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What Lawyers Must Know About NFTs and Digital Art

Anne Kramer Apr 11, 2022
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NFTs are Verifiable, Indestructible and Indivisible

Source: Pexels

Non Fungible Tokens (NFTs) and digital art have reached their niche in the investment market and as these digital assets are new, lawyers need to understand some legal perspectives. There is no scope for error when it fomes to digital assets as they are easy to authenticate and identify and even if these change hands many times. NFTs are digitalised assets existing on the blockchain, and not possible to delete, destroy, or even tamper with them. If an owner loses the wallet, the NFTs are lost. Degradation or breakdown of digital storage may be concerns. NFTs can’t be sub-assets by breaking them up. While investment in a painting can’t be fractioned, NFTs offer opportunities for people to own an asset percentage through fractional ownership.

Why People Invest in NFTs

NFT investors collect specific works to support the musicians, athletes and artists and are delivered on a blockchain as in cryptocurrencies for easy identification and authentication as each NFT is unique, non-fungible, and indivisible, be it music, digital art, an image, or some other content. Each NFT is unique, linked to the token of the smart contract on a distributed ledger, establishing ownership.

Source: Pexels

Many copies do not reduce the creator’s property rights. NFTs can prove ownership of physical assets of collectibles like digital art, music, event tickets, and domain names. Some NFTs are can make millions (like for instance, the NFT of Twitter founder Jack Dorsey’s first tweet was bought for $3 million), while others go for much cheaper. Investors buy them hoping their value will increase. Each NFT has a transaction chain on a new block enabling ownership is tracked seamlessly during its existence.

Giving Legal Advice to NFT Issuers 

A NFT issuer creates a unique, authenticated NFT with rights to reproduce and distribute. They  choose a reputed technology provider for issuing tokens, through a secure, transparent process, taking care of royalty payments applicable. Creators of NFTs receive compensation on the first NFT sale but may not be paid if re-sold later. NFT creators choose their NFT marketplace carefully due to big promises, while others need down-payments for issuing digital assets. Blockchain differences are substantial, and creators must choose wisely. Assist clients by ensuring clear disclosures about the NFT as a royalty vehicle, established trading markets, with special considerations and risk factors.

Legal Advice for NFT Collectors

Source: Pexels

NFT collectors buy a unique code on a blockchain for the product. Whatever the purchase, it is kept in a digital wallet, often controlled by some third party. The client’s clarity as to why they collect that particular NFT and the actual value of the NFT relies on factors, such as the artist’s reputation, the origin of the work, etc., to define if the value remains stable, increase, or decrease. Owners own the token with a code linked to it. The underlying work has copies which others could possess and they must know where the work referenced by the NFT code, is stored, not always on the blockchain. Your clients must know that NFT ownership could trigger many laws in USA, including securities, consumer protection, anti-money laundering, intellectual property rights and commodities laws. As a lawyer, ensure that your client’s NFT transactions are transparent and clear. Whether the clients are NFT creators or investors, advice is needed to avoid legal hurdles.

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