What is an NFT and can the Law Regulate it?
Sometimes, it seems as though the internet and its most diehard users invent things with the express purpose of confusing the rest of the world. Stories about cryptocurrency and blockchain can baffle even the most tech-savvy among us and with a new acronym being thrown into the public discourse every few days, it doesn’t seem like this trend is going to end anytime soon. What is an NFT and can the Law Regulate it?
NFT stands for Non-Fungible Token, these are bits of data (tokens) that exist online and act as a kind of proof of ownership for unique digital assets in a way that is separate from copyright.
Now there’s a new craze burning its way across the online world – NFTs. Naturally, this has left many of us wondering; What is an NFT anyway? How is it regulated? And what does the law say about all this?
What are NFTs?
Now, if I’ve lost you already, that’s OK, we’re going to go through this nice and slow. First off, what does the name mean?
Fungible Items – A ten rand banknote is a great example of a fungible item. Its value is exactly equal to any other ten rand note. Additionally, it’s exactly equal to 2 five rand coins or 5 two rand coins. None of them are particularly unique and nobody cares who owned them before you.
Non-Fungible Items – By contrast, the Mona Lisa is what we would call a non-fungible item. It’s entirely unique and you can’t simply trade it in for another painting or for a bunch of lesser-known works. Likewise, you may take a picture of the Mona Lisa and make a bunch of copies, but none of them will be truly genuine.
What are NFTs used for?
So, now we know that an NFT is unique and can’t simply be replicated. But, so what? What good is a one-of-a-kind stamp on the internet?
Well, when you make a bunch of copies of the Mona Lisa, it’s still pretty easy for people to tell which is the original. Odds are, it’s the one on a 500-year old canvas in the Louvre and not the one hanging on your bedroom wall. The same isn’t necessarily true for digital works. If you draw a picture in Microsoft Paint and upload it to the internet, I can download it and have what is essentially a perfect copy. Often, this makes it quite hard to tell which one was the original.
This is where NFTs come in. Theoretically, an artist is able to create a unique NFT that is attached to their original artwork, sort of like a certificate of authenticity, and stored on a digital ledger called a Blockchain. Once done, the digital asset may be copied and circulated, but the owner of the NFT will be able to prove that theirs is the original. Once again though, it should be noted that this is not a stand-in for copyrights.
Can Digital Art be Regulated by the Law?
Yes, it can. Digital art is viewed by the law in almost the exact same way as other intangible assets. Thus, the usual laws of ownership apply and copyrights are automatically applied upon their creation. Sadly, these laws are much harder to enforce online than in the real world and most people will still be able to download and distribute your work with few legal repercussions. It is for this reason that so many artists add watermarks to their digital artworks to ensure that they cannot be so easily claimed by others.
How are NFTs Different from Copyrights?
As noted, NFTs are not copyrighted. Even after buying an NFT attached to a digital asset, the creator still maintains the copyright and reproduction rights for the asset. In fact, without an agreement between the creator and the buyer, purchasing an NFT would not even grant you ownership rights, instead, you’ll just end up owning the certificate of authenticity that is attached to that artwork.
Why would anyone Buy an NFT?
At this point, many of you may be wondering why in the world anyone would buy an NFT. I mean, there’s still a difference between a priceless physical painting that can’t be replicated and a bunch of pixels on a screen, right?
Well, this is where the arguments over the future and efficacy of NFTs begin. For some people, NFTs are the first step in a technology that will soon be commonplace. Many of them believe that they are purchasing ownership rights to works of art that will one day be priceless.
Critics point out that this all boils down to people online paying exorbitant sums of money for bragging rights. They trade NFTs in the same way some people trade vintage stamps or Pokemon cards and, at the end of the day, these NFTs have no real value apart from what these investors are willing to pay for them.
That said, we should remember that demand is what drives the price of something, not its functionality. Some people spend more money than they make in a month on designer clothes just because they have a certain label on them. In this sense, NFTs may represent a highly profitable market regardless of the rights that do or do not come along with their ownership.
What does NFT Crypto mean?
NFTs and Cryptocurrencies are often lumped together in modern dialogue. This is due to the fact that both services use the same type of blockchain digital ledgers to operate. In reality, though, these are two completely different animals. Cryptocurrency is, as the name suggests, a type of currency used online, while NFTs are a type of asset authentication that is used online.
Can you Copy NFT?
Thanks to the nature of blockchain technology, it is almost impossible to replicate or steal an NFT once it has been recorded. However, due to the intrinsic nature of the internet, people have often claimed to be the creators of a digital asset when creating the associated NFT. This occasionally allows them to obtain an asset’s NFT without actually being the creator.
Are Non-Fungible Tokens Legal?
As with any new and rapidly developing technology, the legal system has not yet created a framework concerning NFTs. As such, they currently exist in a wild-west-style legal grey area that is largely unregulated.
Are NFT’s Legally Enforceable?
Not really. NFTs are generally controlled by ‘smart contracts’ which are essentially the digital versions of the kinds of contracts that you would expect to see if these sorts of transactions occurred in the real world. These contracts are embedded within the purchase tokens and help to ensure that all the contractual obligations are met. Sounds perfect, right?
Well, no. You see, the case law for smart contracts is virtually non-existent and work is still being done to try and create the legal framework which will govern them.
In Conclusion – What are NFTs and What does the Law say about them?
NFTs stands for Non-Fungible Tokens. These tokens are bits of data stored within a Blockchain that acts as a kind of proof of ownership for digital assets (at least, theoretically). NFTs are seen as vital due to the fact that a virtual asset, such as digital artwork, can be copied perfectly. NFTs then is intended to be attached to the original artwork so that they can act as a type of certificate for authenticity.
It should be noted, however, that NFTs are not a stand-in for copyrights and that the owner of an NFT does not normally gain ownership rights over the artwork. In this respect, many people see NFTs as collectables that provide the owner with bragging rights more than anything else. On the other hand, many NFT advocates have likened the purchases to buying paintings from up-and-coming artists that will one day sell for millions. Regardless of your viewpoint, any potential buyers should remember that they will not actually own the artwork after buying an attached NFT.
Currently, NFTs are an extremely novel and nuanced topic and most nations have not yet created a legal framework with which to govern them. For this reason, NFTs are mostly unregulated and interested parties will have to be extra careful when making transactions as there have been multiple allegations of fraud which are notoriously hard to counteract.
While NFTs and some cryptocurrencies use the same Blockchain technology as their digital ledgers, they are not actually linked in any meaningful way although many NFTs are commonly bought and sold using cryptocurrency.
Disclaimer LAW101: All of our posts are for research purposes only. Law 101 aims to assist its readers with useful information on the laws of our country that can guide you to make decisions in line with the South African Governmental Laws currently in place. Although our posts cite the constitution in many instances, they are intended to assist readers who are looking to expand their knowledge of the law. Should you require specific legal advice we advise you to get in touch with a qualified legal expert.
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