Non-Fungible Tokens (NFTs) ' Where And How Do They Exist In The Legal World?

• Published date: 02 February 2022
• Subject Matter: Technology, Fin Tech
• Law Firm: W Legal
• Author: Michael Grimshaw

What is an NFT?

An NFT is a 'unique, digital certificate, registered in a blockchain, used to record ownership of an asset.' They allow an individual to own any collectible item, for example physical or digital artwork and even music.

Despite the frequent comparisons to other crypto assets and crypto currencies, NFTs have various qualities that distinguish them from such tokens. For example, NFTs cannot be traded for another identical token. This is due to the unique meta data code that requires the distributable ledger technology ('DLT') to authenticate it. In addition, they are indivisible and once they have become digitally 'minted' and part of the blockchain ledger, they cannot be edited or deleted. This is a key difference from the other fungible tokens that are interchangeable and indistinguishable from one another.

The use of the term has increased dramatically in the past year and is fast becoming a topic of discussion in many spheres.

Expanding use of NFTs: in the worlds of art and entertainment

Although NFTs allow an individual to own any collectible item, the most common use for them at present is in the art and entertainment industries. Within these industries, NFTs are used to authenticate digital art, collectibles, video content and physical assets.

The NFT authentication process allows additional profits to be made by linking a digital version of an asset to the physical asset itself with a stamp of authentic ownership. The profits to be made as a result are substantial as can be seen through the recent sale of an NFT by model, Emily Ratajkowski. Ms Ratajkowski was able to sell an NFT for US$140,000 despite paying only US$150 for the physical version of the asset. This is a clear demonstration of the substantial profit to be made, but many have also highlighted the additional advantage that it allowed her to take control of her own image.

NFTs can also be sold on various different online markets. The most prominent markets at the moment are 'OpenSea' and 'Decentraland' for digital art and virtual land respectively. A separate online market for music provides tokens that will authenticate access to exclusive album artwork and limited-edition vinyl.

The numerous markets available illustrate the extensive possibilities of NFTs, however, such a range of opportunity can lead to confusion for those individuals who are purchasing the tokens.

Ownership and IP considerations

The most crucial question arises in terms of ownership. An NFT is a token...