NFTs - gold mine or minefield?

Non-Fungible Tokens (“NFTs”) have been garnering a lot of attention in recent months as the volume of sales have dramatically increased. Several celebrities have begun promoting NFTs on social media, or even selling their own NFTs. Despite soaring popularity and sales prices (the market for NFTs in 2021 was reportedly $22bn), there are some key legal issues causing uncertainty and confusion which we discuss below.

What are NFTs?

An NFT is a unique digital file representing an asset (commonly artwork, video clips or music) - NFTs are not just pictures of cartoon apes.  When you purchase an NFT, you are not purchasing ownership of the work itself, you are instead purchasing a set of data with a unique digital ID that represents the digital asset. The purchaser of an NFT is therefore not entitled to claim ownership in the underlying work, instead (depending on what exactly the ‘smart contract’ between seller and purchaser contained within the NFT sets out), usually an NFT simply provides the owner with the exclusive rights to the digital ID and a hyperlink to the underlying asset.

Where the version or copy of the digital work is the only version or carries some significance, the NFT could be extremely valuable and lucrative. An example being the sale at auction last year by Christie’s of multiple digital files created by Andy Warhol in the 1980s for between US $250,000 – US $1,170,000 per NFT.

While this is exciting for NFT creators and those involved in the digital art scene, there remains uncertainty as to the legal and regulatory issues which may arise, most especially around intellectual property (“IP”).
 

NFT-related disputes

NFTs are a relatively new product and so will create uncertainty as to whether they are covered by existing licensing or merchandising agreements, copyright and/or trade marks. Any agreement providing for the division of IP rights entered into more than a few years ago is highly unlikely to expressly cover NFTs and there is little to no case law as to how existing agreements should be interpreted with respect to NFTs.

This uncertainty was evidenced by the claim filed by Miramax against Quentin Tarantino in November 2021 in respect of a planned auction by Mr Tarantino of NFTs based on the film Pulp Fiction. A key aspect of the dispute was whether a 1993 agreement between Miramax and Mr Tarantino, which reserved certain IP rights in Pulp Fiction for Mr Tarantino, covered his proposed NFTs. An agreement from the early 1990s is, for obvious reasons, not going to make clear provision for the sale of NFTs and so conflicting interpretations were a virtual certainty.

In these circumstances, it would be all too easy for someone selling or promoting NFTs to accidentally infringe upon the IP rights of someone else, or to have their own IP rights infringed. Given how lucrative NFTs have proven to be, infringing upon another’s rights, or not defending your own rights, could prove very costly.

More brands are becoming aware of the potential for infringement of their IP in respect of NFTs and are seeking to enforce their rights. For example, Nike has filed a claim against retail marketplace StockX for trade mark infringement for selling NFTs of Nike trainers, and the Premier League has intervened in respect of John Terry’s promotion of ‘Ape Kids Club’ NFTs which contained images of the Premier League trophy. Disputes of this type could become much more commonplace in the near future.
 

Alongside these IP issues, there may, also, be other kinds of disputes in respect of the sale of NFTs, such as those arising out of the following:

1. the volatility in NFT prices - the NFTs promoted by John Terry lost 90% of their value over a matter of weeks;
2. the allegations of fraud associated with some NFTs; and
3. the environmental impact of NFTs.

It is, therefore, very likely that we will see a sharp uptick in disputes, both IP-related and not, relating to NFTs in the near future.

To avoid some of the potential issues highlighted, creators and those dealing in NFTs will need to consider implementing appropriate technical protective measures, notably ensuring any smart contracts or licenses concerning the asset are clearly defined. In addition, interested parties will need to pay close attention to the changing legal landscape as, although the sector is currently largely unregulated, there have been indications that this is changing. For example, the UK Government recently suggested they will soon be bringing in rules to regulate crypto asset promotions.

If you would like to discuss any of the issues raised in this article, please contact the authors listed below.