What Law Apply to NFTs?
NFTs or Non-fungible Tokens are obviously not directly regulated by federal or state law. They are not in any “Restatement” documents or court filings (yet). Without this, you might say, “Yay there is no precedent! Let’s just go make money and have fun!” To that, I would caution you that although there aren’t any specific laws on the books or court decisions outlining the law on this new playing field, many of the things that will apply can be pointed to today. They just haven’t yet been molded together.
NFTs are generally created by artists, musicians, athletes, or anyone with something they want to be tied to the blockchain and want to sell. They are typically most successful when created by a prominent person or someone with either a large following or a highly engaged following. The digital scarcity of the available goods leads to supply and demand issues and other economic factors as well. This supply and demand, coupled with a secondary marketplace, lead to really interesting ramifications for the purchasing and selling of goods.
The law that applies to NFTs right now breaks down like this (in my opinion):
10% NFTs aka GRAY SPACE.
30% Intellectual Property, Licensing, Royalties, and other “Entertainment law” Issues
30% Contract and Smart Contract heavy legal issues across the board
20% Securities Law
10% Blockchain, technology, and other general “startup” styled or new tech issues
NFT Knowledge (10%)
This is the important part, so I’ll start here.
This is where all of the above listed sectors of law converge into gray space. So many things will need to be litigated before there are formal answers. But for now, to hold your own in a conversation about the legal issues associated with NFTs you must understand the language of NFTs and those involved with them. You must have base levels of knowledge in at least 5 if not 7 or 8 different sectors of law. You have to realize that pioneers are typically remembered, but they often die of Dysentery on their way to Oregon.
I am currently spending 14+ hours per day immersed in the NFT space whether that is speaking directly to clients, drafting interesting contracts, sifting through legal frameworks, or sitting in clubhouse rooms learning/talking/working on other things. You can’t approach this with one niche area of expertise and hope to make a dent in the space. It requires a scorched earth approach where one gains knowledge and skills in many sectors as well as a new vocabulary required to competently discuss what is happening in the NFT space and what the mechanics are when someone is describing what they are working on and what they are needing help with.
Intellectual Property Issues (30%)
One of the great features of NFTs is the ability to mint something to the Blockchain and prove that whoever minted the product actually created and owns the relevant work. Problems come in when there are multiple creators involved, old IP, previously owned IP, IP that is currently owned by someone else, etc.
I have seen multiple cease and desist letters, already sent to people who then ran straight to me with them, who were being sued by A-list celebrities. We’ve seen DogFace be denied the right to use the Fleetwood Mac song that his viral video more or less helped Fleetwood Mac reach another level of modern relevance. DC released a document requesting that their artists not sell any of their original works as NFTs even though comic book artists have always been allowed to sell their 1 of 1 pieces and depending on who they contract with they are typically allowed to sell prints of their work at Comic Cons and other locations as well.
The limit of Intellectual Property issues involved with NFTs really stretches as wide as IP issues in general, plus a new layer or two associated with a new space for revenue creation and new reasons to try and recycle quality IP. I’m currently associating in a wonderful Entertainment attorney from Beverly Hills to assist me as we work on documents and projects that involve multi-party IP issues.
Contract and Smart Contract (30%)
I don’t think people realize that Smart Contracts are the simplest form “bargained for exchange” to ever exist. Imagine a world where I said, “I’ll give you five dollars if you will give me that apple.” That’s pretty simple, right? Just make the trade. But what if you could put your $5 in a simple escrow styled account and someone else could put their apple in an escrow-styled account. Then you click “buy” and they are automatically forced to give you the apple. The apple just shows up. That is the shortest and sweetest version of a smart contract built on the Ethereum network. I apologize for the words if you’re new to NFTs and Blockchain… but the learning curve is steep, and the vocabulary is important.
The Biggest problem with Smart Contracts right now as far as platforms and selling NFTs go, is that they are 1) not recognized at all in 47 states 2) Collaborations are only really working when someone has both a smart contract and real-world contract in place, and 3) The Technology Is NOT Capable of splitting royalties between multiple parties, consistently, well, and cross-platform.
I have drafted multiple different styles of collaboration agreement, royalty splitting, the transition of private keys regarding one wallet, who will pay the gas fees, and the perpetuity aspect of this. What happens if someone dies? What if they choose to stop paying? How do you enforce that or go get their private keys to access the wallet? These are DEEP and important issues that are being almost entirely overlooked right now. I believe the major platforms are trying to solve these problems, but they have not yet done so.
Securities Law (20%)
The SEC really broke into the ICO space and took their sweet time in creating legislation around Bitcoin as well as “new securities” in the form of tokens. https://www.sec.gov/ICO. The fact that so many people are selling goods, taking payment in cryptocurrency, and that cryptocurrency is then rising in value, means they are dealing in securities.
The fact that someone can buy an NFT on a blockchain ledger, then sell that NFT for more than they spent, aka their profit can be tracked, means they will be taxed for those gains. This starts bringing in some simple legal issues as well as some incredibly complicated issues.
One of the best questions I’ve seen recently: What if someone sells an NFT that also includes a physical object? Such as Fewocious x RTFKT and their $3.1m sale of a digital shoe which included a physical shoe. Did the physical shoe come as a gift? What if it has its own secondary market? What is a security… maybe something is a commodity? Or maybe it’s all incredibly simple and will be viewed as simply buying and selling goods for a recognizable gain and will be taxed accordingly. But what if the purchaser of art is 14 and they have gains? Lots of fun questions here again that have answers for the most part.
Blockchain and other emerging Technology (10%)
Sorry, I do not have time, nor do you have an interest, in truly laying out and understanding Blockchain law in one paragraph. This includes taxation of cryptocurrencies.
For now I will say this, I have heard the names of 10+ major law firms and various boutique firms that are all extremely competent and fluent in the language of blockchain. This is absolutely required to understand NFTs from a high level or in the trenches.
I hope you enjoyed the read and that it made sense. If you see my opinion and have any disagreements or want to discuss the information within, I’d be happy to hear you out. I’ll continue to be open-handed and give advice on what I do know, while comfortably agreeing if there is something I don’t know or the courts have yet to speak on it.
Feel free to shoot me an email about any of this, whether you need legal advice or want to give feedback: Jacob@jtmtechlaw.com.