Is NFTs Legitimacy Questioned?
While the year 2020 will be known for the economic agony brought on by Covid, it was also a year in which individuals began to think more creatively about the conjugal of technology and economic value. The advent of massive markets for non-fungible tokens (NFTs), which are one-of-a-kind blockchain-based digital assets, represents a watershed in how we think about digital transactions and value stores.
Legal Issues Caused by Non-Financial Transactions
Many companies intending to mint NFTs must first determine if they have the legal authority. Few contracts written before 2021 that assign intellectual property or publicity rights address the minting of NFTs, which is unsurprising. Instead, companies are parsing contract text to establish whether they have the required privileges to mint a certain NFT on their own or need a license or consent from other stakeholders, which is often done on a case-by-case basis. This requires determining how a non-financial transaction (NFT) should be classified under existing contractual conditions. Is an NFT, for example, a sort of product or something else entirely, and what intellectual property rights are required to mint an NFT? (e.g., a distribution right, a derivative work right, a display right, a performance right)?
A traditional rights holder and a corporation with the technological know-how to build the computer code (or “smart contract”) to mint an NFT into a blockchain and govern the storage aspects of digital work associated with the NFT are often involved in the minting of NFTs.
Drafting and negotiating these contracts necessitates a thorough understanding of the technology and “tokenomics” that underpin NFTs and knowledge of the legal problems that such agreements must address. Parties should, for example, consider how to end a contractual relationship in which the NFTs created due to that relationship exist on a blockchain.
Concerns to Be Aware Of
We expect to see various new and expanding business models as NFTs continue to evolve in 2022, raising additional legal issues that companies will need to consider. For example, in the second half of 2021, an increasing number of decentralized autonomous organizations (DAOs) were formed with the intention of participating in the NFT industry.
DAOs apply the decentralization concept that underpins cryptocurrencies and decentralized finance to corporate governance, ensuring that decision-making power is not concentrated in a small group such as a board of directors or executive team. The legal status of DAOs and how they are constituted will likely continue to evolve in 2022, and stakeholders in the NFT ecosystem will probably have to determine whether and how to deal with them.
Be Cautious of Security Law Issues
Some NFT providers created business strategies this year that could raise securities law problems. Some enterprises, for example, connected separate coin offerings to their NFT project that closely resembled the types of “initial coin offerings” (ICOs) that the US Securities and Exchange Commission determined to violate securities regulations in 2017-18 when ICOs were popular. Accordingly, any such currency offerings should be given careful attention. Furthermore, NFT sales should not be advertised or sold as investment opportunities in a way that could result in securities legislation issues.