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23 April 2021

What you should know before buying or selling an NFT in the US

What you should know before buying or selling an NFT in the US

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This comment focuses on NFTs associated with creative works of art.

At this point in time, by far the most famous of these is “Everydays: The First 5000 Days,” a work created by the digital artist known as Beeple.

“Nonfungible” means that each NFT is unique, encoded onto the underlying blockchain with certain metadata that makes it different from every other token, even if the underlying work of art is the same.

This comment is focused on NFTs based on an underlying work of art, and so the obvious question is what a seller is actually conveying or a purchaser is actually acquiring along with the NFT.

Although this may surprise some people, absent agreement from the artist either at the time of acquisition or later, purchasers cannot make and display or distribute copies of the painting; they cannot make derivative works from it; and in many cases, they cannot materially alter or destroy the painting.

For example, this would be the case if the work was done for hire or if the artist specifically signs over their copyright or “moral rights” to the buyer.

How does all of this apply in the case of an NFT based on an underlying work of art.

Of course, the purchaser of an NFT would own the unique token associated with the underlying creative work.

This means that in order to obtain the rights to take pictures or make copies of the underlying work of art, or to make derivative works from it, the NFT purchaser must be given permission from the seller.

For example, with regard to the $69-million auction of Beeple’s NFT for “Everydays: The First 5000 Days,” the purchase reportedly included some display rights in the image, but the artist retained the copyright.

Both parties need to decide upon, create and review appropriate documentation explaining precisely what the creator has retained, what has been transferred, and any ongoing responsibilities associated with the underlying creative work.

It is possible that they are lying about the existence of the NFT (relying instead on a digital image that is unrelated to any blockchain), or the NFT could be tied to a different blockchain that they do not control and cannot transfer, or the art on which the NFT is based does not legally belong to them and, instead, infringes on another party’s copyright.

The Dapper Labs’ template includes language that sellers can adopt to outline the rights that they intend to transfer or license to the NFT buyer.

Theoretically, the entire artistic creation, regardless of whether it is a digital image, video, song or another kind of work, could be included as part of the computer code that constitutes the NFT.

Since on-chain storage is impractical, this means that the creative work must be stored elsewhere, such as on a web server.

The NFT’s code would then refer to the online web address, but this also means that the underlying digital assets are not safely stored on the blockchain, but rather off-chain.

It should also be noted that because the underlying artistic content is unlikely to be embedded in the NFT programming, there are open questions, such as how to ensure that the digital content will be appropriately, continuously hosted in a retrievable format by the purchaser.

This comment does not purport to offer an exhaustive list of potential issues that should be considered prior to a decision to sell or invest in an NFT.

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