Since 2021, non-fungible tokens (aka “NFTs”) have increased in popularity. But what is this emerging technology, and, more importantly, what opportunities and legal liabilities does it introduce?
What are NFTs?
Before diving into the legal implications of NFTs, we first understand the nature of this emerging technology. At its core, an NFT is a unique digital token on a blockchain ledger. Blockchain ledgers are immutable record-keeping systems. Blockchains operate in a decentralized manner: not controlled by any single entity or person. It is made up of a network of various computers, often called “nodes,” which verify information and data stored on the blockchain. This makes blockchain technology extraordinarily reliable and secure because each node must verify and confirm the information held on the ledger. In other words, if someone attempts to breach or change data stored on a blockchain ledger, they will have to compromise each node on the blockchain, which is nearly impossible.
Blockchain technology is most infamously associated with cryptocurrencies like Bitcoin and Ethereum. However, the technology has several applications beyond cryptocurrencies, including non-fungible tokens (“NFTs”). An NFT is essentially a digital receipt for a digital asset and provides a way for creators to exploit additional value from their works. Once an NFT is “minted” (the industry term for “created”) on a blockchain, they are immutable because it is permanently stored and irreversible. NFTs are also “non-fungible,” meaning they are unique and cannot be duplicated. Considered in the following illustration: an NFT is like owning an autographed poster of your favorite celebrity or athlete. There can only be one owner of that autographed poster—you. Likewise, only one person can own a particular NFT.
Artists and crypto-enthusiasts have embraced NFTs to monetize their artworks and musical works and exploit their intellectual property rights. However, like with any new technology, there a severe legal implications NFT buyers, sellers, and creators should consider.
Intellectual Property Concerns
NFTs create a new way to distribute and monetize various works, including works subject to copyright protection and publicity rights. Copyright protects original artworks, photos, and other creative works, giving the author exclusive rights to reproduce and distribute those works. In many states, including Nevada, rights of publicity prohibit using another’s name, image, or likeness for commercial purposes without prior authorization. NFT creators and buyers alike should be aware of the scope and limitations of intellectual property rights when navigating this new space. The rights granted by an NFT seller may or may not include the underlying intellectual property rights a buyer may expect. Continuing the illustration of the autographed poster above, your ownership of an autographed poster does not convey any intellectual property rights. In other words, you do not own the right to make copies of that autographed poster (copyright violation), nor do you have any rights to the celebrity or athlete’s name, image, or likeness rights. Similarly, when you buy an NFT of artwork, you do not have any intellectual property right in the underlying work unless the author expressly conveys it.
Fraud Concerns
In addition to intellectual property concerns, NFTs can be a theft mechanism. When you mint an NFT, typically, there is no way to verify that you are the actual owner of the underlying work. This means anyone can take a screenshot or picture of someone else’s work, create an NFT, and sell it for profit.
Civil Procedure
NFTs raise jurisdictional issues as well. In ordinary civil lawsuits, you have mechanisms to determine who the parties are and where they reside. However, in the NFT world, this has become more challenging. As discussed above, blockchains are decentralized, meaning there is no central company, person, or computer server that controls and logs the information. Instead, anonymous nodes verify and store the information on the blockchain. Additionally, NFT creators enjoy anonymity, using cryptocurrency wallets and pseudonyms to disguise their true identities. Consequently, tracking down bad actors in the NFT space can be difficult. Plaintiffs may be at the mercy of NFT marketplaces to track down fraudulent actors or, as an alternative, may seek jurisdiction in rem if they can determine where the NFT is located.
About this article: This article was originally published in the “Cyber Law” issue of Communiqué, the official publication of the Clark County Bar Association, (October 2022). See https://clarkcountybar.org/member-benefits/communique-2022/communique-october-2022/.
About the author
Caleb L. Green, Esq. is an intellectual property and government affairs attorney at Dickinson Wright, as well as the Treasurer of the Las Vegas Chapter of the National Bar Association.
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