In recent years, the rise of digital content consumption and collecting has raised the challenge of proving the “original” version of a work that can be easily replicated. This issue hinders the development of a digital ownership economy, as most current models operate under a digital license economy where users lose access once subscriptions end or platforms shut down.
NFTs offer a potential solution by using blockchain to authenticate originals, track provenance, reward creators, and unlock new business opportunities such as exclusive access to content or experiences. NFT sales reached an estimated $25–40 billion in 2021, grew in 2022, but slowed from 2023 due to crypto market headwinds and economic downturns.
What is an NFT?
As its name implies, the idea behind “non-fungible” tokens is to generate tokens that are unique, thereby enabling one to use these tokens to identify a digital good as the original or one of a limited series of originals. “Tokens” are also somewhat of a misnomer, as NFTs are actually pieces of computer code, known as smart contracts, that reside on blockchains and include “metadata” that, among other fields, includes: an NFT’s unique ID; a short description of the work associated with the NFT; and, in most cases, a pointer to an off-chain location
where the work associated with the NFT is stored.
Key stakeholders in the NFT market
- Technology Providers. There are numerous technology providers that provide services to clients related to minting, developing, storing and selling NFTs. Such providers can create white-labelled platforms or storefronts for clients looking to create their own NFT offerings and marketplaces.
- Marketplaces. NFTs are commonly purchased and sold through marketplaces. Some of the marketplaces only offer “curated” content in which the marketplace vets the individual digital creator who wants to list their works for sale, or has written agreements with large rights holders (e.g., a sports league or team, an entertainment company). Other marketplaces merely provide open platforms in which anyone can post an NFT for sale. Finally, some marketplaces provide both a “curated” and an “open” section.
- Creators and Rights Holders. As has been noted, NFTs are typically being developed and minted by individual creators or by larger rights holders.
- Owners of NFTs. The owner of an NFT, which is typically an individual, but could also be a Decentralized Autonomous Organization (“DAO”).
Legal issues presented by NFTs
1. Who has the right to mint an NFT?
Copyright considerations: Under U.S. copyright law, a creator owns the copyright in a creative work upon the creation of that work and its fixation in tangible form, regardless of the medium. The copyright holder enjoys a “bundle of rights” with respect to the work, including the exclusive right to reproduce, prepare derivative works of, publicly perform and publicly display the work. This “bundle of rights” can be held or licensed by the copyright holder in whole or in part, but critically, unless each of the rights are expressly assigned or licensed away, they will remain with the creator, or, in copyright parlance, “author,” of the work.
Trademark considerations: Those minting NFTs also need to be aware of issues surrounding trademarks (to the extent incorporated into an NFT without the permission of the trademark owner) and rights of name, image and likeness (“NIL rights”). Both the Lanham Act and corresponding state laws provide protection against the unauthorized use of trademarks in a manner that is likely to cause confusion among consumers. Moreover, the use of any name, symbol, image, or device that is likely to cause mistake as to the source, affiliation, or sponsorship of a good or service is also prohibited. Accordingly, the use of trademarks or colorable imitations of trademarks in NFTs may implicate a third party’s trademark rights. Moreover, if the underlying trademark is famous and distinctive, rights under the state and federal dilution statutes may be implicated.
2. What rights are being acquired in the underlying work?
Purchasing an NFT does not provide the purchaser with intellectual property rights, particularly copyright rights, in the associated work. Under U.S. law, the “bundle of rights” is held by the author of a work unless they are expressly assigned or licensed away. In this respect, purchasing an NFT is no different from purchasing a piece of physical art. While the purchaser of a painting or sculpture may own the physical work, they typically do not acquire any intellectual property rights in such work (e.g., they cannot create and sell posters of the painting they purchased).
3. Remedies for NFT purchasers
In the event that a work associated with an NFT is taken down due to copyright infringement or otherwise, the remedies that may be available to the then-current NFT owner may be significantly limited. As an initial matter, locating the person or entity that minted the infringing NFT may be difficult if the person or entity that minted the infringing NFT is only identifiable through their blockchain address, since blockchains only list alphanumeric public keys of blockchain participants and the person could be located anywhere in the world. In addition, most NFT marketplaces are careful to disclaim any liability for the authenticity or legitimacy of the NFTs offered on their sites and make abundantly clear that the purchaser is acquiring the NFT at their own risk. Some marketplaces, such as those that curate the creators whose works they offer, have mechanisms in place to try and minimize the risk on the purchaser.
A purchaser’s strongest claims may be in cases where they are able successfully to assert that they were misled by the marketplace or rights holder. Clear disclosures of any limitations on the purchaser’s right, and clear disclosure of any fees or resale royalties that may be extracted from any future sale, are essential.
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