First there were CryptoKitties. Then came digital art, CryptoPunks and NBA Top Shot. But when Beeple’s digital art piece “Everydays: The First 5000 Days” sold at Christie’s for US$69 million, the NFT mania truly began. And as with any wave of media mania, there also came the groundswell of negative media and hand-wringing about NFTs.
We believe it is time to address the pros and cons of NFTs from a thoughtful, legal perspective. NFTs are not all evil nor are they a panacea for artists and musicians. Here are our thoughts on the most common questions we have received from our clients about NFTs.
WHAT ARE NFTS?
NFTs are non-fungible tokens issued on a distributed ledger such as a blockchain. They are similar to cryptocurrencies like bitcoin in that they can be identified individually and are authenticated through a decentralized system of nodes via a consensus protocol. However, they differ from cryptocurrencies in that they are each unique, indivisible, and “non-fungible.”1 NFTs are stored in “smart contracts,” which are automatically executable code that run on top of the distributed ledger on which the NFT is recorded. They provide a method of “provable uniqueness” and ownership for pieces of digital art, images, music and other content. NFTs are provably unique because each image and piece of content is linked to a single token stored in a smart contract on the distributed ledger and its ownership can be irrefutably established. While others may have copies of the same content, only one person can own the specific token authenticating ownership of the content. Currently, most, but not all, NFTs operate on the Ethereum blockchain. NFTs may help realize the long-touted but practically elusive goal of making blockchain technology a powerful tool to protect artists’ rights to benefit from their creations without the need of intermediaries and to protect investors by helping establish provenance of art works.
WHY ARE PEOPLE SPENDING MASSIVE SUMS ON NFTS?
NFT purchasers often are collectors who view NFTs as a way to support their favorite artists, actors, musicians, and athletes. While there have been some recent high profile large dollar sales, most NFT sales are at a reasonable price that provides a much-needed way for artists, collectors, and musicians to monetize their work. As with collectors of many items (antiques, baseball cards, art) many collectors purchase NFTs because they hope they will increase in value and will be a good investment. The legal and regulatory analysis of an NFT will be heavily influenced by how it is intended to be used and how it is marketed. Whenever there are high-profile stories of ordinary people getting rich from new technology, some bad actors will try to take advantage of the situation.
WHAT ADVICE WOULD YOU PROVIDE TO ARTISTS OR MUSICIANS WHO WANT TO ISSUE THEIR OWN NFT?
Given recent high-profile stories of people getting rich from new technology, there have been media reports of bad actors who will try to take advantage of the situation.2 If you are an artist or musician who is interested in issuing NFTs as a way to monetize your creative content, you need to be careful on how you proceed. For instance:
Ensure that the piece of art/image, digital music or other creative work associated with the NFT is unique and authenticated. Ensure that you have all of the rights necessary to reproduce and distribute the work.
Work only with a reputable technology company that will issue the token on your behalf in a manner that is transparent and secure.
Inquire about the technology company’s position on payment of royalties. While certain token standards prohibit royalties (because they are viewed as stifling the ability to freely transfer tokens) there have been discussions in the Ethereum community about the creation of a royalty standard.3 At present, artists generally receive a payment when their NFTs are initially sold,…