WH Insights: NFTs - Key Legal Issues Answered

INSIGHTS

26 Apr 2021

In today's WH Insights episode, Joseph F Borg (Head of Fintech at WH Partners) talks about the legal implications of Non-Fungible Tokens or “NFTs”. Can anyone make or sell NFTs? Do NFTs qualify as Financial Instruments or Securities? What about intellectual property? What do you need to know about NFTs and copyrighting? 

The Oxford Dictionary defines a collector’s item as an object valued for its age, rarity, or some special interest. I think of NFTs as such items.

In an increasingly digital world, spurred on by the pandemic, the creation of valuable digital assets has become inevitable.

NFTs initially hit the headlines in 2017 with the launch of cryptokitties and the craze surrounding them. Although attracting less attention from the general public, since then NFTs have become quite popular with gamers in esports, a sector which is growing exponentially.

Besides gaming, NFTs are gaining popularity to sell a wide range of virtual collectibles, including sports virtual trading cards (such as NBA trading cards), music, digital images, video clips and virtual real estate in Decentraland, for example, which is a virtual world.

But just like with other cryptocurrencies, there are a number of legal considerations to onboard before issuing an NFT.

Can anyone make or sell NFTs?

It is very easy to create an NFT, not much different from creating a traditional cryptocurrency. But the protocol is different and unlike cryptocurrencies, each token is unique, thereby non-fungible. However, what is this token representing? Is the person creating it, also the creator of whatever it is representing? Are the rights granted to the token holder clearly established? These are all questions that need to be addressed before one issues NFTs.

Do NFTs qualify as Financial Instruments or Securities?

While in Europe, unlike the US, many cryptocurrencies do not qualify as Financial Instruments (in US terms, securities), many NFTs may well do, particularly because they normally have an underlying asset.

Depending on what NFTs represent and how, they could easily be considered as contracts for differences, derivatives or even collective investment schemes. But just like cryptocurrencies, not all NFTs are Financial Instruments. So, my advice as you’re visioning and designing such a project is to lawyer up and get professional assistance.

What do you need to know about NFTs and copyrighting?

Another heated debate bubbling around NFTs relates to intellectual property rights. Quite simply, the agreement of sale should clearly specify if the buyer is actually acquiring the asset as intellectual property or just a license to use it. By extension, the issuer also needs to give proof that he or she owns the intellectual property being sold or licensed.

Not surprisingly, these are only just a few of the legal implications of NTFs. The entire maze is quite complex, and well, risky. Therefore, whether you are issuing, selling or buying NFTs, be careful and do your homework. If you have any doubts, consult a lawyer.

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WH Insights is a video series discussing key legal concepts, trending legal topics, news and legal updates.

This video is not, and is not intended to constitute, legal advice and should not be relied on as such. It is intended for general information purposes only.