market has several intrinsic characteristics that could make it susceptible to a variety of financial crimes.
Conclusion
The law around NFTs is still evolving because of a lot of gray areas associated with digital assets. Integrating digital assets into the law will be of much use because they are the most happening thing at the moment and likely to take over in the next few years. Amendments of laws especially copyright laws and ownership rights have to be done in order to maintain transparency. The market and the law will have to develop and establish model contracts and practices that are easily understood and user friendly when transacting possibly through smart legal contracts, in order to address uncertainty and reduce the disputes associated with NFTs.
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