The pandemic, which remains a global phenomenon, upended the revenue streams of artists.
In response, some discovered they could resume making a living or even build wealth by licensing their work as NFTs (Non-Fungible Tokens) on a blockchain platform. That entrepreneurial move seems brilliant. Digital artist who goes by the moniker Beepie sold his NFT "Everydays: The First 5000 Days" for $69,346,250.
The digital artists include the traditional types - that is, there's no ambiguity that their creation has aesthetic value. In addition, there are those on the continuum of what is classified as "adult content." That could range from erotica to soft porn to what could be ruled to cross the line to "obscenity."
All this activity had opened myriad legal questions.
Does securities law apply?
What about changing privacy laws which allow for deleting or modifying content when the blockchain makes that immutable?
And there is the age-old issue if the material is art or obscene?
As the saying goes: Law hasn't caught up with the technology. And law firms with blockchain practices, be they Big Law's Paul Weiss or boutique DLx, will be dealing with complex legal issues. Meanwhile the first class action lawsuit has been filed in New York state court. It contends the NFT Top Shop Moments is an unregistered security. Here is a copy of that lawsuit "Jeeun Friel, et al. v Dapper Labs, et. al."
So what is a NFT? Investopedia defines NFTs as:
" ... cryptographic assets on blockchain with unique identification codes and metadata that distinguish them from each other. Unlike cryptocurrencies, they cannot be traded or exchanged at equivalency. This differs from fungible tokens like cryptocurrencies, which are identical to each other and, therefore, can be used as a medium for commercial transactions."
From the get-go, the legalities can be confusing. Walters Law Group provides a useful summary of the major related points of law. Reed Smith's white paper on the metaverse provides sections on NFTs.
For instance, those purchasing the digital art only are gaining access to the control of information in the blockchain entry ledger. They do not "own" the underlying work of art. That remains the property of the artist. Walters Law Group provides these details:
"The artist typically retains all copyrights in the work, including the right to copy, distribute, modify, and publicly perform or display the work. The buyer generally purchases the NFT along with a limited license to use the underlying artwork for personal use, such as publicly displaying the artwork on an online NFT marketplace ..."
Those terms and conditions the artist must make explicit during "minting," that is when creating the smart contract and storing the digital asset on the blockchain.
Another huge issue is the future of regulations. No one feels comfortable with regulatory risk and there is plenty of that with NFTs. Some speculate that NFTs could be looped in with cryptocurrencies in how they're regulated. Currently, the Commodity Futures Trading Commission classifies cryptocurrencies as "commodities." That puts them under the Commodity Exchange Act. NFTs could be also subject to the CEA. That could rein the business in by mandating it only be conducted on registered exchanges.
When it comes to what is designated "adult content" there is the jurisdictional matter. Some mandate users be 18 years of age. But, as with many social networks, the verification apparatus is not in place.
The lock-in aspect of the blockchain technology also makes it very difficult to remove content that could be ruled "obscene" in court. How will the legal system deal with that? How will artists and those who purchased the license to the art manage the financial implications?
In addition, it's buyer beware. They may be anticipating a surge in the value of the NFT. However, they have to understand the asset itself is speculative. Also, no one knows if the current interest in NFTs is a sustainable trend or a fad.
Given all this, it is interesting to analyze how Paul Weiss has structured its Blockchain/Crypto Practice. Here it is:
" ... Paul, Weiss is at the forefront in helping financial institutions, fintech companies, investors, media and entertainment clients and technology companies navigate the new world of cryptocurrency and blockchain technology. Our multi-disciplinary team helps clients capitalize on the business opportunities, identify the challenges and mitigate the emerging legal risks of digital assets."
Take note of the two terms:
Multi-disciplinary team
Risks.
It is going to take plenty of different kinds of legal expertise to guide clients through some very old and some very new kinds of business risks.
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