From first-time investors to celebrities, and small brands to international venture capitalist firms, NFTs are quickly evolving beyond the status of niche commodities and into immense capital opportunities that have the potential to completely reshape the financial industry.
In 2021 alone, NFTs grew 21,000%, with trading hitting $17.6 billion and it is expected by 2026, the industry will reach a market size of $147.24 billion. While this is a field obviously rife with opportunity, the decentralized nature of NFTs holds inherent risks, risks that can leave individuals financially and legally vulnerable.
Today we’ll be exploring what NFTs are and what current legal issues impact NFTs.
What is an NFT?
NFTs, or non-fungible tokens, are distinctive digital assets, formed by a smart contract with metadata and secured cryptographically on a blockchain, or a system that tracks the transactions of cryptocurrency through a peer-to-peer model. While most people associate NFTs with digital avatars or profile pictures, they can actually take the form of art, videogame assets, music, digital records, and more.
Ultimately, the two elements that define an NFT are the non-fungible aspect, wherein the value of each is not intrinsically interchangeable, and the ability for it to meet the token standards, ERC-721, related to unique ownership, and ERC-1155, related to fungibility.
The popularity of NFTs comes from its capacity to create new forms of revenue-free from interference from government and other regulatory bodies and its method of connecting NFT owners, building a community around a common goal of seeking the most culturally relevant and valuable content available. With all its benefits, there can still be many drawbacks to being part of a relatively new marketplace and these drawbacks have clear legal implications.
What are the Current Legal Issues Impacting NFTs?
While many NFT owners see the lack of regulation as a perk of NFTs, without laws and oversight, there can be many issues that arise, especially when it comes to ownership and intellectual property rights.
In terms of ownership, there is currently no system deeming what property rights one holds when one purchases an NFT, especially due to the royalty system in place wherein many individuals can be profiting from the value of the token itself.
As a result, it cannot be assumed that when one is transferred an NFT, they possess the asset fully, making it difficult to parse out which elements of the NFT belongs to whom. Related to this are the issues that arise with intellectual property rights and NFTs. While the record of purchase on the blockchain can securely provide clarity on the rights of the digital asset, it is unclear how intellectual property rights are transferred from the creator of the NFT, due to a lack of a standard, signed contract. These are just two of the many areas in which legal input could better fortify NFT transactions.
Overview
With the nature of NFTs and the role of the legal system in managing issues with NFTs can be murky, the need for legal assistance in managing issues related to this revenue system has never been more clear. It would behoove legal teams to not only become more familiar with the NFT system but advocate for a comprehensive legal framework to address issues that arise within this novel, industry-changing marketplace.
In clarifying the nature of transferability and ownership elements of NFTs, the legal landscape has the opportunity to bolster the growth of NFTs for all, prevent users from being vulnerable to fraud, and revolutionize how creators and supporters create capital while building community.