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Legality of NFTs

Published On : September 1, 2022

Adv. Ruvarashe

NFT stands for non-fungible token, it is a unique token that is attached to a digital asset be it in the form of an image, a song, an animation or a video.Ownership of NFTs is logged and authenticated using decentralized blockchain technology, mainly cryptocurrency Ethereum. An NFT becomes a digital certificate proving ownership and or rights to a unique asset, Blockchain records the ownership. Every transaction, future sales and transfers are recorded on the blockchain when the token is logged. This therefore creates a record of authenticity and ownership which cannot be deleted or counterfeited and is easily accessible. Through the blockchain technology, there is a creation of a market where NFTs can be sold and resold.

Despite the fact that there might be many identical pieces of an NFT or related assets, the original art can be sold by the digital artist at a high price because of its authenticity.By so doing, “the NFT market mirrors the traditional art market, where original artwork is considered to be worth substantially more than mass-produced prints.” However, there are implications of several laws that come with tokenization, these include but not just limited to licensing, intellectual property, anti-money laundering, etc. The NFT market, the legal and regulatory associated with NFTs and digital assets are still evolving, therefore, NFTs continue to raise some interesting legal considerations, many of which are ambiguous or unresolved by the current laws in place.

License Rights

The first-order problems with NFTs are ownership and license rights. The buyer usually receives a license to the asset represented by the token instead of actual ownership of the token. Usually, the person who created the material or asset will keep the copyright. Different licensing conditions may be used, ranging from limited commercialization rights to personal and noncommercial rights. Whatever the preferred business model, the buyer's rights must be precisely and clearly stated in both marketing materials and the conditions of the license.Marketing that is inaccurate or misrepresentation cases where for example, the seller or owner of the asset assures the buyer that they now own an asset which in actual fact the buyer only has a restricted license could result in a number of legal claims as well as other problems. License conditions therefore should explicitly specify rights and what a buyer is and is not permitted to do with their purchase. In order to establish a legitimate contract, it is also crucial to make sure that there is affirmative acceptance.

Ownership Rights

According to several NFT projects, smart contracts can be used to grant copyright to assets. Whether such an assignment is legal is up for debate. A copyright assignment is only valid if it complies with two requirements:

(I) It is in writing; and
(II) it is signed by or on behalf of the assignor.

This is stated in section 101(3) of the Copyright Ordinance, which is used by many corresponding copyright statutes in Australia, U.S., UK and other jurisdictions. Transference of NFTs ownership is done through smart contracts which are self-executing computer programming codes. Contrary to the name and what they may appear to be, they are not legitimate legal contracts the traditional contracts we are used to. As of yet, the blockchain technology together with the system of smart contracts have no effective protocol over the integration of copyright terms to into the token. The reason for this is because the design of smart contracts does not allow or rather humans cannot read them because they are a code run by a computer. The smart contract system lacks in that it is not equipped to deal with actual legal relationship and entitlements.

When an NFT is listed on marketplaces, there is usually no copyright information shown on the listings thus making it difficult to determine what rights the buyer has. In order to find out about the ownership rights, one has to visit the NFT projects websites in order to find out and examine the Terms and Conditions pertaining to the NFT in question published by the project creator. It also crucial to note that they are not signed by or on behalf of the assignor. Therefore, the validity of an assignment of ownership through smart contracts is questionable. It is of paramount importance to note that one is not buying the digital work itself when they buy an NFT, hence, the selling of the NFT does not immediately transfer the artwork's copyright. The rights to reproduce, distribute, alter, and perform or publicly exhibit the artwork might be retained by either the artist or the third-party vendor.