NFT Basics and Opportunities Part 1

NFTs have become mainstream. But what are NFTs? Should your company develop its own NFT? How are they regulated? IN The NFT collection series of alerts, we will delve into these issues to help your business understand this new technology.

What are NFTs?

Non-fungible tokens, or NFTs, are digital certificates of ownership of certain, usually digital, assets held on a blockchain. NFTs are most often sold in relation to digital works of art, but the underlying objects can also be a video, music file, objects in games, tweets or physical objects such as coaches or even real estate. Using blockchain technology, each NFT contains transaction data that is open to the public and allows the owner to verify ownership of NFT.

Since NFTs are related to a particular underlying element, each NFT is unique and cannot be replaced with another, hence the name non-fungible (meaning non-changeable). An important thing to note, however, is that users do not buy the digital work itself. What you buy is just a collection of code known as metadata, which links to the “true” version of that work. This means that owning it may not prevent others from downloading, viewing or commercializing the digital artwork.

Last year, sales of NFTs or ‘non-fungible tokens’ shot up so much that the term was awarded the Word of the Year by Collins Dictionary, and some of the highest value brands are exploring the potential of NFTs. according to Financial TimesNFT sales in 2021 totaled over $ 40 billion, with the most expensive NFTs to date being Paks ‘The Merge’ NFT, which sold for $ 91.8 million, and Beeple’s digital artwork, Everydays: The First 5000 Days, sold for over $ 69.3 million.

There are currently several online platforms where users can sell or buy NFTs, the largest being OpenSea. NFTs are purchased using cryptocurrency such as ether (ETH), the default currency on the Ethereum blockchain. Unlike NFTs, cryptocurrencies are fungible or interchangeable (but only with respect to that cryptocurrency, so one bitcoin can be exchanged for another bitcoin, but that bitcoin can then not be exchanged for an ether). On the other hand, an NFT is valuable because it is non-fungible, as each NFT is unique and cannot be replaced directly by another NFT. It is in fact the digital signature of an artist, and is a means of authenticating the work of art and your ownership. Valuable, the company that characterized NFT by Twitter CEO Jack Dorsey’s first ever tweet, encapsulated the true meaning of the value behind NFTs:

“Owning digital content can be a financial investment, have sentimental value and create a relationship between collector and creator. Like an autograph on a baseball card, the NFT itself is the creator’s autograph on the content, making it small, unique and valuable.”

Jack Dorsey, CEO, Twitter

Interestingly, in May 2022, the UK Supreme Court recognized NFTs as “property” in the legal sense. The legal adviser in the case said the ruling “removes any uncertainty that NFTs are property in themselves, different from what they represent, under the laws of England and Wales. “

Non-exchangeable opportunities

NFTs provide an interesting opportunity for companies to monitor their intellectual property rights with other companies in the latest investment trend. The most obvious way is to sell your NFT to a third party, but additional revenue can be generated by making smart contracts that automatically make royalty payments equal to a percentage of a subsequent sale, to the original NFT seller (ie your company). For example, this continuous revenue stream will be a useful way to explore for companies in the gaming sector who may want to move their digital content to a decentralized sphere, reducing overhead while reaping the benefits of subsequent sales.

However, when a person buys an NFT, they take the risk as an NFT is simply unique metadata about an asset added to a blockchain – not the physical asset itself or any intellectual property rights attached to it. For example, the sale of Beeple’s digital artwork mentioned above did not give the owner any rights over the artwork itself, only an authorized certificate – the copyright itself remained with Beeple. It is possible to go one step further in NFT sales by simultaneously transferring the intellectual property rights related to the underlying asset to the NFT buyer.

It is possible to own a short text address via the Ethereum name service, which works in the same way as the Internet domain name service. This short address can be used instead of a crypto wallet address, which are long alphanumeric strings. We would recommend that all brands considering entering the NFT site immediately register using their brand name, as there is currently little way for a brand owner to complain that a third party is doing so, and this may prevent consumer confusion issues. further down the line.

Another thing to consider is the duration of the blockchain, when an NFT exists, it exists in that blockchain forever. This has several consequences, the first of which to really delete an NFT will be impossible, even if it can be moved to a wallet with no or few access permissions.

Where next?

Companies can take advantage of the sudden popularity of NFTs to create new financial opportunities for themselves, as long as they understand the potential risks. It will be important for companies to understand any local regulatory concerns and what role IP rights will play in the sale of NFTs. To help, in our next bulletin, we will consider regulatory considerations, or lack thereof, for a number of important jurisdictions.