Buying & Selling NFTs: Navigating the Legal Landscape

The purchaser buys the token, not the asset.

As noted in our previous post, Understanding NFTs, when you buy a NFT, you are buying the token, but you may not necessarily be buying the underlying digital asset. Whether you in fact own the underlying asset, will be governed by the terms of the sale. However, even if you are buying the underlying asset, the token and the digital asset are separate and distinct assets. This separation of the NFT from the digital asset may present some risks of ownership. If the underlying asset is hosted on a URL, the asset's existence will be at the whim of the domain owner's ability to keep the site online. If the site goes under, so does the asset. To address this issue, digital assets may be hosted on decentralized databases, such as the InterPlanetary File System (IPFS), which is a peer-to-peer distributed file system that ensures that the content remains online by relying on a multitude of hosts rather than a single domain owner. The way the purchased asset will be stored is thus something that a careful buyer ought to investigate prior to purchase.

Copyright is owned by the original author.

Unless the terms of the sale provide otherwise, the copyright in the work is owned by its author/creator, who controls the exclusive right to, for example, make copies, distribute, display, or perform the work. The terms of the sale may grant certain limited rights, such as in the case of the NBA Top Shot license, which grants the buyer the right, among others, to use, copy, and display the artwork for personal non-commercial use, but the buyer does not own the right to modify the art, use it for advertising purposes, or otherwise commercialize the NFT. This limitation on usage is essentially no different than when you purchase other forms of digital assets, such as a song, online—you are acquiring a limited license. This means that the author/creator of the work is free to display the work, and nothing prevents others from viewing the work. "Mars House," the world's first NFT digital house, was sold in March for over $500,000, with the artist Krista Kim reportedly retaining the copyright in the work. That is why the artist owns the right to display Mars House for viewing by the public on her web site or in other digital exhibits.

Selling NFTs

A groundbreaking feature of NFTs is the ability of the rights owner or the original seller to capture revenue from the secondary market, or the resale marketplace. Under the traditional framework, the "first sale doctrine"—which provides that a buyer of a physical work may freely dispose of that particular copy without accounting to the owner—precludes the owner from reaping any benefit from a secondary sale of that physical work. As an example, Buyer 1 purchases a piece of artwork from the artist. When Buyer 1 re-sells that artwork, the artist does not receive any commission or royalty for the asset, even though the artist owns the copyright. In contrast, the first sale doctrine appears to have no place in the universe of NFTs. NFTs are coded with smart contracts, which may be configured to pay a percentage (generally 10%) from the secondary sale of the NFT as a royalty payment to the artist upon each resale of the NFT. Some limitations exist, however, as the royalty is currently only recognized if the resale occurs on the same platform. Programmers have proposed standards such as EIP-2981, which would enable setting a royalty to be paid to the NFT creator or rights holder upon a resale across multiple platforms, although the system is still voluntary in that a platform must opt in to provide it. These and other developments provide a major long-term benefit to artists and creators of digital assets, but the logistics to achieve this benefit are still in the works.

Key Take-Away

In sum, as a buyer of an NFT, it is important to read the terms that govern the sale of the NFT to determine what you actually own beyond ownership of the NFT, and how the underlying digital asset will be stored. Purchasing an NFT does not by default entitle you to ownership of the underlying digital asset, nor to the intellectual property in the work depicted in the NFT. As a seller of NFT, perhaps one of the most attractive features is the ability to recoup royalties for each successive secondary sale. But the seller must be aware of the limitations that currently exist with the ability to recoup such resale royalties, and should be careful to review the terms of the NFT platform for transparency on when the artist or NFT creator will or will not be entitled to a royalty.