Legal Implications of Owning and Minting NFTs

May 2021. If you’ve been following cryptocurrency or blockchain technology, you may have recently heard about something called NFTs. This quick overview is to help you get an idea of what they are, how they work, and why people want them.

What are NFTs?

NFT stands for “non-fungible token”, and no, it has nothing to do with mushrooms. When something is non-fungible, it means it’s a completely unique, one-of-a-kind item that can’t be replaced or replicated.

For the art aficionados in the room, you may know of Banksy’s Girl with Balloon murals spread throughout London, and the subsequent painting that found its way into a Sotheby’s installation in London in 2018. You might also remember how guests looked on in horror as the painting – the only one of its kind – began to self-destruct. Love really was in the bin after all.

Blockchain enthusiasts can breathe easy knowing their NFTs can’t be decimated in a similar way. In fact, that’s one of the touted benefits of NFTs: the inability to replicate them makes them not only unique but indestructible. That’s because NFTs are entirely digital and created using blockchain technology.

How do NFTs work?

The blockchain is an online ledger where transactions are recorded. For example, Bitcoin and Ethereum both operate on blockchain technology. Once a transaction is laid down, it can’t be removed or changed. The transaction produces something called a hash code, which is a big string of letters and numbers that incorporates information from the transaction.

Hash codes can be used to identify unique digital assets, called tokens. NFTs are unique digital assets that are tied to real-world objects, like songs, photos, artwork, or even tweets. The non-fungible part means that the token can’t be replaced or exchanged for something identical.

Here’s the tricky part: when someone buys an NFT, they’re typically not buying the actual object it describes – they’re only buying the NFT. The NFT can act as a sort of certificate of authentication. Depending on what was coded when it was minted, the NFT can certify ownership of a physical asset like a painting or a piece of music, or a piece of digital art like a 3D Metaverse rendering. If the NFT is on a blockchain like Ethereum which can handle executable code, the NFT can contain so-called smart contracts (which aren’t very smart, they’re just code) that can do things like automatically remit to the original owner of the NFT a percentage of each subsequent sale of the NFT called resale royalties.

Why would someone want an NFT?

Only one person can own the NFT at a time, so they’ve become somewhat of a novelty among tech and cryptocurrency enthusiasts. Although you can copy digital files, you can’t copy ownership. And just like you can own a copy of Van Gogh’s Starry Night, a copy doesn’t give you ownership. But it does give you cool bragging rights, which a lot of people seem to want these days.

Bragging rights aside, NFTs have given artists a big advantage in leveraging their rights, accessing new markets, and expanding creativity. And those bragging rights can come with a steep price tag. The artist Beeple sold Everydays: The First 5000 Days for over $69 million USD at a Christie’s action. Death of Old, a 50-second video by musician Grimes, went for $388,938 USD.

NFTs can also be minted in a series, say 5,000 as unique tickets for an event. According to Ethereum, NFTs are compatible with anything built using its platform. An NFT ticket for an event can be traded on every Ethereum marketplace, for an entirely different NFT. You could trade a piece of art for a ticket!

How do you make money off NFTs?

Several marketplaces have opened up for artists to sell their work. San Francisco-based startup Bitski aims to be a Shopify-like storefront for creators. Niftie Gateway calls itself the “premier marketplace” for Nifties” (NFTs). And Mintbase is a platform that helps artists get started on creating and selling their digital assets.

NFTs are perfect as digital merch items for recordings artists to sell to fans, and for photographers or other visual artists to sell in connection with limited editions in either digital or physical formats, because the NFT’s can be authenticated.

NFTs are also used as investment vehicles, similar to cryptocurrency like Bitcon and Ether. Like all investments, keep in mind the potential future value and the various tax laws in your jurisdiction when getting into the market and selling. Note, the tax man might be watching your social media feeds to compare lifestyle with reported income. Like other assets or investments, when it comes time to sell or when you receive revenue, any profit you made is taxable, in principle, even if done in a Metaverse and for example occurring entirely over a blockchain.

Here’s 8 Legal Implications of Minting & Owning NFTs

1 - The NFT is just lines of code, which themselves are capable of copyright protection. But in the process of becoming minted, the NFT will digitally point to a separate work of copyright, a trademark and/or person elsewhere on the Internet, and perhaps describe a separate physical object.

2 - To the extent that the NFT points to a protected work like a sound recording, composition, artwork, trademark, etc. or to a living person, the right to point at that work or person for commercial gain might need to be cleared.

3 - To the extent that a copy of the protected work appears in a link on the Internet meaning that the copy is hosted somewhere online, well, that’s a copy that’s been created and without clearance it’s an infringing copy.

4 - This is an evolving area that is fact-specific. A guiding principle here is that if you’re minting an NFT or considering buying one and wondering if it’s legal or authorized, you’d best be watchful because the way the law works generally speaking is, if you’re leveraging someone else’s rights for commercial gain, you’re likely going to need permission – a license – and that permission is likely going to cost you money – otherwise the NFT is not lawful and you’re setting yourself up to be sued for making it and/or finding yourself owning an NFT that’s not worth much or anything because it’s an unauthorized bootleg.

5 - Every NFT must have an owner and this is of public record and easy for anyone to verify. However, for example, owners can still hide behind anonymous emails accounts used when the NFT was minted and reserved only for NFT ownership so there is no other digital footprint evidencing the real person like an Instagram page.

6 - Someone buying an NFT should consider where the underlying media resides and who has the obligation of storing it. That is, what if the NFT’s media resides on a server and then the server goes offline? The NFT will no longer be viewable because it won’t point to anything live.

7 - Ownership of the copyright in any works that are automatically purchased with the NFT still needs to be confirmed by an assignment signed in writing in order to comply with typical copyright law formalities. In other words, an additional, written assignment is needed to convey the full IP rights in the underlying work – if that’s the intention – otherwise the NFT alone would be purchased. An area that's ripe for confusion and litigation is whether there has been a uniqueness agreement (e.g. that only one NFT would be minted by the copyright owner for that particular digital asset and not part of a later series, perhaps), which could be written or implied (since it was in the nature of a license or contractual term and not full ownership conveyance).

8 - NFTs are digitally unique – no two NFTs are the same. This is the exact scarcity that can give an NFT value depending on the demand to own it. There’s been some speculation online that artists need to hurry up and tokenize their works before infringers do it instead, thereby ruining the opportunity to monetize the work through an NFT. There is some truth to that, but the mere fact that someone else has minted an NFT for a specific work, does not mean that the true owner is foreclosed from doing the same thing. In that situation there would be two NFT’s: the authorized NFT, and the bootleg. The bootleg might have satisfied some level of demand for owning the NFT, and perhaps thereby decrease the desirability of the authorized one. But then, what’s the point of owning a genuine fake? That seems to defeat the main purpose of NFTs, which is to make and own digital assets that are unique.

Special thanks to Nicole Dinn for her assistance in preparing this article. Nicole is currently completing her law degree at Osgoode Hall Law School, Toronto, and will soon begin a clerkship with the Ontario Superior Court of Justice.

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