Enrico Schaefer - April 1, 2021 - Non-Fungible Tokens (NFTs)
Cryptocurrency has been been in the press cycle for years. But now there is something new in the blockchain space. ‘NFT’ stands for non-fungible token. In this Tech Law Radio podcast, NFT attorney Enrico Schaefer talks about legal issues which are already being litigated by lawyers in the NFT marketplace. (See bonus video below, legal advice for buyers and sellers of NFTs).
Enrico Schaefer is a lawyer specializing in NFT company representation. Having expertise in non-fungible assets and smart contracts is important if your lawyer is going to understand the issues. This article and YouTube video cover the following topics in this informative article about non-fungible tokens.
Every bitcoin is the same and fungible and interchangeable. It is standard. A non-fungible token (NFT) is unique with each NFT being different than the other. A non-fungible token allows you to put a smart contract onto the blockchain that is unique unto itself.
Blockchain is a specific type of database that stores data in blocks that are then chained together. As new data comes in it is entered into a fresh block. Once the block is filled with data it is chained onto the previous block as a ledger or record of transactions. Decentralized blockchains are immutable, which means that the data entered is irreversible. For Bitcoin, this means that transactions are permanently recorded and viewable to anyone.
Different types of information can be stored on a blockchain including ledger information and smart contracts. With Bitcoin, the transaction is added as a block to the ledger. With NFTs, a smart contract is added to the block recording the key elements of the transaction and authenticating the data record. There is a private key associated with that entry, and it allows that record to be recorded and assigned to one or more people.
NFTs are being used to store smart contracts and authentication for digital artwork and other digital assets. A record is created on the blockchain that records a transaction associated with meta-data. Meta-data is usually going to be a URL that links to a digital asset, say a digital picture or a digital video. So, when an NFT gets put onto the blockchain, it records the terms and authentication of the transaction related to that digital image. It’s like a digital signature. Like an artist who signs a painting. That signed painting is going to be worth a lot more than a print copy or an unsigned version of that painting. just like in the real world, the signature of the creator creates scarcity. The scarcity that’s driving market prices into the thousands, tens of thousands, hundreds of thousands, and millions of dollars for a single NFT auction.
Lawyers with expertise in blockchain technology encounter unnecessary legal issues around NFTs which could have been avoided. Relatively few lawyers understand NFTs and have the expertise necessary to provide general counsel services to NFT companies, NFT sellers, NFT buyers, and NFT platforms.
People will bid on an NFT, a non-fungible token, associated with a piece of digital artwork. Sometimes they’re not going to get what they paid for, or the digital artwork will disappear. In other instances, the signature which acts as the authentication of the digital item turns out to be counterfeit or fraudulent. The person running the auction may not be the person who owns rights to that digital asset.
Let me give you an example. So, I can go online, I can do an image search, I can download that image, and I can run an NFT auction on that image, signing it Enrico Schaefer and auctioning it off to the highest bidder. How is a buyer at an auction supposed to know that they’re getting authentic digital artwork and that the person who is signing the certificate is the ‘rights holder’ to that digital image?
Your only protection on the front end is due diligence. You could end up with something that doesn’t exist, something that’s pulled down off the web or that is being authenticated by someone that does not own rights. On the back end, you may need to hire an attorney who understands NFTs
Some of these issues are going to give rise to claims of copyright infringement, price-fixing, or price manipulation. There are technical issues involved because people are creating NFTs on platforms, and auctioning the NFT using other software platforms. Sometimes, the person selling the NFT is storing the digital image on yet different platforms. Well, what if those platforms fail? What do the terms of service say about your rights?
There’s going to be litigation around these NFT marketplace issues. As with any emerging technology, there will not be many answers in the courts to these issues, and it will take years, if not decades, for various appellate courts to deal with NFT legal issues where they are non-standard. If you’re looking to create an NFT, participate in an NFT, auction hire an attorney who understands NFTs. Make sure that you own the rights you think you do.
If you are looking to buy an NFT or auction at auction, make sure that you get an experienced NFT attorney who specializes in blockchain to handle your matter. You want to make sure that the contracts between the various entities are drafted correctly. Your lawyer who knows NFTs will need to review all NFT related contracts and terms between all parties.
What happens if your NFT transaction goes wrong or what if the platform fails in some way? Then, of course, you will want to get an attorney involved to unwind that transaction or obtain damages or other relief. NFTs are going to be around for a long time. For the creative community, NFTs offer monetization opportunities that never existed before. Make sure to hire the best lawyer you can find who understands the legal issues specific to non-fungible tokens, blockchain technology and smart contracts.
If you’re a platform looking to build software as a service around the NFT marketplace, you want to get an attorney involved who understands NFTs to help build out the terms of service and the website policies for that platform. My name is Attorney Enrico Schaefer; we’ll see you next time.