By Kandy Williams, Esq. and Yev Muchnik, Esq.
NFTs, or non-fungible tokens, are all the rage this year. Beeple’s digital art NFT sold at Christie’s for $69m; DJ and music producer 3LAU sold music NFTs for $11.6m in 24 hours; Grimes made $5.8m in 20 minutes; and, according to Reuters, NFT sales volume for the first half of 2021 was $2.5b.
The burgeoning NFT collectibles marketplace shifts power back to creatives by allowing them to monetize digital creative works without intermediaries, creating new classes for artists, agencies, purchasers, and marketplace platforms to become market players. Beyond art and music, there are NFTs for sports collectibles, pixelated images of characters, domain names, COVID vaccination passports, medical records, real estate, and even tweets.
NFTs are a new digital asset class, built on code (smart contracts), and recorded on the blockchain. Blockchains are permanent, immutable ledgers that allow holders of NFTs to verify and track ownership and authenticity. This immutability makes it impossible for NFTs to be pirated, refuted, replicated, or deleted.
Each NFT is programmed with unique metadata distinguishing it from other NFTs, making each one of a kind like a stock certificate or numbered lithograph. Other digital tokens like Bitcoin and Ethereum are fungible or readily interchangeable for other Bitcoin or Ethereum, without any differentiation.
NFTs present new opportunities as well as new legal risks. For example, depending on the facts and circumstances, an NFT may be a security if there is an expectation of profit in a common enterprise derived from the efforts of others. The offering of a security must be registered or exempt from registration under the Securities Act of 1933 and may also require registration as a broker-dealer under the Securities Exchange Act of 1934. Additional considerations include anti-fraud laws, insider trading, restrictions on short sales, and market manipulation.
Other key legal issues involving NFTs include intellectual property rights, anti-money laundering, money transmission and virtual currencies, cybersecurity, and data privacy. NFTs may seem a goldmine, but without proper legal guidance NFTs remain potential landmines for the unwary.