By: Melanie A. Bigos
As has proven common in the twenty-first century, Internet virality has allowed yet another niche and complex concept to hurl itself into mainstream vernacular. Prior to the past few months, the phrase “non-fungible token” would probably only elicit recognition from a small subset of the population with intersecting interests in technology and finance. Yet, in the present moment, this highly esoteric and arguably peculiar subject matter has manifested as a source of mainstream intrigue. A non-fungible token, or NFT, is a type of digital collectible. But despite the sheer “buzzwordiness” of the notion of non-fungible tokens, public understanding of its logistics is lacking. What presents even more of a challenge is the feat of evaluating already-puzzling NFTs in a legal context; perception through the lens of intellectual property and securities law adds another layer of complexity. While a comprehensive explanation of NFTs and their impact is beyond the scope of this article, it seeks to evaluate the several legal challenges presented that must first be hurdled to ensure businesses, organizations, and individuals maximize the reward from what has the potential to be a revolutionary moment in technology.
While much of the public discourse surrounding NFTs has centered around the difficulty of understanding their essence, experts have not yet established a layman-friendly breakdown. The word “non-fungible” indicates that the subject cannot be exchanged for something else of equal value. While NFTs are similar to cryptocurrencies in the sense that they are authenticated through decentralized systems, they differ in terms of fungibility. For example, fiat currencies like the U.S. dollar are fungible in the sense that a one-dollar bill can be exchanged for any other dollar bill – the same holds true for cryptocurrency tokens. The word token refers to a unit of currency on the blockchain; which is the service that allows for the buying and selling of cryptocurrencies such as Bitcoin and Ethereum.
Blockchain technology allows a network of computers to keep record of transactions and verify assets by authenticating ownership – an NFT is essentially a certificate of authenticity. Much of the current focus is upon digital assets, such as images, videos, and other media. They can also be used for other practical purposes, such as verifying identity and tokenizing real physical property. While NFTs’ popularity has recently grown at an exponential level (recently, a digital artwork in the form of a JPG file sold for $69 million) there is widespread ambiguity concerning if and how they can fit into the provisions set forth by the existing legal and regulatory landscape.
One of the areas of concern regarding NFTs is in the realm of intellectual property law. The novelty of NFTs means that intellectual property rights, unless specifically delineated by contract, are ambiguous. Purchasing and possessing an NFT does not necessarily convey ownership of the asset. Instead, it is an acknowledgement of the buyer’s right to use the asset or representation for personal purposes, yet does not grant the rights of reproduction or production of derivative works.
There is a concern among digital artists who fear losing their own right to ownership which is threatened by the “immature market and spotty regulation of NFTs,” which has already been exploited by people who resell work without permission or authorization, effectively stealing intellectual property. Yet the uncharted territory of NFTs complicates this; the doctrines of fair use and first sale are likely to apply to their creation, reproduction, and distribution, but the lack of existing legal precedent should discourage reliance upon these loopholes. Furthermore, one of the complications of the underlying technology of NFTs is the fact that there is not a centrally located ledger, which poses a unique challenge in determining the governing law to be applied. The lack of a clear jurisdiction gives rise to the ambiguity of conflicting legislation.
The nuances of understanding and applying existing legal frameworks to NFTs manifest yet again in the concept of securities law. Like other blockchain tokens, classification of an NFT as a security is highly circumstantial — it’s dependent on the specific nature of each individual asset. Falling into this category would impose registration and disclosure requirements and other potential liabilities. The test used for most digital assets, the Howey Test, classifies transactions as investment contracts if “a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.” At a glance, it may seem as though NFTs should not fall into the category of security tokens – most are “finished products whose value is determined at a sale that is made directly to a buyer.” Yet, this is not a definite exemption, and the situational details of a particular NFT may subject it to specific security-related regulations, such as logging each sale of the token and committing to registration of sales platforms as a securities exchange.
The potential legal and logistical ramifications of unbridled experimentation within the world of NFTs is not limited to the realms of intellectual property and securities law. The concept of universal acceptance of these tokens is curbed by the fact that most transactions use cryptocurrencies which are not U.S. legal tender, are not state-regulated, and do not insulate users from fraudulent activity. Furthermore, an uninformed buyer or seller may fail to consider the tax implications or sanctions laws upon international business.
Inevitably, it will be some time before the laws play catch-up with the novelty of NFTs. In the meantime, the most advisable solution for buyers and sellers is to demonstrate vigilance toward transparency in the buying and selling of assets as well as understanding the applicable laws and regulations. As NFTs are rapidly evolving and expanding into a plethora of industries, it is crucial that those involved stay informed and aware in order to take full advantage of all the benefits that buying and selling these assets may afford.
Student Bio: Melanie A. Bigos is a second-year law student at Suffolk University Law School and serves as a Staff Member on the Journal of High Technology Law. Melanie holds a Bachelor of Arts in Psychology from Boston College.
Disclaimer: The views expressed in this blog are the views of the author alone and do not represent the views of JHTL or Suffolk University Law School.
