NFT Legal Specialist
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PAIL® Solicitors are NFT specialist lawyers focused on blockchain projects. For a consultation with us use the above form or call peter on 020 7305-7491 or email petert@pailsolicitors.co.uk.
What are NFTs?
NFTs are unique cryptographic tokens or digital assets representing physical or digital item ownership. These physical or digital items are typically art, videos, animation, images, and music files, but the only limit is your imagination. The NFT creation process is known as minting. Mining is when a miner solves the cryptographic problem and adds to the current block on the blockchain.
NFTs use the same minting, mining, and blockchain technology as cryptocurrencies. The ownership rights for NFTs are exclusive such that an NFT can only have one owner at a time.
Currently, NFTs are bought and sold on differentiated platforms known as Marketplaces. These sites often sell through auction, although there are fixed-price NFTs. It is important to note that buying an NFT does not necessarily facilitate the transfer of the intellectual rights derived from the token. One of the reasons for the lack of legal certainty in purchasing and selling NFTs is the use of smart contracts alone to execute the trade. As mentioned later, smart contracts are inadequate for complex transactions. It is advisable to have Master Agreements or Side Letters linked to the Smart Contract.
What is the difference between an Exchange and a Marketplace?
Exchange is the aggregation of buyers and sellers who trade in Assets. Assets are another way to talk about Digital Collectibles. If you want to change your crypto assets to get other crypto assets, you go through an exchange like Binance. You can also buy Assets via an exchange using your credit card.
A Marketplace is where sellers can come together to sell their Assets to a curated customer base. Marketplace owners do not own their inventory and focus on marketing and driving traffic to the platform converting views into sales. BURST is a term used for NFTs that you want to buy.
NFT Marketplace Lawyers
How do you trade in NFTs?
Most NFTs are Ethereum-based tokens; hence most marketplaces in OpenSea only accept ETH tokens as payment for their collectibles. Gas is the charge you need to pay for any trading on NFT platforms. Gas needs to be paid on some platforms at every step — from minting to NFT sales.
To buy NFTs, you have to:
Get an Ethereum wallet such as MetaMask. Wallets can be custodial or non-custodial. A non-custodial wallet means that you control the private keys stored in your computer. A custodial wallet is when a third party holds the private keys and controls your funds, allowing you only to buy and sell.
Fund your account. Or directly link your money account to MetaMask to enable payments.
Submit a bid for the piece of art or collectible you want to acquire.
The issuer then uses the highest bid as the bid price.
Some of the popular NFT marketplaces are:
1) Axie marketplace is the online shop for the video game Axie infinity. In this marketplace, players can purchase axies, land, and other NFTs used in the game.
2) SuperRare- SuperRare is an exclusive NFT platform that allows people to buy and sell digital art.
3) NBA Top Shot Marketplace- NBA Top Shot is an online shop for licensed NBA collectibles. Distinguished basketball moments like video clips and game highlights on this platform are sold as collectibles.
You can Flip your NFTs, which means a quick sale. You can also use Staking to 'lock up' your NFTs for a period without selling them, increasing your investment value.
What are the preferred ownership models of NFTs?
With the ongoing publicity around NFTs, Cryptocurrency and the prospects of Web 3.0, buying NFTs and collectibles is as easy as buying any other asset. Even then, the legal challenges relating to models of ownership, transfer of rights attached to the NFT and dispute resolution arise due to the lack of a clear legislative and policy framework on NFT, public ignorance of the laws and the imbalance of power between the buyers and sellers.
Follow these links for more information on buying and selling NFTs on Opensea.
Often, NFTs and collectibles are bought from creators by corporates (which run marketplaces). These corporates have a separate legal personality from their owners whose personal liability is limited to the amount invested in the business as established in Salomon v A. Salomon and Company [1897] A.C. 22.
The businesses that own and run the Marketplaces set the terms of engagement for any consumer willing to buy and sell NFTs on their platforms. Buyers of NFTs mostly have limited negotiation power during the transaction and little understanding of the rights acquired with every NFT purchase which is coded in the smart contract.
According to Opensea terms of service, an NFT is as follows:
"NFT" in these Terms means a non-fungible token or similar digital item implemented on a blockchain (such as the Ethereum blockchain), which uses smart contracts to link to or otherwise be associated with certain content or data."
A smart contract is computer code that automatically executes the terms written into the code on certain conditions being met. It is unwise to use smart contracts for complex transactions. The inability to change terms and the difficulty of understanding contractual terms make smart contracts inappropriate for the complexity of liability and intellectual property licensing issues. It is simply impossible to write complex contractual terms into code. You will need to communicate the detailed terms of the offer, which a coder cannot hide within a smart contract code because there has to be clear communication of an offer.
In a recent US class action suit, Friel v. Dapper Labs, Dapper Labs is being sued for its failure to disclose the true nature of the NBA moments they sell as required under the Sections 5 and 12(a)(1) of the Securities Act of 1933, Inc, seeking the court's intervention in determining whether moments are security property.
Whether Fractional NFTs(f-NFTs) qualify as security property is essential given that the model of owning NFTs is becoming more pronounced as it is more affordable. According to DappRadar, the f-NFTs market has surpassed $290 million in 2021. Typically, an NFT token is split and sold to multiple parties under this model, with each person owning a percentage of the token. This model made the NFT world more cognate to the real world. Joint owners of NFTs are analogous to owners of shares in a company. They each receive rights and profits depending on their percentage of ownership, and they can sell their portions independently.
A smart contract governs the transactions of joint owners of a token with “if/when…then…” commands. As such, if the whole of the token were to be sold, each fractional owner automatically receives a proportionate share of the profits or losses.
One NFT owned under the fractional ownership model is Eve Sussman's 89 Seconds at Alcazars.
Sussman's NFT reveals the power of blockchain technology. Sussman's NFT clarified the margin of rights that each fractional owner enjoyed during the display of the NFTs while widening the applicability of the concept of smart contracts and blockchain technology to the traditional real estate market. The solution advanced by Sussman is exciting because, in real estate, joint ownership of property is marred with irregularities when it comes to the enforcement of the rights of each owner.
NFT Marketplace Lawyers
NFT Legal Specialist