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WHAT ARE NFTS?

NON-FUNGIBLE TOKENS ARE A NEW DIGITAL ASSET CLASS WITH UNIQUE RISKS AND OPPORTUNITIES

While most people believe the NFT is the image itself (ie the Bored Ape image), the NFT is an Ethereum smart contract recorded on the Ethereum blockchain that indicates ownership, among other simple contract terms. The token’s ownership, transfer history, purchase price, and other basic data related to the digital asset are recorded on the public blockchain in a secure and immutable way. NFTs solve a previously unsolved set of problems and create ownership and transfer opportunities that did not exist previously.

Before NFTs, there was no easy way to gauge the authenticity or scarcity of digital works on the internet. Since digital works (whether photos, art, videos, text, etc.) are so easily copied and pasted, knowing who created the original work and who currently owns it has been difficult, if not impossible. NFTs allow one owner to create a chain of titles back to the original owner/author/creator. For each ‘Bored Ape,’ there is one owner. NFT smart contracts can trace authenticity back to their origins. Any digital file can be stored as an NFT to identify the original. NFTs are typically scarce items, either one or a limited series. They’re like any other collector’s items that can be authenticated and ownership proven.

Examples of  Legal Issues Related to NFTs

There are an endless set of legal issues related to NFTs.  Because they are new, there are some risks that are still unknown. Some common issues involve:

  • Buying and Selling NFTs creates a variety of issues such as whether you have the rights needed to sell the NFT, and what you are really buying when you purchase an NFT.
  •  If you are a technology company launching an NFT, you need to make sure you own all of the rights necessary in the digital asset to run the sale.  You also need to create your NFT smart-contract terms.  Are you taking royalties on future transfers?
  • Each NFT sale is unique.  One often overlooked issue is the copyright license that goes with the NFT. typically, the NFT seller retains copyright ownership of the digital asset and licenses the purchaser certain use rights.  More importantly, the copyright license limits use.  For instance, most NFT sales limit the commercialization or monetization of the NFT beyond future transfers.
  • If your NFT auction is associated with a software platform such as a metaverse, you need to carefully draft the use agreement because it may be impossible to change those terms around a new business model in the future.
  • If you are a brand launching an NFT auction and the digital asset includes your trademark or logo, you need to ensure that any future use is consistent with your brand message and values.
  • Fraud and theft of crypto, NFTs, and digital assets is rampant.  How do you get your NFT or tokens back when someone steals them?  Sometimes, retrieval is possible.
  • Securities and investor issues for token ICOs are evolving.  Security Token Offerings (STOs), DAICO, Simple Agreement for Future Tokens (SAFT), Interactive ICO (IICO), and Token airdrops have unique legal issues and liabilities associated with them.
  • Investor fraud and offering misrepresentations about the token, the software, or utility can give rise to liability for the crypto company offering the token, coin, airdrop, or other crypto assets.  Consumer protection laws can create liability for any false representation about the offering, the bonus or incentive, or their underlying technology.
  • Some clients want to create their own smart contracts and token contracts to be added to a blockchain. Understanding what the contract terms should be and how to program those into the smart contract are critical.  In most cases, it is not possible to amend the contract later.


 

FREQUENTLY ASKED QUESTIONS ABOUT NFTs

What is a non-fungible token? contracts recorded on the etherium blockchain. Bored Ape’s are each unique (or a limited series of) non-fungible tokens. Non-fungible tokens are unique because they add unique contract terms linked to the token.

A fungible token is like a stock certificate. Fungible tokens are all the same. Bitcoin and Etherium are fungible tokens. Each token is identical.

Ethereum is decentralized open-source ledger software that securely executes and verifies application code, the smart contracts referenced above.

An initial coin offering (ICO) is an event where a company sells a new cryptocurrency to raise money. Investors receive cryptocurrency in exchange for their financial contributions.  The primary difference between ICOs and IPOs is that IPOs involve selling highly regulated securities overseen by the Securities and Exchange Commission (SEC).  There are significant disclosure requirements and investors must be qualified, typically having assets worth more than $1,000,000. ICO’s are currently not regulated by the SEC, although regulations are likely coming for coin offerings that are considered securities.  Many crypto companies identify their tokens as ‘utility’ tokens in order to avoid regulatory oversight.  Our attorneys expect a growing number of lawsuits and litigation around ICOs.

A token is an abbreviation for a ‘token contract’ and is the information recorded on the Ethereum blockchain. Smart contracts are applications that run exactly as programmed without any possibility of downtime, censorship, fraud or third-party interference. The blockchain runs on large numbers of decentralized computers and therefore never shuts down unexpectedly or becomes unavailable. The contracts recorded in the token cannot be changed, hacked, or manipulated.

The Attorneys at Traverse Legal have been globally recognized for their experience and results. We can provide legal expertise for variety of industries and practices areas such as blockchain, cryptocurrency, NFTs, and smart contracts.  Contact our team today!

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