In today’s age, blockchain, cryptocurrencies, and non-fungible tokens (NFTs) are sweeping the headlines and making buzz in the press. From artists, to musicians (Kings of Leon, Mike Shinoda), to athletes, investors and businesspeople alike, many are taking advantage of the juxtaposition of cryptocurrencies and their respective industries. It will be fascinating to see how this convergence between collectibles and cryptocurrencies develops.

NFTs are essentially digital collectibles – they can represent things (a tweet, or an asset) or they can be things (like art, or a highlight). The value proposition here is that these NFTs are unique in the digital sense. They exist on a blockchain, which is a decentralized, often public, digital ledger consisting of records called blocks. The blockchain is used to record transactions across multiple computers so that any involved block cannot be altered retroactively without the alteration of all subsequent blocks. So, while anyone can copy and download a video highlight package or image file, the NFT has a record saying that it only has one owner. Well-known entrepreneur Gary Vaynerchuck has compared NFTs to various “skins” or costumes that players can purchase in a video game. In fact, a few weeks ago, the New York Times ran a story about a work of art in the form of an NFT that sold online for $69 million.

Currently, it is unclear how NFTs fit into the existing legal and regulatory frameworks that usually govern financial, technological, and crypto-industries. NFTs don’t behave like initial coin offerings, so these new collectibles cannot simply be treated like a security. While there are some laws that govern the behavior of NFT activities, it is essential to ensure consumers are aware of what they’re doing and purchasing. Vaynerchuck has chimed in on this issue as well, highlighting how he is concerned about 98% of the NFTs being released. His concerns lie in the fact that people have already viewed and have other methods to consume the intellectual property. By this, Vaynerchuck means that people have already viewed the content that the NFT has on it, making it less appealing, or only appealing for a fleeting moment.

This highlights the first legal concern, consumer protection. Fordham Law Adjunct Professor Donna Redel has recently commented on the issue, noting that many consumers really have no idea what they are buying when engaging with these NFTs. Additionally, Redel notes, it does not bode well that NFTs are becoming popular with an increasingly younger and less sophisticated audience. This proposition makes an already volatile market seem all the more volatile.

While consumer protection is an area of NFTs where plenty of legal issues may arise, the intellectual property aspect also seems ripe with the possibility of legal disputes. Since the law generally tends to lag behind, especially in the field of intellectual property, several issues with copyrights and trademarks may come about as a result of this trend.

In an interview, Nelson Rosario of Smolinski Rosario Law, P.C. has said that the main question is whether buyers’ perception of what they bought matches the legal reality. In the NFT space, sellers have the added issue of making sure that the NFT that they sell has exactly the content they want to sell. Unlike other digital files, an NFT cannot be easily edited once it has been recorded on a blockchain. Additionally, there is no going back with NFTs either. Once that NFT is out in the open, a seller can put out a second token, but the initial existing NFT is going to be out there. Sellers will have to be mindful of this, especially when using third-party intellectual property, or when dealing with the intellectual property of multiple different authors or artists.

Another important issue is ownership. Who really owns the copyright in the work: the creator, the purchaser, the platform, or downstream purchasers? If there is contracting in place to resolve this, would the clauses be recognized and valid in all of the jurisdictions that the blockchain exists in? Mike Shinoda, the lead singer of Linkin Park, believes that this issue isn’t as pervasive as one may think. Shinoda asserts that no one who takes NFTs “seriously” really humors the idea that what you’re selling is the copyright or the master recording, meaning the artists retain the copyright even as they sell some form of licensed content to buyers.

On the other hand, when dealing with the trademark side of intellectual property, if you have an NFT that incorporates a trademarked brand or slogan, are there risks for infringement, and if so, in that case, who should be liable?

While the musicians, artists, collectors, and athletes who create NFTs of their own artwork likely have an understanding of their rights, people can also mint, or create their own NFTs of works made by others. This is a possibility, but it has not happened yet, and an interesting proposition becomes whether or not these NFT marketplaces have policies and processes in place to deal with the “minting” of NFTs they don’t own.

In the National Basketball Association, the popularity of NFTs is no different. There is a growing craze called “Top Shot” that is sweeping the nation and drawing the eyes of fans and collectors alike. These “packs” are all exclusively online and contain various highlights of players from all over the league. The highlights within the packs come in the form of NFTs and are exclusively stored in an online wallet through blockchain, which is the only place to access the collectible. Depending on the type of collectible that is pulled in the pack, there may be duplicates of the code that can be stored on the blockchain; however, for the most part, these highlights are supposedly not able to be replicated and unique in their own right – hence the allure.

However, since NFTs sold by the NBA come in the form of video clips, there has been some confusion among consumers since their release. For one thing, what exactly are the consumers buying? “Top Shot” is being advertised as a Digital Highlights Marketplace, but what digital highlights are consumers buying? And what are their rights once they have secured these often-sought-after digital NFTs? Some consumers have misunderstood what the NBA is offering and have been led to believe that they actually possess certain intellectual property rights in the NFTs that they purchase. What we see with NBA “Top Shot” is the first major attempt to contract out and provide consumers, and sellers alike, with a clear agreement and terms of service, which the NBA and their partner Dapper Labs have attempted to do.

The terms of service lay out the rights and licenses that consumers actually purchase when they buy the NFT – which, interestingly enough, ends up being nothing but the underlying NFT and a limited license.

The terms of service indicate that the purchaser owns the NFT. The moments/highlights come in the form of NFTs on the Flow blockchain. On this blockchain, the purchaser can trade the moment, sell it, or give it away. This ownership of the NFT is mediated by the entire Flow network. DLI and Dapper Labs say that they will not freeze or otherwise modify the ownership of any moment; however, it will be interesting to see how this rule in the terms of service is kept. With the ever-growing popularity of effectuating purchases and trading online, recent issues such as those with Robinhood come to mind. If the demand or supply of the moment NFTs get so one-sided, or go in a direction not forecasted by experts, will the platform shut down for dead periods, or prevent consumers from purchasing more? Right now, there is no set plan in the terms of service, and it seems that DLI and Dapper Labs, along with the NBA, are comfortable with this promise and the prospect of enforcing and abiding by this process.

Moreover, the terms of service attempt to flesh out further what rights are afforded to consumers (if any), and what licenses may be afforded in lieu of certain rights. The section of the terms of service titled, “Ownership; License; Restrictions” covers these rights and states what consumers are, and are not, entitled to as owners of these NFTs. These terms break down what some consumers may be concerned about: that they aren’t actually afforded any rights other than the ownership rights in the underlying NFT. Much like purchasing a skin for a character in an online game, the intellectual property doesn’t belong to you, you merely have a license to use such property on the particular platform in which you purchased it.

Additionally, DLI and the NBA have gone a step further, adding in provisions in the terms of service where consumers agree that they do not have the right to copy, distribute, or otherwise commercialize any elements of the DLI Materials without prior written consent in each case, and also that the consumers do not have the right to try to register for, or use, any DLI trademarks or service marks, or any other marks that could be construed as confusingly similar marks. These terms also provide acceptable uses for the NFTs, and lay out where misuse issues would arise.

Ultimately, the NBA’s venture into “Top Shot” is the first major attempt to contract out terms and conditions and fully explain to consumers what they actually are purchasing in this online marketplace. Intellectual property concerns still remain, but the NBA has clearly done their legwork and their homework and has a comprehensive terms of service in place to protect the intellectual property rights of their organizations and athletes. Whether or not these provisions and terms will be enforceable is the next step in this NFT craze, and it will be very interesting to see how issues such as this play out in court in the coming years. The law typically lags behind, especially in issues relating to intellectual property. Will the law continue to lag? Only time will tell.

April 8, 2021/by Privacy and Data Security