A Beginner’s Guide to NFT

NFTs are becoming increasingly popular. The NFT-craze is real, especially in digital artwork and collectives, revolutionizing the production and distribution of these. One can observe an increasing number of established brands joining the NFT market, including the National Basketball Association (NBA) and Sotheby’s auction house.

Only recently, Christie’s sold a digital artwork for $69 million in JPEG form by an artist called Beeple The digital artwork, called “Everydays — The First 5000 Days”, turned out to be the third most expensive artwork that has ever been sold by a living artist.

In short, NFTs stand for “non-fungible tokens”. NFTs are digital assets that are provably distinctive, creating digital scarcity. They cannot be replaced for another similar asset. They have many use cases, including in: digital collectibles, music, artwork, and in-game tokens.

But what are they, actually?

History

One of the first times we heard about NFTs was with CryptoKitties’ collectibles. The whole CryptoKitties ecosystem was structured in the following way:

“Each blockchain-based digital kitten is unique; if you send someone a CryptoKitty and receive a CryptoKitty from someone else, the one you receive will be a completely different CryptoKitty from the one you sent. Collecting different digital kittens is the point of the game”.

The main properties of NFTs

Indivisible: NFTs can’t be broken down into fractions, unlike Crypto. In other words: you either own a whole NFT, or you don’t own it at all.

Verifiable: Each NFT is unique and comes with a unique identifier that specifies who owns it, when they bought it, and from whom.

Indestructible: NFTs leverage blockchain and smart contracts technology, which means ‘they cannot be destroyed, removed or replicated.

NFTs art

The way NFTs are increasingly being used is as proof of authenticity of a digital file (an artwork, for instance). Everyone is joining the trend. On May 5th, after weeks of teasing his drawings on Twitter, entrepreneur Gary Vaynerchuk announced: “he’s launching his first NFT collection, VeeFriends, a series of 10,255 character tokens available for purchase via the cryptocurrency ethereum”.

Some artists from the creative industries that are using NFTs are Kings of Leon, who launched an album as NFT and Basketball collectives; Grimes, a Canadian musician, singer, songwriter, record producer, music video director, and visual artist, who sold around $5.8 million worth of digital artworks, and a series of 10 pieces went up for sale on Nifty Gateway on February 28th or Beeple, a digital artist and graphic designer who sold a digital artwork for $69 million. Other artists exploring NFTs include Nicki Minaj and Eminem, doing concert visuals, Blake Kathryn, Giant Swan and the recent Dream Catcher Auction by Steve Aoki x Antoni Tudisco, among others.

NFTs Marketplace

NFTs is a booming market, and it is expected to grow in the years to come. In fact, in 2020 alone, NFT trading as a whole was worth $250 million, a +300% growth from the year prior. Crypto art alone has surpassed $100 million in worth so far this year. This activity, and the growth of NFTs as a whole, can be easily attributed (at least in part) to communities circling around Discord servers, two European examples being the Utopia Genesis Foundation server, and the NFTlondonUK server.

How to buy NFT tokens

Non-fungible tokens can be bought on a large number of NFT marketplaces. Some of the most popular ones are: Rarible, OpenSea, and Enjin Marketplace.

Using Rarible as an example…

“1: Go onto the website and click the ‘Connect’ button on the top right. From here, select the wallet you want to connect to the platform and log in. Accept the terms of service. You can connect using any wallet that you prefer.

2: When logged in, search the platform for the NFT you are looking to purchase. Once selected, click the ‘Buy now’ button. Click the ‘Proceed to payment’ button to go to the final step.

3: Confirm the transaction with your wallet. Once confirmed, your NFT will be deposited directly to your Ethereum address”.

Advice: When buying your NFTs during peak times, you may end up with unproportionately high gas fees, so it is always useful to keep that in mind.

NFTs and Copyright

The basic proposition in US law is that: “Under Section 106 of the U.S. Copyright Act, a copyright owner has certain exclusive rights to reproduce, prepare derivative works of, perform, display, and distribute the copyrighted work. As a general rule, the purchase of a piece of art does not transfer all copyright in such work to the buyer”.

That is true unless “(a) the transaction is accompanied by contractual stipulations regarding the transfer of the work attached to the NFT that are valid under the applicable national law, or (b) the applicable national law somehow configures the NFT transaction (absent other contractual stipulations) as the transfer of the linked-to work, then the acquirer of an NFT obtains only a right over the metadata pointer to a digital object”.

There is a similar wording in the terms of service of digital exchange platforms or sellers, such as Dabber Labs. Some other services, however, e.g. Bluebox, claim that their model allows for the “trade” of copyrights. It is unlikely, however, that it would be beneficial for artists to be transferring/selling their copyrights. A limited license model will be the most commonly used tool in this area.

NFTs and Securities law

The term “security” in US securities laws includes an “investment contract”. To assess this, US courts apply a test from the U.S. Supreme Court’s decision in SEC v. W.J. Howey Co., 328 U.S. 293 (1946).

Under that Howey test, a given token is a security if:

: there is an investment of money or some other consideration,

: in a common enterprise,

: with a reasonable expectation of profits,

: to be derived from the efforts of others.

Most NFTs, on their merits, are not likely to qualify as securities. Unless: the NFT issuers are involved in selling fractional interests in NFTs or groups of NFTs. As prices for some NFTs sky rocket “this approach becomes more appealing to potential buyers who want a piece of the NFT. According to recent statements by SEC Commissioner Hester Peirce, however, doing so increases the likelihood that the NFT would be deemed a security under the Howey test”.

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