Non-fungible tokens, more commonly known as NFTs, have exploded onto the scene in the past year. In this article, Advanced Media and Technology partner Mercedes Tunstall reflects on the NFT craze and what to expect from this space as the technology continues to develop.
Mercedes Kelley Tunstall is widely recognized as a legal leader in fintech and consumer financial services regulation and compliance. As a former Federal Trade Commission lawyer and bank in-house counsel, Mercedes draws on her experience to work with companies in a wide variety of industries on advertising law, privacy and cybersecurity issues. She takes pride in helping her clients, including banks, lenders, payments companies and fintechs, innovate by incorporating artificial intelligence, mobile payments, social media, cryptocurrency, and blockchain and distributed ledger technology into financial products and services.
Who is selling NFTs and why have they exploded onto the scene?
NFTs have been embraced by a wide variety of parties—digital artists, celebrities, influencers, athletes, sports teams and leagues, brands, musicians and fashion designers have all started buying and selling NFTs. Even Fortune 500 companies, which under normal circumstances would never go near cryptocurrencies, have had their interest piqued by NFTs. The wide variety of engagement in this space is something that I find very interesting, and there are several reasons why NFTs have become so popular.
First is what I call the “crypto-curious” aspect of NFTs. People have a genuine curiosity about cryptocurrency and how the industry operates, and NFTs are a new, exciting way to get involved in the blockchain. NFTs are a gateway into the world of cryptocurrency, and they make this world more accessible and fun for the average consumer. All the people entering this market, including celebrities, athletes and other influencers, have a lot of optimism about what’s to come in this space, and that excitement is very contagious.
Another reason why NFTs have become so popular is that many companies are seeing their inherent value. Luxury brands have always had to fight against knockoffs of their products, and NFTs can provide a unique solution to this problem. For example, one brand has started issuing an NFT along with the purchase of its collectible sneakers. When its shoes later go up for sale, if the seller can’t provide the NFT that goes along with the sneakers, that’s a very good sign to the purchaser that the shoes are a knockoff. Having the ability to regulate the purchase and sale of their products is a huge advantage for brands.
The pandemic has also played a part in the rise of NFTs. When everyone was stuck at home, they naturally had more time on their hands to explore the cryptocurrency space. NFTs also allow you to buy and sell products virtually, without ever leaving your home.
What legal issues are you encountering in this new area?
NFTs are very much a developing area, so we are seeing different legal issues arise virtually every week at this point in time. But the overall legal issues can be broken down into three different areas.
First, NFTs pose a whole host of intellectual property (IP) considerations. How do you protect your IP with an NFT that can be sold by the purchaser to third parties that you have no relationship with? When third parties become involved, do you maintain your rights to the original content? There is a clear reputational risk that comes with NFTs, as your IP can fall into a stranger’s hands and you don’t necessarily know what they will end up doing with your work.
Second, there have been a lot of questions surrounding how cryptocurrency works and concerns about the volatility of pricing and value in this space. The market can be very volatile, and the value of NFTs has swung up and down, often quite suddenly. Many consumers who are buying and selling NFTs are not sophisticated and not very familiar with cryptocurrencies. Therefore, risk is involved when consumers are buying and selling NFTs.
Third, NFTs have raised a variety of securities issues. If you have an NFT that is clearly a collectible, in that it is unique, then it can easily be compared to a physical collectible, such as an autographed baseball. A physical collectible can go up in value, but it’s in that collectible category, so it’s clearly not a security. On the flip side, if you have 1,000 NFTs that all have the same content, and that NFT skyrockets in value, that NFT could be used by those holding it as a currency in and of itself. In that regard, the NFT could look very much like a security. So the issue then becomes, how do you deal with something that looks like a security and behaves like a security but for which the proper disclosures have not been provided? We have seen this issue come up quite a lot lately.
Another place where the securities issue may pop up is in a closed marketplace that’s operated to sell NFTs. While closed marketplaces can be beneficial because they can be set up to provide more IP protection than would be available on an open marketplace, securities issues are more likely to arise in this type of marketplace. For companies selling NFTs, weighing the pros and cons of selling NFTs in a closed marketplace that the company can control versus selling NFTs on a third-party open marketplace is an important thing to do when you are entering this space.
More generally, NFTs also pose several transactional issues: How do you describe NFTs? How do you price them? Since they are so new, even these basic legal issues must be addressed.
Are there any particular trends you’re watching in this space?
There are several trends I’m watching. I’m seeing a lot of articles claim that the “NFT craze is over” and that it was all silly to begin with. I’m watching these particular news stories closely because the sudden popularity of NFTs is only one aspect of this technology. If its popularity fades, that doesn’t mean the technology itself is something we will no longer care about. NFTs represent a form of digital ownership that’s different from the way in which you can own anything else electronically, because of internet limitations and the way the internet works. NFTs solve that particular technological problem that we’ve had in the past. The technology itself has applications that will be with us for many, many years. As a result, I’m watching closely for the initial popularity to fade away, in order to see the more serious applications of NFTs come forward.
Another trend I’m watching relates to a concept called interoperability. Interoperability allows you to take your NFT from where it originally lives (i.e., in the blockchain) and access it in different environments, so that you don’t have to go back to the original marketplace in which you bought it in order to see the content. Having the ability to transfer an NFT in this manner will become crucial for the collectibility of NFTs. For example, let’s say you want to trade your NFT based in Ethereum, which is a type of cryptocurrency. Ethereum can be very expensive to trade in. However, interoperability may allow you to move the NFT into a parallel marketplace where you can then transfer the NFT without having to make the transfer on the blockchain itself. This concept is a natural outgrowth of the industry—which has had technological limitations in the past—and is definitely something to keep an eye on.
A third trend I’m watching relates to the storage of the digital content that is in NFTs. Most of the time, the digital content in the NFT—whether it be an illustration, a photograph, a piece of music or video—is not actually written to the blockchain. Rather, digital content is accessed through a referral link within the NFT that directs you to a file with the digital content and allows you to access the content. You may keep that file in the cloud or somewhere else in “digital land.” I’m watching what storage solutions are created to help consumers safely store their NFTs.
Why is Loeb so well equipped to advise clients on NFTs?
NFTs intersect perfectly with our firm’s “bread and butter”—the representation of athletes, celebrities, TV and production houses, brands, and agencies at the intersection of media, technology, licensing and IP issues. That’s a mash-up of all things NFT. The fact that Loeb has an entire group of lawyers dedicated to the advertising and media space is really the differentiator between our firm and others.
Our Advanced Media and Technology (AMT) group also has a large bench of lawyers with significant experience in emerging technologies, including understanding the consumer impacts and privacy and data security issues that come along with these new mediums, as well as helping companies identify the potential risks associated with them. Within AMT, we also have many seasoned IP lawyers who work on the front lines of these developing and cutting-edge copyright, trademark and other IP issues. Overall, we can offer our clients a significant amount of support with the many legal issues they face when it comes to NFTs.