Editor’s note: This article is the first in a series by Katten lawyers examining NFTs and various emerging legal issues raised by NFTs, including in copyright law and beyond.
When artist Beeple sold a non-fungible token (“NFT”) of his digital artwork for an eye-watering $69 million at a Christie’s online auction in March 2021, only about 178,000 wallet addresses had bought or sold an NFT on an Ethereum marketplace. Today, the figure is over three million. Although headline scandals and continued regulatory uncertainty over the treatment of digital assets have cast a cloud over cryptocurrency markets in the intervening years, major companies and brands have spearheaded efforts to bring NFTs to the consuming public. Recently, an update to the Bitcoin protocol source code called Taproot that enabled a limited form of smart contracts on the protocol has inspired a budding marketplace for Bitcoin NFTs called Ordinals and STAMPS.[4]
The market for NFTs remains persistent, generating approximately $24.7 billion in trading volume in 2022 compared to $25.1 billion in 2021. This sustained and growing interest in NFTs reflects their unique appeal in a world filled with fungible digital assets (approximately 22,932 according to Forbes) — each NFT is literally unique, and can be used to buy and sell interests in music, art and collectibles. This feature of NFTs thus allows brands to engage with consumers through digital media while relying on the benefits of blockchain technology, namely a tamper-proof and transparent way to verify ownership and authenticity. NFTs can also be programmed to automatically pay their creators a portion of the resale value of the NFT whenever the NFT is resold on a secondary market, thus giving artists and creators a new way to monetize their creations.
Some have compared NFTs and their characteristics (ie, uniqueness and exclusivity) to physical collectibles. In fact, an issuer of NFTs recently compared its NFTs to baseball cards in an attempt to dismiss a class action lawsuit alleging, among other things, that the NFTs were sold to buyers as unregistered securities. What makes NFTs arguably more extensive in scope than physical collectibles such as baseball cards or rare coins, however, is that the metadata in an NFT that refers to the underlying source material can point to virtually any digital content or data, including content that the issuer of NFT cannot hold ownership rights to. This feature of NFTs, combined with the pseudonymous and immutable nature of blockchain transactions, has raised new and complex questions of intellectual property, privacy and copyright law for brands, creators and consumers alike. We examine these issues in our upcoming series on NFTs.
