T&Cs and NTFs

What is an NFT?

A Non-Fungible Token (NFT) is a type of digital asset or token of a small piece of data linked to an object, such as a unique image, cartoon or animation. It is critical to understand the difference between owning an NFT and owning the underlying asset and the copyright attaching to the asset, which requires an analysis of the terms of the contract. Non-Fungible simply means the token cannot be changed once it is created and each token is completely distinguishable, so no two NTFs assets are the same. NFTs are sometimes called ‘crypto-collectables’, so think of it like collecting rare music posters or football cards. Another useful analogy is that an NFT is like a deed to property: the deed is not the house itself, but it serves as a record of ownership.

How do they work?

NTFs are usually sold on marketplace websites such as Opensea or BlockBar, and they often can only be purchased using a cryptocurrency that is native to the blockchain the NFT is stored on, typically Ethereum. You will receive a password which is an address to a piece of data resembling an artwork or cartoon advertised on the marketplace. The transaction is recorded on the blockchain and the NTF is stored on a secure digital wallet. As strange as it sounds, the most popular NFTs are of digital artworks of monkeys and cartoons. Other well-known NTFs include the world’s first Twitter post, and a ‘slam dunk’ by basketballer LeBron James.

Why purchase an NFT?

The main incentive for purchasing NTFs are the financial gains that can be made buying and selling NFTs. Once created, they are sold at auction and attributed value on the secondary market by interested buyers, comparable to selling company shares on a trading platform. Much like other collectables in pop-culture such as Pokémon cards or vintage figurines, NFTs are regularly bought and sold for a profit and increase in value over time because of their scarcity and uniqueness. They are also becoming a legitimate investment product that organisations can create and sell to their followers. For example, the Australian Open earlier this year auctioned NFTs of commemorative tickets, 3D coloured tennis balls and ‘legendary moments’ of past matches which allows their fans to ‘own’ a piece of history.

What are the legal issues?

Types of ownership

It is important to understand there is a distinction between ownership of the NFT as a unique token and ownership of the content or asset that the NFT may be associated with. Unless otherwise agreed in the smart contact and/or terms and conditions, generally the pre-existing copyright owner will continue to be the copyright owner and have certain exclusive rights when an NFT is resold, while the investor will own the NFT but not much more. Therefore, anyone in the world can still watch the video of LeBron James playing basketball on the internet, but the owner of the NFT is able to assert they own the NFT of that footage. In this example, the NBA is the author of the footage and owns the copyright of the digital asset unless they transfer ownership of the copyright to someone else. However, the terms and conditions of some NFTs may stipulate that you also own the copyright of the underlying digital asset, so you should pay close attention to the contract. In practice, the copyright owner may grant the NFT owner a license to make certain uses of their work.

Ownership in asset-backed NFTs

There is also an emerging category of NFTs which are linked to ‘real-world’ assets. This category of NFT allows the holder to ‘trade-in’ their token in exchange for the associated ‘real-world’. An example of this is through the BlockBar platform that sells NFTs that correspond to a physical bottle of alcohol. Investors have the ability to purchase the digital version of the bottle through the NFT before then being able to exchange it for the physical bottle and have it delivered to them. See our previous article for more information on this platform here.

With this complex relationship and arrangement comes many potential legal implications, in relation to which the law is mostly lagging behind. This is why it is crucial to consider the terms and conditions/terms of service related to the NFT before investing as this is currently the clearest way to be informed of parties rights, obligations etc. Notably, BlockBar outlines the following major points in their terms of service that relate to commercial rights for investors:

• Each NFT does not represent ownership in the actual physical asset it corresponds to (the physical alcoholic bottle). It is an independent work of art used as token of exchange/redemption where the owner of the NFT simply has contract rights relating to the exchange/redemption.

• Title to, and ownership of all NFTs passes from the supplier to the purchaser. Then if the NFT is used to redeem the alcohol, BlockBar defines their responsibility to ship and/or arrange for shipping of the physical alcohol as a ‘service’.

• BlockBar is a company registered in Panama meaning the laws of that country governs any action related to their terms of service.

Terms such as these are certainly not universal or standard across NFT marketplaces or exchange platforms which again demonstrates the importance of considering them thoroughly before investing as there will often being parts that surprising and unexpected.

Other considerations before investing

With NFTs still being relatively uncharted territory, there are also other considerations in addition to ownership rights that should be contemplated before investing. Currently, these include:

• Whether the NFT transaction occurs in Australia or overseas as this may determine what legislation and legal frameworks govern the transaction.

• The decentralised nature of NFTs which involves immutable blockchains removing and self-executing smart contracts means that dispute resolution and remedial rights can be extremely difficult to exercise in the absence of intermediaries.

• The creation of a significant ‘digital footprint’ on the publicly verifiable, decentralised ledger on the blockchain which showcases your entire NFT transaction history. Although this data it is pseudonymous through random letter and numbers, it nevertheless could raise privacy concerns amongst some.

Takeaway

Purchase of an NFT does not mean you automatically own the piece of underlying artwork, animation or footage of the NFT. You should read the terms and conditions of the NFT to confirm what rights you acquire as well as the other legal considerations that can apply to investing in NFTs. This article also does not consider the taxation implications of purchasing an NFT.

For more information, please contact:

Paul Gray
Principal
T: 03 5225 5231 | M: 0414 195 886
E: pgray@ha.legal

Ryan Popovski
Lawyer
T: 03 5226 8572
E: rpopovski@ha.legal