What is an NFT?

A non-fungible token (NFT) is a unique token that uses blockchain technology to validate its authenticity and state ownership. NFT’s are often pieces of art in the form of pictures and they are supported by specific blockchains, the most popular being Ethereum.

Legal issues

On 11 January 2022, the Law Society of England and Wales published the second edition of their blockchain report (the Report). The legal issues and implications on the financial services regulatory landscape are vast.

“I don’t understand” I hear you say. I can just take a screenshot of a “Bored Ape Yacht Club” picture and now I have it on my phone, too? The key is authenticity and ownership. You may have the picture on your phone, but the digital ledger won’t record your name as the owner. Many people can take pictures of the Mona Lisa. They do not own the painting.

The above does represent a real problem of uncertainty with NFTs however. The holder of an NFT is not entitled to the intellectual property rights in the image that is associated with, and used, for the purposes of identifying the relevant NFT. The holder only has the NFT itself.

The Report does provide guidance as to best practice in order to overcome this legal issue. To avoid confusion, defining the rights vesting on the holders of their NFTs is important. Typically, IP rights such as copyright will be retained by the issuer and so care needs to be given as to whether any IP rights can be granted in any subsequent sale or transfer of the NFT. Commercial disputes may arise if the seller’s brand is not protected or, similarly, if the buyer misuses its intellectual property rights.

Further, contractual issues need to be at the forefront of any NFT transaction. The terms of sale need to be explicitly set out clearly with the buyer agreeing to such clauses upon purchase. Smart contracts, put simply, programs that are stored on a blockchain that run when predetermined conditions are met, may also be engaged when purchasing NFTs and it is important the parties are aware of this.

Such transactions are constantly evolving and both buyers and sellers need to be mindful of the practical challenges that may arise if things do not go to plan, including if IP rights are misused. Perpetrators can hide behind cloaks of anonymity and may be located in a different legal jurisdiction.

If you are looking for advice in respect of the legal issues surrounding NFTs, or have a commercial dispute surrounding such transactions, or a crypto dispute more generally, please contact JMW Solicitors LLP on 0345 872 6666.