Non-fungible tokens (NFTs) are digital ownership certificates created using blockchain technology, which can be linked to digital assets such as art or music. The commercialisation of NFTs is becoming increasingly prevalent, with businesses of all sizes using them in the entertainment, media and video gaming sectors.
There are number of things you should consider before launching an NFT collection – here are our top three...
1. Make sure you don’t infringe other people’s rights
Your NFTs might link to digital art or music created by someone else. When an artist creates the digital art or music, generally speaking they will own the copyright in it. Under the laws of some countries (including the UK) that is the case even if you paid the artist to create the work for you. You will therefore need to get the artist to either assign (i.e. transfer ownership) or license (i.e. give permission to use) the copyright in the asset to you.
When someone buys an NFT, they will own the token, but they will not necessarily automatically acquire rights in the asset linked to that NFT. Those rights needs to be granted to the buyer separately. Until a more technologically elegant (but nonetheless legally compliant) solution is found, most collections do this through T&Cs. See more on this below.
If the underlying asset features third party IP rights – such as trade marks, designs or image rights – you may need to get permissions from the relevant rights holders, or remove those components. The permissions may come with strings attached, such as restrictions on how the asset is used. Those restrictions will need to be passed on to buyers of the NFT, and you will need to consider how, in practice, you can ensure that they will adhere to them, to avoid being in breach of contract.
2. Make sure you have proper T&Cs in place and that they are binding
You will almost certainly need to have T&Cs in place which govern how the NFTs and their associated assets can be used. Once NFTs are minted, they can be sold on third party marketplaces like Opensea. You therefore need to ensure that subsequent buyers of the NFT are also bound by the terms.
It’s important to remember that the underlying asset is (in most cases) not stored on-chain, which means that, in the eyes of the law, the NFT and the underlying asset are entirely separate things, and need to be considered separately. When an NFT is sold, the rights in the underlying asset need to reflect this. This does not necessarily happen automatically, so it’s important to ensure that the legal framework you put in place achieves what you want it to achieve. In most cases, this means ensuring that the new owner benefits from the same licence of rights as their predecessor, and is bound by the same terms.
A key consideration is how the underlying asset can be used by the person who mints it, and subsequent buyers. Clearly the buyer must have the right to store the asset (for example, on their computer or phone) and to use it for personal purposes, like displaying it as their avatar. But what about commercial use? If you do not want the asset to be used commercially – for example, by being sold as merchandise, or used as the logo of a business – this needs to be made clear in the terms, as well as any other restrictions on use.
3. Be aware of other laws and regulations that could be triggered
Depending on your business model, other laws could come into play. For example, the use of NFTs in game-like activities which feature a prize could, depending on how they are structured, amount to gambling under one or more jurisdictions. Gambling is a heavily regulated activity. In many countries, it cannot be done without a licence, and in some it is prohibited entirely. In some countries – the UK included – there are also stringent restrictions on how, where and to whom activities which amount to gambling can be advertised, including through your own website and social media.
Finally, bear in mind that NFTs are likely to be treated in the same way as any other digital asset for the purpose of consumer protection laws. This means consumers may automatically have certain rights, such as the right to change their mind within a certain period of buying the goods and requesting a refund, or rejecting the goods if they are defective. You should consider how you will deal with this in the context of an NFT and its associated digital asset, and include appropriate provisions in the T&Cs to deal with these scenarios.