NFTs Empower Innovative New Business Models and Revenue Opportunities | Skadden, Arps, Slate, Meagher & Flom LLP
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- Most of the existing agreements covering the exploitation of intellectual property rights did not provide for how NFTs should be treated.
- Drafting and negotiating agreements involving NFTs requires an understanding of both the underlying technology and business models, as well as the new legal issues they present.
- Parties looking to harness the potential of NFTs should consider the growing popularity of Decentralized Autonomous Organizations (DAOs).
- Those who market NFTs should be careful not to promote them as investments in a way that could violate securities laws.
The dramatic increase in the use and adoption of non-fungible tokens (NFTs) in 2021 can be seen in the wide range of year-end reviews and listings in which they appear. Rankings for these blockchain-based assets can be found in industries such as Marketing/Branding, Sports, Film & TV, Music, Art, Gaming, Fintech, and Crypto -currencies. The impact of NFTs in these and other industries is in its infancy, and their use and the resulting legal issues will only multiply as companies that gave little thought to NFTs in early 2021 enter into 2022 armed with business plans and NFT divisions.
The nature of an NFT
An NFT is essentially a digital certificate stored on a blockchain that reflects certain rights, including ownership, associated with an asset – usually a digital one. The unusual terminology comes from the fact that each NFT is unique, unlike other blockchain tokens, such as cryptocurrencies, which are fungible (for example., every bitcoin is the same, just like every dollar is the same). NFTs can also be associated with physical goods or experiences, acting as a password or digital key to authenticate the owner of the NFT.
While there is often only one NFT associated with a work, a creator can also create a limited series of NFTs all related to a work, such as special access to certain videos or music available only to a set of “superfans” who bought the NFTs. They can also be used to generate tickets to attend an event or access real physical resources.
NFTs have been around for about four years, but it wasn’t until 2021 that creators and rights holders started capitalizing on their potential. Today, most NFTs are bought and sold through third-party marketplaces that also provide the technology needed to create new NFTs.
NFTs have a number of powerful features enabling interesting and important innovations in the digital asset space:
- Since they are stored on a blockchain, NFTs are immutable and allow brand owners and creators to sell ownership of an “original” digital work even if that work can be easily reproduced.
- Although referred to as a token, NFTs are actually pieces of computer code that, once created (or “minted”), can be programmed to perform various functions. More importantly, they can be designed to efficiently and automatically allocate any revenue from the initial or secondary sale of an NFT to an unlimited number of stakeholders.
- Since most NFT transfers are recorded on a blockchain, whose transactions are transparent, holders can establish the provenance of a digital asset and, in cases where the striking party can be identified, the authenticity of the NFT.
Legal issues generated by NFTs
A threshold issue for many companies looking to mint NFTs is whether they have the right to do so. Not surprisingly, few contracts written before 2021 that award intellectual property rights or publicity rights address NFT minting. Companies therefore attempt to analyze contract language and determine, often on a case-by-case basis, whether they alone have the appropriate rights to mint a specific NFT or whether they need a license or consent from other stakeholders. . This involves determining how an NFT should be characterized under existing contractual provisions. For example, is an NFT a type of commodity or something different, and what intellectual property rights are needed to mint an NFT (for example., a right of derivative work, a right of distribution, a right of display, a right of representation)?
There have already been two high-profile disputes over such issues. One pits director Quentin Tarantino against film company Miramax over the former’s right to mint NFTs of script pages from his film “Pulp Fiction.” In another, Jay-Z and Damon Dash, co-founders of Roc-A-Fella Records, clash over Dash’s attempt to strike and sell an NFT of his copyrights to Jay-A-Fella’s debut album. Z, “Reasonable Doubt”.
We anticipate more such disputes over NFTs as creators, rightsholders, and licensees test the interpretation of existing license agreements and the limits of their rights. In the future, parties to new agreements involving the exploitation of intellectual property rights or name, image or likeness (NIL) rights will want to explicitly state which party or parties have the right to mint NFTs. .
Minting NFTs typically involves a collaboration between a traditional rights holder and a company with the technical know-how to write the computer code (or “smart contract”) to mint an NFT on a blockchain and to administer the storage aspects of the process. digital work. associated with NFT (since the digital work itself is usually not stored on a blockchain). Drafting and negotiating these contracts requires a nuanced understanding of the technology and “tokenomics” underlying NFTs, as well as experience with the legal issues these agreements must cover. For example, parties must determine how to terminate a contractual relationship when NFTs that were created under that relationship nevertheless continue to persist on a blockchain.
Issues to watch out for
As NFTs continue to evolve in 2022, we expect to see a variety of new and expanding business models raising other legal issues for businesses to consider. For example, in the second half of 2021, we have seen the formation of an increasing number of Decentralized Autonomous Organizations (DAOs) with the aim of getting involved in the NFT sector. DAOs extend the philosophy of decentralization underlying cryptocurrencies and decentralized finance to corporate governance, so that decision-making power is not concentrated in a small group such as a board of directors or a management team. Rather, governance of the DAO is exercised through member voting managed and recorded on a blockchain through “smart contracts.” The legal status of DAOs and their organization will continue to evolve in 2022, and stakeholders engaged in the NFT ecosystem will likely have to decide whether and how to contract with them.
Over the past year, some NFT providers have also created business models that may raise securities law concerns. For example, some projects associated separate coin offerings with their NFT project that closely mirrored the types of “initial coin offerings” (ICOs) that the United States Securities and Exchange Commission found violated securities laws. securities in 2017-18 when ICOs were common. Particular attention should be paid to such coin offers. Additionally, sales of NFTs must not be promoted or marketed as investment opportunities in a manner that could raise securities law issues.
Overall, we expect 2022 to be a year of growth for NFTs, with the creator class, brand owners and rights holders continuing to innovate, raising new legal issues along the way.