Non-Fungible Tokens (NFTs)

Personal property or right of access?

Non-Fungible Tokens (NFTs)

What is an NFT?

An NFT, or non-fungible token, is a unique set of data tracked on the blockchain that can be thought of as certificate of ownership for a digital or physical asset, but which can also be bought and sold itself. The blockchain stores an immutable record each time a transaction of the NFT takes place, allowing the asset with which the NFT is affiliated to be tracked and authenticated. Presently, most NFTs are minted on the Ethereum blockchain, a type of cryptocurrency, and are stored in NFT-compatible digital wallets.  

Current Applications

NFTs are commonly linked with “one-of-a-kind” digital assets. In an age where online copyright infringement is rampant, being able to verify the “original” of a piece of digital artwork, limited edition comic, autographed video clip, or digital trading card reestablishes the scarcity these types of assets traditionally derive their value from. There are similar applications for real-world assets too, such as Nike’s “CryptoKicks” to verify the authenticity of Nike sneakers.

It’s inaccurate to think NFTs are only for art collectors and niche gaming markets. There is now buy-in from large commercial organizations, like the NBA TopShot platform created by Dapper Labs of Vancouver (where users can buy NFTs linked to unique video “Moments” of their favourite basketball players in action). Similar platforms are in the works for the UFC and NFL.

IP Ownership and Pitfalls

NFTs have no real intrinsic value. Their price is dictated by subjective valuations of the scarcity of the particular asset. This makes the NFT market volatility high and necessarily risky. There are also climate impacts of NFTs still to be solved given the energy consumption challenges across cryptocurrencies.

Another pitfall is analogizing an NFT too closely to tangible personal property. NFTs are like tangible collectibles in that buyers can resell the work but rarely own the underlying intellectual property rights in it, which remain with the author unless a contract provides otherwise.

However, while tangible collectibles can be bought and sold freely, NFTs are often subject to restrictions constraining the marketplace in which they may be resold.

Currently, NFTs can only be bought and sold in online marketplaces adapted for such transactions, like OpenSea and Rarible. Not only does this raise questions as to what might happen in the event of infrastructural failure (à la Quadriga), these marketplaces have their own sets of terms and conditions users must abide by. For example, the NBA TopShot terms and conditions provide that purchased Moments can’t be altered, used with hate speech, or used for commercial benefit. The global nature of these marketplaces also raises questions about dispute resolution, enforcement, and jurisdictional issues.

Thus, it is important to check the terms and conditions of the platforms facilitating the sale and storage of the NFT. It is also important to verify that the minter of the NFT has obtained the requisite authorizations from the copyright owner and third-party rights holders. Has consent of the artist been obtained to mint an NFT of their digital artwork? What about the facial likenesses of people appearing in video content linked to an NFT (as required by s. 3 of the BC Privacy Act)?

Future of NFTs

While we currently conceptualize NFTs as intangible personal property, they are quickly becoming something more — a right of access. Imagine owning an NFT corresponding to a seat in a virtual stadium that provides access to exclusive concerts and events, or that gives you free contest entries and sports bets. Many NFTs have been adapted for these kinds of special privileges already. NFTs can even be used to store identity information, which has implications for global travel, credit scores, and real estate.

As the digital and physical worlds merge in the metaverse, it is likely we will see NFTs play a more significant role.