Legal Considerations When Dealing with NFTs

Top Five Legal Considerations When Dealing With NFTs

30 June 2021 

In a previous blog we explained what NFTs are and explored the rationale behind their popularity, but what are some of the legal considerations when it comes to NFTs? In this blog, we’re going to cover some of the legal issues relating to NFTs, and what you should be aware of.

Let’s think about the internet. When the internet was created, most people had no idea how to use it or what to expect from it, let alone how its use was regulated.

These days, most of us are familiar with the digital world and are better equipped to deal with technological advances. However, in contrast to the internet which was introduced to the public gradually, blockchain technology and NFTs have grown in popularity so rapidly that legislators barely had time to blink before the first NFT artwork was auctioned and sold for a staggering $69 million. Therefore, as you may have guessed, the legal treatment of NFTs has yet to be determined.

While some people think that the lack of regulations in the NFT market is a great thing, there are quite a few associated pitfalls. We have summed up the top 5 legal considerations that people dealing with NFTs, whether they are artists or collectors, should think about:

1. Ownership

One of the main issues when dealing with NFTs is that anyone can claim ownership in a digital photo or drawing by attaching a token to it, even if they did not create it.

While the blockchain is usually a publicly recorded immutable digital ledger where you can track all transactions, it does not require that people attach their identities to those transactions. This makes it very hard to not only track who the actual owner is, but also get recourse if the artwork is stolen. Can you imagine taking a photo of your angry kitty to later found out that someone stole it, converted it into collectible NFTs and sold it for a million dollars? We bet that kitty would not be the only angry thing in the room!

2. Tort of conversion

In most jurisdictions, a buyer of stolen goods does not acquire a legal title to the stolen goods. This principle applies regardless of whether the buyer knows the goods were stolen and the original owner of the goods can take action against the current owner and get possession of the stolen goods.

So, in theory, it should not be the end of the world if you do not know who stole your NFT as long as you know who currently owns it. From here, you should be able to reclaim the ownership of the stolen NFT through the tort of conversion.

Currently however, this remedy would be of no use to NFT owners as it does not apply to intangible assets and once again, leaves NFT owners and creators with limited protection and rights.

3. Copyright

As we have mentioned in our previous blog, when you buy a NFT, you only buy a bit of code that links you to an underlying asset. For example, Nike has recently launched NFTs that link to their sneakers. Some people might assume that if they buy an image of those sneakers or even the actual sneakers, they then own them. In reality, all they likely have bought is a digital link to the image of those sneakers, unless there is a clear additional legal transfer of rights.

Nike, as an original creator, remains the copyright owner who retains all exclusive rights in those sneakers and their digital representation, while the buyer only receives the token and the right to use that NFT code for personal use. It’s easy to imagine how it can lead to an infringement liability if buyers are not familiar with copyright laws, and subsequently try to profit from their NFT by commercialising it in a way that breaches copyright law.

4. Royalties

One of the benefits for artists tokenising their digital art is that they can get paid at the moment that they first sell their art, and then get royalties each time their work is resold by third parties. Create and sell once – get paid multiple times. Sounds great, doesn’t it?! Don’t too excited yet. In almost all cases at the time of writing, the only time you get automated royalty payments is when the NFT is resold through the same NFT platform.

So, if a buyer purchases the NFT on a marketplace A, transfers it to their digital wallet, and then decides to sell it on a marketplace B, the NFT creator gets nothing.

In the real world, creators have so called resale rights. However, neither UK, nor US or EU laws recognise resale rights for NFTs and would provide no recourse for unpaid resale royalties in such instances.

5. Data Protection

Lastly, with the evolution of data protection laws in recent years, people have started being more concerned with who collects and processes their personal data and what they use it for.

The GDPR is based on an underlying assumption that in relation to each personal data point there is at least one natural or legal person against whom data subjects can enforce their rights (such as the right to delete or rectify their personal data).

However, blockchain technology does not oblige people to disclose their identity, which makes it nearly impossible for data subjects to exercise their rights. While the identification point does not violate the GDPR, the fact that blockchains are immutable and so it is technically impossible to erase personal data stored on them does breaches the GDPR. As such, NFTs that contain personal information probably would violate some of the data protection principles.

As you can see, the lack of regulation of NFT space raises a lot of concerns. The UK Law Commission is currently working on a reform that would ensure that English law is capable of accommodating digital assets, including NFTs, allowing for the same remedies as tangible assets. This reform would solve some of the above issues, however until then, the above concerns should be kept in mind when dealing with NFTs.

If you would like to know more about NFTs you can watch our Future of Art webinar where we discussed NFTs and their place in the digital art world. If you’d like to discuss their regulation or any issues you faced when creating, buying or selling NFTs, please contact the firm at hello@stephenson.law.

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