Navigating the Uncharted Legal Territory of NFTs
Over the last two years, non-fungible tokens, commonly known as NFTs, have entered the mainstream as global brands, entertainment companies, sports leagues and others have created (or “minted”) NFTs of a variety of digital works, in many cases attached to “real world” benefits. If your company is presented with an opportunity to take advantage of NFTs, you will need to understand in broad terms what NFTs are, the existing legal framework surrounding them and the unresolved legal issues they pose. To understand NFTs, one has to start with blockchain technology. A blockchain is a peer-to-peer decentralized network of computers that allows transactions to be validated and then transparently recorded in a master ledger. Importantly, there is not a single blockchain; rather, there are multiple blockchains, not all of which can interact with one another. Because each new block of transactions on a blockchain is cryptographically based on the previous ones, blockchains are immutable; for all practical purposes, records cannot be altered. Blockchains therefore provide a powerful technology to create and perpetually store immutable records of the ownership of digital goods. These ownership records are NFTs, each of which have a pointer to the specific digital good they represent. That distinguishes them from other types of digital assets on a blockchain, such as cryptocurrencies, which are all the same — i.e., fungible. A key feature of NFTs is that, despite the term “token,” they are in fact programmable pieces of computer code. This allows developers to design an NFT that, for example, pays royalties automatically every time an NFT is sold.
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