Legal Ownership of NFTs

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Legal Ownership of NFTs

May 22, 2022         Fatima Raza

NFTs are a new and emerging tool that has significantly advanced the digital world. NFTs however can be complicated in the legal ownership aspect especially as they differ depending on the NFT. Therefore buyers must be wary of the legal implications attached to them and what is and isn’t associated with them. 

What is an NFT?

A non-fungible token (NFT) is a cryptographic tool that uses blockchain technology as well as a unique ID that links it to an underlying asset. It’s essentially a non-replicable digital certificate of a digital asset. NFTs are composed of “smart contracts” in which it contains the asset as well as the rules and rights attached to the NFT. The term non-fungible means that the token cannot be divided or replaced however can be resold. To understand NFTs better they are basically the authentication of assets e.g. an artist signing their artwork authenticates that it is their artwork and is “real”, NFTs in simple terms are like the digital form of the signature. NFTs unlike bitcoin have their value derived from the rights concerning the asset or the value perceived from the buyer. 

NFTs can either be linked to real world assets or be digitally native in which they do not rely on real world assets. Examples of NFTs include postage stamps, art, memes, songs etc.

Legal Implications 

Many people believe that if they purchase an NFT they acquire the underlying art and all the rights accompanying it. This is not the case, in reality you are just purchasing the metadata associated with the work but not the work itself. 

Generally through the buying and selling of NFTs, the platforms used to do so will outline the rights and restrictions associated with the NFTs. Because usually you are not purchasing the art itself, the pre-existing copyright owner will continue to be the copyright owner and contain exclusive rights. This is because usually most NFTs don’t involve a transfer of rights, unless otherwise agreed. It’s important to note as well that usually you may buy some right to use the original asset however this differs between different trading platforms. 

Legal Title

In the case where title is bought and sold, the NFT will record the transfer of ownership within the blockchain. Transference of title can occur off chain as well such as simple agreement between the parties, it is then expected that the transaction is recorded on the NFT. Majority of NFT sales are recorded off chain where there is an agreement and then transfer of ownership is manually recorded afterwards. It is also possible to transfer title without transferring it onto the blockchain as there is no legal requirement to do so. However it is strongly recommended to do so for evidential purposes. 

Licenses

In theory agreements can be coded into smart contracts. Rights can then be altered through licenses. 

Licenses may provide rights such as: 

  • Displaying artwork and using it for personal purposes:
  • Listening to the song on personal device

Licenses may also provide restrictions such as: 

  • Cannot distribute the NFT;
  • Cannot use it for commercial purposes; 
  • Cannot take pictures of the work and replicate it; 
  • Cannot display the content on third-party websites.

Copyright Issues

Because of the works being traded such as art, there is a growing interest in copyright issues in regard to NFTs. NFTs may or may not be subject to copyright protection, or could even be part of the public domain. NFTs don’t actually have much to do with copyright as anything that is digitised can be turned into a NFT. Only the original work is needed to create the unique tokenID and address. 

Key Takeaway 

NFTs can be subjected to many different legal implications such as licenses and copyright issues. Therefore it is important that buyers understand the NFT they are purchasing and the rights attached to it. For more information or help with NFTss, get in touch with our team via the contact form or by calling 1300 337 997.

About Fatima Raza

Fatima RazaFatima is a legal intern at Openlegal and is currently in her third year studying Law and Media and communications at Macquarie University. Her interests are commercial, property and international law.