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NFTs (‘non-fungible tokens’) are arguably the second most popular use-case of blockchains, the first being cryptocurrencies. While the latter consist of indistinguishable tokens which are exchangeable with each other at a 1:1 ratio, NFTs are ‘non-fungible’ because each is considered to have a unique set of attributes. Here’s an example of what these attributes may look like:
In simple terms, NFTs do not function as mediums of exchange but as digital collectibles which carry symbolic value. Owning a “Cryptopunk” or a “Bored Ape”, for instance, signals membership of a rarefied group which has ‘made it’ in crypto. Because of this symbolic characteristic, the monetary value of most NFTs is impossible to predict. At a given point of time, it is purely a function of dominant cultural trends.
While digital art meant for use as profile pictures (PFPs) are presently the most popular form of NFTs, it is important to note that any digital file, including audio and video, can be turned into an NFT. This is because in most cases the actual file data is not stored on-chain. Instead, when an NFT is minted on a platform such as Opensea, a new token is created which stores a reference to the original (url, folder location, etc.) as part of its identity, i.e. in its metadata.
Despite the fact that most NFT projects make direct claims to ‘ownership’, the token itself stores nothing other than this metadata reference. For this reason, it is entirely possible for two identical images to be minted as distinct NFTs, i.e. in the above example the “original image” can be the same even when its “token ID” and “name” are different.
While considering the legal implications of NFTs, it is crucial to underscore that every ‘token’ is a representation of something. In the traditional legal sense, a registered and notarised title deed represents title to the house. In a similar fashion, a negotiable instrument represents a transferable debt payable to the bearer. Such examples tell us that ‘tokenisation’ already has a rich and variegated history which is not only recognised in, but sanctified by, the law.
With the rise of NFTs, tokenisation has simply moved into the digital realm. While the token itself is digital, it can be made to represent any real asset. For instance, the rules of title ownership in a hypothetical jurisdiction may mandate that property-registration occur on a particular blockchain once adequate consideration is transferred. Here, the NFT would merely represent ownership of a real asset which has been otherwise guaranteed and sanctified by the law. To say that NFTs themselves guarantee ownership of anything remains a dubious claim. Even in the case of digital assets, authentic NFTs are best understood as those which have been digitally signed by a recognised artist/issuer. In the cryptopunks example considered above, note that all the “unique attributes” are merely visual traits. As such, they can be (and in fact have been) easily duplicated. This implies that the “proof of ownership” a cryptopunk holder actually possesses is merely a claim to a token digitally linked to (or ‘signed by’) LarvaLabs.
As is evident from the foregoing, the most far-reaching legal consequence of NFTs lies in the world of intellectual property rights. Because of their ability to generate unique tokens, blockchains provide robust tools for digital rights management. This explains the eagerness of big brands, artists, media platforms and gaming companies, etc. to move into this space.
Having said that, there are many grey areas in which it is not possible to determine whether an NFT holder is the actual owner of an underlying asset. Instances of copyright and trademark infringement, for instance, are quite widespread in the cryptoverse. Oftentimes when an NFT project is successful, many iterations of it may be released such that they become barely distinguishable from each other. The copyright issues such projects raise need to be analysed on a case to case basis, and in light of evolving precedent. If any commercial use-rights flow from the NFT project (for instance the right to specific merchandise or access to events) then they must be carefully drafted before being promised to the NFT holder. Presently, in our view, most NFT projects do not take these challenges seriously, and therefore carry the risk of serious legal conflicts in the future.