NFT is a relatively new technology and the industry is rapidly changing as new laws and regulations are being put in place. Here are some of the questions we get asked most often about NFTs.

What is the timeline for blockchain technology that led up to the creation of NFTs?

Bitcoin was introduced as the world’s first decentralized digital currency in January 2009, six years before the first NFT was introduced to the world. Two decades earlier, in 1991, blockchain technology was created – in theory. The researchers who began the movement that led to the eventual creation of blockchain were W. Scott Stornetta and Stuart Haber. Their goal was to invent a system that prevented the tampering of digital timestamps on documents.

When Bitcoin was launched in 2009 it was the first time that most people had ever heard of blockchain. That launch was also the first real-world application for blockchain.

How long have NFTs been around?

The first NFT was created in 2014 when Kevin McCoy created the “Quantum.” The technology was very new and garnered very little attention. It wasn’t until the launch of the blockchain-based game “CryptoKitties,” created by Dapper Labs, in 2017 that people began to take notice. The game utilizes the Ethereum network and allows players to breed, adopt, and trade virtual cats.

Over time NFTs have moved out of the strictly digital marketplace and into mainstream markets. As cryptocurrency has become more widely accepted, major corporations are cashing in on NFTs, bridging the gap between the physical world and the digital one. They are becoming more widely accepted and the line between digital and physical is getting less and less distinct.

What caused NFTs to become popular?

There was no single event that caused the popularity of NFTs to increase so rapidly. It was several things that occurred and played a part in creating a perfect storm for digital assets in 2021.

  • The pandemic forced people into their homes and kept them there with little to no in-person interaction. Many turned to the internet to socialize and battle boredom. Anything new and shiny grabbed the public’s attention and people began gravitating toward this new, exciting technology that was NFT.
  • As a result of being stuck at home and the exploration of NFT and blockchain technology, interest increased in digital collections.
  • Dapper Labs launched another NFT, this time called “NBA Top Shot.” Its popularity skyrocketed.
  • As awareness increased, NFTs were presented as a new way to support musicians, athletes, and artists in a more direct way. There were no third-party intermediaries to take a percentage of the sales. This also made the technology attractive for the creators, musicians, and artists because it was a way to monetize their work and retain most, if not all of the profits.

How do NFTs work?

NFTs are individual, unique assets that are attached to blockchain technology. Each NFT stands alone, granted its own set of attributes that make it unlike any other. They contain specific properties such as scarcity and ownership which turns them into digital collectibles. Access keys to the NFTs provide proof of ownership of the asset it represents. It relies on the immutability of the blockchain which is essentially tamper proof. This ensures that the digital asset is unique and authentic. This irrefutably establishes ownership. 

NFTs can be bought, sold, and traded. They can be used for investments although in that arena they are typically governed by SEC regulations.

Do you have legal rights to an NFT?

When you purchase an NFT, the rights to the digital work that is associated with it typically remain with the original creator or artist. The only way to obtain rights is by getting a formal grant of rights. It is not automatic.

The only right the buyer usually gets is the right to use the art for their own personal, noncommercial use.

Another model, which is fairly new, grants commercial rights to the buyer. This means that they are free to use the artwork in any way they choose, even put it up for sale. 

Then there’s the public domain artwork that is free for anyone to use in any way they like.

Another common feature of NFTs regarding sales is a rider included in the agreement that gives the original artist a portion of the profits if the NFT is sold.

Any rights given in the original agreement will only be transferred to the next agreement when an NFT is resold if the rights are included in the agreement.

Are there any regulations on NFTs?

At this time, there are no direct regulations regarding the sale or trade of NFTs unless they have been classified as a security by passing the Howey test.

NFTs that are securities fall under the jurisdiction of the Securities and Exchange Commission (SEC) where they are regulated. They are subject to the same laws and regulations that other types of securities must adhere to. However, even these measures are not adequate. There are no laws that explicitly address the types of digital assets that NFTs are.

Some laws refer to “digital assets,” but the language is broad and leaves a lot of room for interpretation. There is a need for specific laws that directly address NFTs in order to protect traders and consumers as well as ensure a safe marketplace.

NFTs that do not qualify as securities are largely unregulated. There are some laws that very loosely apply to them which allow law enforcement some footing in theft and fraud cases, but most of those laws originally applied to currency and physical assets. There really isn’t much by way of laws that specifically address assets in the metaverse.

Several states are working on creating NFT laws and crypto laws, but that takes time. In the interim, lawmakers are bending current laws in an effort to make them fit some of the larger issues regarding NFTs, such as white-collar crimes like fraud, scams, money laundering, and theft.

What can you legally do with an NFT?

When it comes to NFTs and intellectual property rights, you need to know what you actually own. You need to pay close attention to the terms of your purchase agreement before you close the sale. Make sure that it fits your needs and that you will be able to do what you want with it.

Some NFT projects allow buyers to monetize the artwork when they purchase it. Others restrict any use of the artwork beyond personal and noncommercial.

Before making the purchase, ask these questions:

  • Who owns the intellectual property rights after the sale?
  • Does the sale agreement give you personal and noncommercial rights or full use commercial rights?
  • Does the sale agreement include, like most NFTs, a license that gives the holder the right to “use, copy, and display” ONLY?
  • Is the NFT subject to intellectual property protections like:
    • Design patent
    • Copyright
    • Trademark rights
  • Did the NFT creator fail to specify an intellectual property license? If so, it is by default a personal license, meaning that the NFT is for personal use only.
  • Is the NFT a public domain asset? If so, it can be used by anyone for any purpose, including profit.
  • Is there a stipulation that the buyer is required to pay the original creator a percentage of profits they earn from any monetization of the NFT?

It is best to know what you are up against and what your rights are before you purchase an NFT. 

What factors influence the value of an NFT?

The value of NFTs is not arbitrary. It does not rely solely on hype or fame, although that can contribute to it. Several factors influence an NFT’s value:

  • Scarcity or rarity of the token
  • The reputation of the creator
  • Demand in the market

While NFTs may have value and that value may increase or decrease, just like physical collectibles like art, there are digital qualities that also play a part in that value.

  • NFTs cannot be divided
  • NFTs are immutable
  • NFT ownership is verifiable

NFTs can be bought and sold just like you would buy or sell a painting or a sculpture. The difference is, you can’t put your hands on it. You can’t hang it on your wall. It exists solely in the metaverse. That does not decrease its value though and it does not make it any less art than a painting hanging in the Louvre. It’s just a different medium and a different market.

What can you do with an NFT?

The most recent focus on NFTs has been its relationship with the art industry. However, they do have other uses and applications.

  • Art – Digital artists can authenticate their work and verify ownership much more easily with NFTs. They can sell their art with no middleman, meaning they get all the profits. NFT value can also be quite high. Many digital works of art are selling for hundreds of thousands and even millions of dollars.
  • Business
    • Certificates for licenses, assets, and properties – NFTs provide legal, easy-to-verify proof of ownership for various types of certificates and digital property. 
    • Ticket sales – NFTs cannot be changed so using them for tickets helps prevent scalping. It also provides a system of identification and verification that is unchangeable.
    • Memberships – Can represent an individual’s membership as a digital identity. It provides secure data storage to protect PII and help prevent identity theft.
    • Fashion and sports – NFTs can be used as collectible cards for fans and as giveaways with sales as a marketing strategy to boost sales and customer loyalty.
  • Entertainment and Hobbies
    • Collectibles – This is probably the best-known use for NFTs. They can have a high value or increase in value, making them a good investment.
    • NFT games – The original NFT game, “CryptoKitties” is still going strong, and other games have come onto the scene, incorporating NFTs for players to earn.

How can an NFT be stolen?

NFTs can indeed be stolen and they are often difficult to get back. Most people who have lost their NFTs to theft never get their assets back.

Theft of NFTs is complex. They are attached to the blockchain which is in itself pretty secure. However, it does not grant NFT ownership to a certain person. It grants ownership to a specific digital wallet. The person who owns the wallet (and subsequently the NFT) has the private key and the wallet information that allows them to access it.

This means that if a hacker or scammer wanted to steal an NFT, they would have to somehow get access to the digital wallet. This is usually accomplished by stealing the private key. There are several ways that this can be done and unfortunately, the owner, the person they are stealing from, often has a hand in the thief’s acquisition of the key.

  • Scam or deception – If you spend any amount of time online with email or social media, you have no doubt encountered a scam designed to steal your information. That is how scammers get ahold of private keys. They set up fake profiles and fake websites, send convincing emails and private messages, and use these methods to convince the victim to give them their information. The victim thinks they are providing the information to a government agency or company but in fact, they are sending it directly to the scammer.
  • Hacking or exploitation – The hacker bypasses the holder of the NFT and goes right for the NFT platform. They isolate a weakness in its security and take what they want then usually quickly sell their stolen goods and keep the profits.
  • User error – Often NFT theft is a crime of opportunity. The user failed to protect their key or they did not use two-factor authentication to secure their online account. In short, they did not take the necessary precautions to ensure that their NFTs were secure.

Can you sue someone if they use your NFT?

If someone uses your NFT’s digital asset in a way that infringes on your intellectual property rights or without obtaining your permission, you may be able to sue for infringement. An NFT attorney can help you determine if you have a case. There have been some cases where the injured party sued for copyright infringement and won.

Buy, Sell, and Trade Your NFTs the Right Way With an Experienced NFT Lawyer

If you are just starting out with NFTs or if you’ve been doing it for years, you can always benefit from the experience and knowledge of an NFT lawyer. The industry is changing rapidly which means that new laws are emerging. Regulations are changing quickly and you need someone who is up to date on all current laws regarding NFTs.

You don’t want a noncompliance charge on your record!

Call the Litvak Law Firm today at 718-989-2908 and get the legal representation you need to protect your assets.