What's the deal with NFTs? An overview
We're sure you've noticed the term ‘NFT’ scattered across your headlines lately. Boasting over USD$250 million in sales in 2020, and reaching even higher heights after Christie's auction house sold a digital art piece for an eye-popping $69.3 million, the quirky digital market has driven scores of people to jump in on the action. Considering the digital asset's recent explosion in popularity we thought it may be a good time to give you some insight to exactly what all the fuss is about - perhaps some of you would just like to know what an "NFT" is in the first place. If you’re a creative, a finance-related lawyer or working within a field where you want to work with NFTs, this rundown may be of particular benefit to you.
So what is "a non-fungible token" (NFT)?
In a nutshell, a Non-Fungible Token or “NFT” is a digitally unique token which is not interchangable (that is it is non-fungible) with other digital assets - its a unique, one of a kind, not-to-be repeated, collectible, which is why you've likely noticed, its a handy item to tie to artwork's which are by nature, equally unrepeatable.
By way of comparison each Bitcoin (or part thereof) is interchangeable (or 'fungible') with any other Bitcoin (or part thereof) - get the drift?
The rights that can be attached to NFT's are broad in nature, but their use can be narrowed down to two main kinds:
They can be connected to a physical one of a kind item, like a physical piece of art: in which case the NFT acts as a 'certificate of authenticity equivalent' or
They can be attached to a digital artefact, like a digital piece of art or a record of something (like a land title): where ownership lies in the holder of the NFT, but copies or other uses of the item automates a payment of royalties - for example.
While the way NFTs function depends on the item they represent or attach to, at the heart of it, these objects represent and enforce ownership. In some situations they can even be used to trace property. For instance, many supply-chain blockchains use NFTs to track individual things on their journey through a supply chain and anti-counterfeiting platforms can use NFTs to prevent products being copied (wine has been a fruitful area for this).
What kind of presence do NFTs have in the Australian market right now?
The NFT market globally increased by more than 299% in 2020 - and it seems like its growth is only going to continue. As we've mentioned, the concept of NFT ownership has deeply penetrated the traditional and digital art market. Across the world, online NFT art auctions are increasing and now physical events showcasing NFT art are starting to pop up - in Sydney in particular.
But another area NFTs have taken a strong hold of is the electronic gaming market. Digital collectibles are not a foreign concept to gaming worlds, so its marriage with NFT's seemed natural.
On the topic of the robust economy that NFTs are creating for gaming eco-systems, Ed McCormack, Chief Executive of Dchained, a cyrpto education and news provider, agreed that this move towards NFTs was natural:
the practice of creating digital items that are unique and can be traded based on their utility or scarcity, has become a sizable economy in the gaming industry for years.
Australia has been home to the online game Gods Unchained for many years and recently the makers of GU launched an NFT marketplace, Immutable X, which saw 1.5 million NFTs listed for trade in it’s first 24 hours.
Any major issues?
Nothing new- and especially as innovative, comes without teething problems or areas for improvement.
Two main legal issues that surround NFTs at present are:
What rights are transferring or associated with an NFT, that is what is the purchaser of the NFT actually receiving. Most art based NFTs are likely to carry a licence analogous to purchasing a print from an artist, but people need to be aware that any rights can be set in terms of a licence, so its something deeply important to be across. Be aware of what you're buying or, like in any upcoming trend being taken advantage of, these can lead to scams and/or an arising of the dreaded question of "Hmm, what am I actually getting here?" ;
Data issues are also live because an NFT on a blockchain has a publicly verifiable chain of ownership. To put it briefly: If Person B purchases an NFT from Person A, Person B will know Person A’s digital wallet address and can have visibility into what transactions have occurred in Person A’s digital wallet.
There are also practical issues where an NFT is used as a digital title for a real world asset as the digital title needs to be recognised at law or it is not likely to be useful.
Issues and opportunities for lawyers
Lawyers need to gain an in depth understanding of how NFTs work or engage specialist counsel to assist, as the blockchain space moves so fast and has such a technical barrier to entry that it is easy for something to be overlooked.
This author thinks IP lawyers who are dealing with copyright and licensing will likely find close analogies with certain kinds of NFTs and platforms enabling sales of same, as initial commercial contracts are likely to have similar themes. Without being around for too long, NFTs inherent qualities - which make them akin to "a certificate of authenticity" or ownership certificate, already demonstrate the great opportunities they present to actors in the areas of intellectual property and copyright.
Our advice to you
The way we see it, NFTs are an extension of supply chain style blockchain use cases and are only likely to continue to rise in popularity over time. Lawyers wanting to get involved should be attending meet-ups, buying NFTs themselves to understand how they work, and learning a bit of coding skills. As this year marks the beginning of their lifecycle, we have yet to see just how beneficial NFTs can truly be.