SHARE

March 25, 2022

Understanding NFTs

You've Reached Your
Free Article Limit This Month
Register for free to get unlimited access to all Law.com OnPractice content.
Register Now

Key Takeaways

  • By now you may have heard about NFTs: the new cryptographic asset that is having a major impact in many industries and is likely to continue to do so for many years.

By now you may have heard about NFTs: the new cryptographic asset that is having a major impact in many industries and is likely to continue to do so for many years. Christies sold an NFT of digital artwork for $69 million. An NFT of Jack Dorsey's first tweet sold for over $2.9 million. NBA's Top Shot program has resulted in over $700 million in sales of NFT, and Internet memes are selling for hundreds of thousands of dollars. NFTs are selling for astronomical prices and opening new markets and opportunities for monetizing creative works in ways that previously did not exist. As this new technology gains foothold in mainstream media, novel and critically important legal issues have emerged. This client alert discusses the current NFT craze in the digital world, and the three basic things you need to understand if you are considering entering the NFT world.

1. What is an NFT?

NFT, or non-fungible token, is a unique digital file that resides on the blockchain so that ownership of that digital file can be tracked. It is a cryptographic "hash," or a unique string of letters and numbers that is related to a specific asset or object. The key characteristic of a NFT is that it is not fungible, meaning that, unlike cryptocurrency such as Bitcoin, each NFT is unique—each NFT is coded to verify that it is the only digital asset with its specific attributes, much like an original painting is a physical asset that is unique.

2. What is blockchain?

The underpinning technology that supports NFTs is the blockchain. Blockchain is a digital ledger that records information (such as ownership transfers) in a what is believed to be a secure manner. The hallmark of blockchain technology is decentralization: instead of having one central body (such as a bank, County Clerk's office, or US Copyright Office) maintaining the data, a network of computers maintains the data in an immutable and permanent shared record of transactions—the digital ledger. When an NFT is purchased, the transaction is recorded on the blockchain (most commonly, on the Ethereum blockchain) as a new block of data entry. Each block contains a list of historical transactions and the latest NFT transaction will be added to that list. The block will include information about the payment history, chain of title, and other information about where you can find information regarding the underlying asset. The information on the blockchain will link to the asset's location, which, in most cases, resides off-chain and elsewhere on the Internet.

3. What exactly do you own when you own an NFT?

When you buy an NFT, you are buying the token, and not necessarily the underlying digital asset. Each NFT has a contract (i.e., rules) associated with it which determines precisely what you own. And generally, even if the contract does grant you ownership of the digital asset, it does not transfer ownership of the asset's intellectual property, which will remain with the creator of the asset unless agreed otherwise.

As an example, if you are a huge NBA fan and are committed to collecting exciting plays that last only a few seconds on the court, you can now purchase NFTs on NBA Top Shot, which is an online marketplace that allows users to trade NFTs that present game clips or photos from actual games (i.e., the "Moment", as the NBA Top Shot calls them on its website).

When you purchase a "Moment", such as a clip showing Vince Carter dunks over Shaq, what you would obtain is the ownership of the NFT underlying that Moment but not the ownership of the dunking clip, or the intellectual property embodied in that clip. The purchase of the NFT entitles you to a license to use the Moment in a personal and non-commercial way, such as showing the dunking clip to your friends or trading it for other Moments. But you are NOT entitled to modify or use the dunking clip for other commercial purposes because NBA Top Shot (or the NBA or the player) retains ownership of and intellectual property rights in that clip.

As such, if you wish to modify the clip to make it look like Vince Carter had dunked over Larry Bird and sell it for profit, you will need NBA Top Shot's consent for doing so.

ALM expressly disclaims any express or implied warranty regarding the OnPractice Content, including any implied warranty that the OnPractice Content is accurate, has been corrected or is otherwise free from errors.

More From Ingram Yuzek Gainen Carroll & Bertolotti

Legalized & Leasing - The Dilemma Facing NYC Landlords And Unlicensed Marijuana Dispensaries

By Michael A. Mulia Ingram Yuzek Gainen Carroll & Bertolotti January 27 , 2023

The cannabis cash grab is fully underway in New York City and many commercial landlords (whether willingly or unwillingly) find themselves as key participants in the industry.

One Man's Trash Is Another Man's ... House?!

By Christine S. Varghese Ingram Yuzek Gainen Carroll & Bertolotti January 26 , 2023

Would you live in a house made of recycled plastic water bottles?

Judge Tosses First Amendment Defense In Yuga Labs V. Ryder Ripps

By Mioko C. Tajika Ingram Yuzek Gainen Carroll & Bertolotti January 24 , 2023

On December 16, 2022, a federal district judge in California denied artist Ryder Ripps’s and his partner’s anti-SLAPP motion and motion to dismiss in a closely monitored action filed against them by Yuga Labs, Inc. (“Yuga”), the creator behind the monumentally successful Bored Ape Yacht Club (“BAYC”) NFTs.

More From Copyrights

IRS Releases Memorandum on Deducting Cryptocurrency Losses

By Andrew M. Granek McDermott Will & Emery January 26 , 2023

On January 13, 2023, the Internal Revenue Service (IRS) released a Chief Counsel Advice Memorandum (CCA 202302011) concluding that taxpayers cannot claim a deduction for cryptocurrency losses that have, absent a sale or other taxable disposition, substantially declined in value if such cryptocurrency continues to trade on at least one cryptocurrency exchange and has a value that is greater than zero.

Your Gang Did What!? No Matter—No Forfeiture of IP

By Kat Lynch McDermott Will & Emery January 26 , 2023

In a unique case blending intellectual property and criminal law, the US Court of Appeals for the Ninth Circuit agreed that a district court properly exercised jurisdiction over a motorcycle club and upheld the lower court’s finding that the club did not have to forfeit its collective membership marks.

Deleting Goods from Registration Subject to Cancellation During Audit May Result in Adverse Judgment

By Eleanor B. Atkins McDermott Will & Emery January 26 , 2023

The Trademark Trial & Appeal Board (Board) addressed, for the first time, whether the deletion of goods and services as a result of a post-registration audit during a cancellation proceeding triggers Trademark Rule 2.134 and found that it does.

Featured Stories
Closeclose
Search
Menu

Working...