CIArb Features

Non Fungible Tokens and Dispute Resolution

19 Apr 2021

Non-Fungible Tokens – or NFTs for short – has seen a staggering increase in influence since its 2020 introduction into the mainstream, with NFT market caps growing by over 1,700% in 2021. The idea of NFTs is built on that of cryptocurrencies and rely on the same blockchain technology in order to establish a market presence. That being said – why are legal professionals suddenly talking about it, and what are the potential legal risks of trading NFTs?

What are NFTs?

NFTs sits on the same technological branch as other cryptocurrencies, such as bitcoin. These items are representative of a set unit value, much like physical notes or the aggregate sum in a checking account. To prohibit hyperinflation – no central agency or state entity controls the distribution and minting of new cryptocurrency – each monetary unit is earmarked, thus making it traceable and identifiable at all stages in its circulation. These digital assets – or tokens – can then be used as payment for goods and services at a so-inclined provider or – as we shall discover – as trading commodities.

Where bitcoin and other similar cryptocurrencies are fungible – meaning that one unit can be exchanged for another unit of equal value – NFTs are non-fungible, making them unique and therefore not interchangeable. A NFT is thus a unique item on a blockchain – the digital record used for tracking transactions of cryptocurrencies – that by virtue of its design and desirability holds unique and intrinsic value.

In addition to being traceable via the blockchain, NFTs are also capable of storing certain information about its creator – providing collectors with the opportunity to build collections with unique items that can be traced straight back to their respective artist. The traceability and inherent value of these tokens have given way to a several sub-categories of NFTs – like crypto art, online gaming, and digital collectibles.

The traceability and perceived legitimacy given by the connection between the art and the artist has endeared real-world artists and creators to dabble into the field of high-stakes crypto investing, offering up their work for sale on the various platforms. However, amidst the scuddle and scramble, the actions of scammers and fraudsters has actualized the legal dimension of NFTs – and the potential fallout for copyright and IP disputes.

What are the legal issues?

The emergence of NFTs has raised concerns in relation to copyright, ownership, and artists’ rights to their intellectual property. Creation, distribution, ownership, and trading of these tokens and thereto related works of art are all parts of a rapidly emerging market that comes with plenty of both legal and ethical questions. Some familiar in their analogous nature to matters associated with traditional copyright law and some novel for both legal professionals and service providers.

Some countries – France for example – has already started down a legislative path to address some of these issues. Other countries will e contrario have to fall back on existing laws and regulations when addressing the problem – at least at the prima facie stage. Of particular interest to lawmakers are copyright issues and contractual matters arising from contradictory and complex terms and conditions that governs the various NFT marketplaces. In lieu of targeted legislation, prejudicing judgements – which is undoubtedly set to be handed down eventually as the value and attractiveness of the NFT market continues to grow – will come to guide parties in the near future. Hence, the form and legal subject matter of first proceedings involving NFTs will be of immense interest.

Licensing intellectual property – in the traditional sense – has always been a complex process and stable of IP law that usually involves detailed negotiations. The dynamic world of NFT, for its part, does not exhibit a great track record in that regard – something that creates an inadvertent rift between creators, traders, and buyers in terms of trust and foreseeability in case of foul play. The emerging popularity of EFTs, hence, puts the spotlight on the lacking legal development in the area of copyright claims over alleged infringement into digital works of art.

Another potential source of conflict is claimed ownership over a piece of art. An NFT is by its technical definition simply a link to a work of art that is in turn stored on a different platform. If the trader holds a good title to the work he or she is offering, that is one thing less to worry about. But how would a prospecting buyer know this? What if the latter does not in fact have the right that he or she indirectly claim to have, or what if the host site goes down? The status – and even existence – of the artwork in question depends entirely on these factors. Furthermore, even if nothing of the above turns out to be an issue – how does the buyer assert that he or she is getting the right to then commercialize the work of art?

These question – and more – puts a not insignificant due diligence burden onto the buying party. This burden may come to include securing the original artist’s authenticity, consent for commercialization of their work as well as acquiring a good title and consent for future resales of the artwork as an NFT. Most of these checks can be done with the original artist, but others will have to be done in coordination with the trader and even the platform that facilitates the trade. In summary, this is a legal and regulatory quagmire that runs a high risk of yielding disputes – especially until that time where the law has ruled on the exact extend of the buying party’s duty to conclude their own due diligence and the selling party’s duty to disclose potential inconsistencies with their ownership of the NFT.

Lastly, it is worth considering the aspect of the artist’s moral rights. These are highly country-dependent – bringing yet another transnational complexity to the mix – but aims to protect the work’s attribution and integrity, ensuring that the work of art is not subjected to derogatory treatment. Added to this is the matter of artwork ownership, which depending on the type of art and the circumstances under which it was conceived may differ radically from case-to-case.

What should be the next steps?

Grappling with these complex matters of IP law and international commercial law will require lawyers to not only be comfortable with these aforementioned legal elements, but to also exhibit at least a basic understanding of blockchain technology and other technical concepts that goes into verifying art work authenticity and understanding the intricate functionality surrounding purchasing, selling, and storing NFTs.

This opens up the door for skilled and eager dispute resolution professionals to make their mark on a relatively untapped source of ground-breaking future legal precedence by becoming early adopters of the emerging technologies that spurs on the development of cryptocurrency and NFT-trading whilst also – by the nature of their professional – being savants in the nature of international law.

With its ferocious speed of transactions, high monetary values, and lack of targeted legal regulation, disputes arising from the commerce of NFTs will most likely be – at least in part – addressed prima facie outside of the regular court system, something that makes ADR additionally well-suited to resolve these budding conflicts.

Ludvig Hambraeus ACIArb