EVENT REPORT: NFTs Demystified: a Tech Lawyer’s Perspective

July 8, 2021

The sale by auction in March of an non-fungible token (“NFT”) was perhaps the moment the world woke up to the concept. Everydays: the First 5000 Days, a collage of 5,000 digital images created by Mike Winkelmann, was purchased by Vignesh Sundaresan using 42,329 Ether, approximately $69.3m. It was the first sale of its kind by major auction house, Christie’s, underscoring the huge valuations which digital securitisation via an NFT might attract, and indeed their increasing legitimacy – as an asset class – amongst investors. Professionals should be paying attention.

And so the webinar last week was much appreciated. Tim Ryan, head of media and technology at DAC Beachcroft, together with Kelsey Farish, an associate in his team, provided an overview of what we should know.

First, definitions. An NFT is a “unique digital identifier that cannot be copied, substituted or subdivided and is recorded in a blockchain and used to certify authenticity and ownership”. Tim unpacked the elements, explaining that the immutable blockchain, a form of distributed ledger technology, and its hashing of new blocks via cryptography, provides authenticity. Kelsey then explained that it is this perceived authenticity which underpins the perceived value in a given NFT. 

But how does this work in practice? Well, you take your digital asset, whether it be an artwork, a video clip or a digital asset in a video game, and then you “mint” it using one of the many online providers offering this service. “Minting” the digital asset hashes its place on a given blockchain and in doing so generates what we now call an NFT in the encoded metadata contained in the hash/hashes (i.e. think time or date stamps). This non-fungibility of the token can be better understood by contrasting it with its entirely fungible relations in cryptocurrency, i.e. one Bitcoin is indistinct from another. And so this is blockchain technology really being applied to unique or one-of-a-kind assets.

Kelsey explained away the contention that any given digital asset could be copied or screenshotted, post-minting, thereby undermining the value in the NFT. Provenance has been the determining factor in the valuations of artwork since the dawn of markets in artwork. Why? Because the nature of demand for artwork must in some way be related to provenance. In other words, the bragging rights only attach to the authentic original – and certainly not to the cheap screenshot. NFT markets work in precisely the same way. 

Tim outlined the legal complexities in this area. Whilst the looming threat of regulation  is as tangible as ever, Tim outlined the challenge of GDPR’s right to be forgotten for the metadata making up the NFT. The problem is with the immutability and therefore the probable permanence of the blockchain: and not just data subject rights but various of the lawful grounds to process personal data do not appear to be consistent with use of NFTs. The other big challenge is storage. The digital asset is linked to the NFT but if the link fails, say the server hosting the digital asset on the internet goes down, then the NFT does not link to the asset (and is arguably, for the length of time the link is down, not valuable). The legal implications of these operational challenges to a mature marketplace are not yet ironed out.

In the same way, intellectual property rights are not automatically assigned by the sale of NFTs in the marketplace. Ownership of the copyright in the underlying digital asset will not automatically transfer with ownership of the NFT. Smart contracts or off-chain contracts, however, will enable willing sellers and purchasers (or at least those who have taken legal advice) to transfer any intellectual property rights which the purchaser may require.

The courts are catching-up though. Tim explained that the courts have granted proprietary injunctions in respect of cryptocurrency: that is  the same set of concepts which underlie an NFT such as encoded metadata – remembering that there are more things in heaven and earth than choses in possession and choses in action. With English common law warming to the idea of protecting rights in tokenised securities subsisting on a blockchain, including NFTs, it seems there is sufficient will by the judiciary to be guided by committees of technologists and lawyers to understand the best way to regulate these burgeoning markets. 

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Gerald Brent is an associate in the Commercial team at Addleshaw Goddard, advising on data protection and IP issues.

Watch the full webinar here (member log in required)