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NFTs: The Next Generation of Authenticating Assets

The popularity of NFTs exploded during the pandemic. Here is a guide to NFTs and the opportunities they present to lawyers.

Non-fungible tokens, or NFTs, may appear to be a new phenomenon, but they have been around for several years. Their popularity exploded during the pandemic, as society spent more time online than ever before. At their core, NFTs are a unique digital asset that reflect some legal right grounded in copyright law. The NFT may be art or a digital collectible, like an emote (dance) or an avatar in a video game. NFTs are, by definition, scarce, and because they are “non-fungible,” they cannot be exchanged in the way that currency, or fiat, can be (e.g., exchanging five $1 bills for one $5 bill).

Some may question the entire premise of an NFT because the underlying asset, such as a digital artwork (possibly stored as a JPG or TIFF file), may be copied; it is not unique in the sense that it may exist outside the NFT. But that misses the entire point of NFTs, which reflects ownership rights recorded on a blockchain. Blockchain is a digital ledger that securely records transactions; it is typically distributed via a decentralized database managed by multiple participants, making it virtually impossible to hack or tamper with. In the case of NFTs, the blockchain typically may not store the asset underlying the NFT. Rather, the entry in the blockchain (created with the help of “smart contracts”) may only consist of a few lines, including metadata and a link to the asset. NFT sellers may have the option of allowing a buyer to unlock content, like a high-resolution image, once purchased. Fundamentally, the NFT is a digital version of a certificate of ownership or authenticity securely recorded on a blockchain. Put another way, in terms of physical art collecting, anyone can buy a print of a Picasso painting. But only one person or entity can own the original.

So, why the sudden rise in popularity? NFTs and digital art came together in 2017, according to the creator of “CryptoKitties,” as a way to “explore the concept of digital scarcity.” In a world where digital assets are painfully easy to replicate through the click of a button, NFTs provide a means for artists and creators to protect and monetize these digital works in a secure and meaningful way. With live events canceled in 2020, artists and creators were forced to think outside the box and explore new ways of creating revenue based on their art. Between that and a significant rise in online activity, the explosion of NFT sales during the pandemic was likely inevitable.

NFT investors may be unclear as to what they are buying insofar as their legal rights. For example, ownership of an NFT does not necessarily come with exclusive rights, such as the right to reproduce or prepare derivative works. Without such rights, the owner of an NFT may not, for example, be permitted to file a copyright-infringement action against someone who has copied the work underlying the NFT. Much like owning a limited-edition poster or an autographed copy of a book, a collector doesn’t have the right to reprint or distribute a work he or she owns to others. Those rights remain squarely with the original rightsholder. Despite this limitation, digital collectors have come to the table with lucrative offers for NFTs, making them potentially lucrative for many creators.

Adding to the confusion are misrepresentations by some attempting to cash in on the NFT craze. Entities promising to protect creators’ works through NFTs have popped up, fundamentally misunderstanding the entire purpose of NFT. Creators should be on high alert with respect to anyone promising things they cannot possibly deliver using NFTs, such as intellectual property “protection.”

The value of an NFT is ultimately tied to its ability to authenticate something. At present, nearly anyone can mint an NFT, and several marketplaces exist to buy and sell them. The potential for fraud and copyright infringement is significant. Accordingly, lawyers, particularly those with an intellectual-property focus, would be well served in learning some of the technical intricacies of NFTs to serve potential clients in the arts whose works may be commandeered (for example, by going through the exercise of minting an NFT on popular platforms). Lawyers may also serve a role in the NFT space by registering creative works with the Copyright Office and authenticating NFTs that reference those works.

In a world of infinite digital copies, reposting, sharing, and “likes,” lawyers may have the opportunity to carve a significant role for themselves. The concept behind an NFT goes beyond just CryptoKitties and the Gucci Ghost. Linked to the art is a self-authenticating block on a blockchain confirming its uniqueness.

This Practice Point was originally published by the American Bar Association Litigation Section. Patricia Diaz-Rodriguez is a senior director at Ankura. David L. Hecht is the founder and managing partner of Hecht Partners LLP. Christiane Kinney is the founder and president of Kinney Law, P.C.

© Copyright 2021. The views expressed herein are those of the author(s) and not necessarily the views of Ankura Consulting Group, LLC., its management, its subsidiaries, its affiliates, or its other professionals. Ankura is not a law firm and cannot provide legal advice.

Tags

data & technology, data strategy & governance, f-risk, article, f-transformation

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