NFT, short for non-fungible token, has been making waves in the cryptocurrency industry and gaining mainstream attention due to major companies entering the NFT business. One particularly notable event was the auction in 2021, where an NFT artwork by a digital artist named “Beeple” called “Everyday ‒ The First 5000 Days” fetched approximately 7.5 billion yen. The growing popularity of NFTs has led to the rapid expansion of NFT marketplaces like OpenSea, with the total distribution in August 2021 exceeding 3650 billion yen, ten times the previous month’s growth.
To fully participate in transactions involving NFTs and protect your rights, it is crucial to understand the underlying technology and the legal implications associated with it. In this article, we will delve into the significance of NFTs, explore the technology behind them, and examine the legal issues specifically related to NFT transactions involving digital art.
Features and Mechanisms of NFTs
Unique Characteristics of NFTs
Before we dive into the technical aspects and features of NFTs, let’s first understand how NFT transactions work on NFT marketplaces. Digital art artists can leverage specific blockchain standards like ERC-721 in the Ethereum blockchain to create tokens with unique IDs. These tokens, known as NFTs, have their independent value and cannot be exchanged on a one-to-one basis with other tokens. By linking these NFTs to their corresponding digital artworks, artists add scarcity and asset value to their creations.
NFT marketplaces provide a platform for artists to sell their NFT-linked digital art. Buyers can find and purchase these unique NFTs, and all transaction histories are recorded on the blockchain. With this technological breakthrough, NFTs have revolutionized the art world by imbuing previously easily reproducible digital art with rarity and value.
In addition to their uniqueness, NFTs possess three key characteristics:
Traceability: NFT transactions are recorded on the blockchain, making it easy for buyers to verify the ownership and transaction history of an NFT. This traceability adds trust and reliability to the marketplace.
Portability: Unlike traditional digital items that are confined to a specific game or platform, NFTs can be used across different games or platforms. The decentralized nature of NFTs enables the transfer and utilization of NFT items across various environments.
Programmability: NFTs can incorporate smart contracts, which are programmable agreements stored on the blockchain. Artists can leverage this feature to enable revenue returns similar to the resale rights adopted in the EU. By setting conditions within the smart contract, such as receiving a percentage of the purchase price with each NFT transaction, artists can benefit from subsequent resales.
The Mechanism behind NFTs
The uniqueness of NFTs is made possible by the underlying technology, and Ethereum is a prominent blockchain for issuing NFTs. ERC-721, an Ethereum token standard, is commonly used for NFT issuance. NFTs based on ERC-721 have a specific data structure recorded on the blockchain. This data includes the token ID, holder address, and token URI (Uniform Resource Identifier) that points to the metadata associated with the NFT. It’s worth noting that while the metadata and content data are mostly managed off-chain due to blockchain size limitations, the blockchain ensures the immutability and security of the token ID and token URI.
Legal Issues Related to NFT Transactions
- Organizing Concepts
To address the legal issues surrounding NFT transactions linked to digital art, it is essential to establish a clear understanding of the relevant concepts. Specifically, we need to differentiate between “NFT digital art” and “NFT” itself. NFT digital art refers to digital artworks linked to NFTs and managed off-chain. Although these digital art pieces do not fall under legal ownership, they are protected by copyright if they qualify as “creative expressions of thought or emotion.” In case of copyright infringement, the creator can seek injunctions and claim damages. On the other hand, “NFT” solely represents the token recorded on the blockchain. It’s crucial to distinguish between NFTs and NFT digital art to determine the subject of a transaction and the legal rights acquired by the buyer.
- Legal Perspectives on Rules for NFT Digital Art Transactions
Protecting the Rights of NFT Purchasers
NFT transactions present specific issues concerning the rights of the buyers. One of the inherent problems is the gap between buyers’ expectations and the legal status they actually acquire. Buyers often hope to “own” the NFT digital art associated with their NFTs, but legally, NFT digital art remains unownable. Since NFT data and NFT digital art are separate entities, owning an NFT does not grant ownership of the associated digital art. Instead, buyers can only obtain the right to use the NFT digital art through a licensing agreement. This incongruity between expectations and legal realities poses a challenge within NFT transactions.
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