Non-fungible tokens (NFTs) – legal and commercial considerations

NON-FUNGIBLE TOKENS (NFTS) – LEGAL AND COMMERCIAL CONSIDERATIONS

Non-fungible tokens (NFTs) have become increasingly popular over the past couple of years and continue to be a global phenomenon. With the NFT market generating billions across industries including art, music, fashion, real estate and finance, it continues to face many issues that touch on various areas of law. So what are the legal issues surrounding NFTs?

Intellectual Property Rights

Brand and Artists

In 2022, we saw countless copyright lawsuits between brands and artists, notably Hermès v MetaBirkins. Hermès filed a hefty trademark claim against artist Mason Rothschild and his digitally designed Birkin handbag collection. Rothschild argues, they are artistically relevant and do not explicitly mislead about their source or content. The trial continues in January 2023.

Buyers & Sellers/Artists

When you buy an NFT, typically, copyright and other Intellectual Property Rights (IPR) will be retained by the issuer or artists, and the buyer will be granted a right to display the underlying asset (the NFT).

What the purchaser of an NFT will own depends on any coding or smart contract embedded in the NFT (or the terms of sale in a traditional contract format). NFT creators may, for example, set up an NFT to create an automated ongoing payment of royalties or commission on any resale of the tokens.

Care needs to be given to how and whether IPR is licensed through the sale and subsequent transfer of the NFT, particularly to ensure that the issuer’s valuable brand is protected (including effective remedies if their IPR is misused).

Considerations

• If you are looking to sell your NFT’s, clearly define the rights you are giving away and the rights you retain.
• Carefully draft terms and conditions and ensure they are accessible and easy to read. Consider including this on the NFT minting page or marketplace where the NFT is listed or being purchased from.
• Ensure the licence or ownership agreement can be easily found. Consider including this on the minting page or marketplace.

Estate Planning

For cryptocurrency and NTFs, the decentralised nature of the asset ownership means that there is no centrally controlled registry where your ownership and title to the asset is recorded. Unlike a share register or land registry the assets are essentially owned by whoever has the private key (an alphanumeric password used to access the digital wallet). In effect, whoever has the key is the alleged owner and can deal with and transfer the asset. On death, unless the private key is known and the family beneficiaries know the details of the digital wallet, there is no way of accessing the assets.

To avoid the assets becoming inaccessible, the first step is to identify any crypto assets and make them known to the executors or advisors. It may be worth keeping an inventory of assets with details on how to access private keys, wallets, and exchange passwords. This in itself becomes a sensitive document and should remain confidential, yet accessible in the event of death.

 Environmental Considerations

 Although not so much a legal point, it should be considered that blockchains consume a great amount of energy. To put into perspective, in 2021 Bitcoin alone consumed approximately 123 Terawatt Hours (TWh), meaning Bitcoin uses more energy than 185 countries and is comparable to the annual energy consumption of Norway. Prior to the merge, Ethereum consumed approximately 83 TWh of electricity per year, which is the equivalent consumption of a country similarly sized to Finland. Ethereum has now supposedly reduced this footprint by 99.95% to 0.01TWh, which is a huge step forward for sustainable crypto and paves the way for other blockchains to make similar moves.

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