What Do You Need To Know When It Comes To NFTs And The Law?
As NFTs become more popular, it's important to understand the legal issues surrounding them.
As the world of virtual reality continues to grow, so does the potential for digital assets and virtual property. Non-fungible tokens (NFTs) are one kind of such digital asset, and they have quite a promising future. But, as is the case with any new technology, they are accompanied by plenty of legal questions that need to be answered.
NFTs are unique digital assets that cannot be replicated. They’re often used to represent items in games or other virtual worlds, but they can also take the form of art, music, and even physical objects.
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While NFTs have a lot of potential, their legal concerns are factors that must be considered. For example, there are questions about who owns NFTs, how they can be taxed, and what happens if they’re stolen or lost.
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As NFTs become more popular, it’s important to understand the legal issues surrounding them. Here’s what you need to know.
What Are NFTs?
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NFTs are digital assets, though they are not interchangeable like traditional cryptocurrencies. This means that each NFT has its own unique value that cannot be replicated. An NFT can represent anything from digital artwork to assets found in virtual worlds.
Their unique nature means that NFTs are not subject to the same price fluctuations as traditional cryptocurrencies. Instead, NFT prices are based on supply and demand.
The use of NFTs is still in its early stages, but already a number of platforms enable users to buy, sell, and trade NFTs, including OpenSea, Rarible, and SuperRare.
What Are The Legal Issues Associated With NFTs?
There are a number of different kinds of legal issues that need to be considered when it comes to NFTs.
- Data Hosting And Storage
When an NFT is created, the file is stored on a blockchain. This raises multiple issues, including questions of who owns the data, who is responsible for storing it, and how it will be accessed and controlled. There are also concerns about the security of the data and whether it could be hacked or tampered with.
- Intellectual Property
Intellectual property is another legal issue that comes into play when NFTs are involved. This includes questions about who owns the intellectual property rights for the NFT and how those rights can be protected.
It’s also important to consider how NFTs can be used to infringe on someone else’s intellectual property rights. For example, if an NFT is created that uses copyrighted artwork without permission, that could be considered copyright infringement.
- Royalties
Since the dawn of the digital age, intellectual property has been a highly debated topic. With the advent of blockchain technology and non-fungible tokens (NFTs), that debate has only intensified.
NFTs have the potential to upend traditional perspectives of intellectual property ownership and royalties. For example, an NFT could be created that gives the owner the right to receive royalties every time the NFT is sold, which could create a whole new revenue stream for artists and other kinds of creators.
- Antitrust
NFTs have the potential to concentrate power in the hands of just a few large companies. If a company were to control the platform on which an NFT is created, they could use that control to stifle competition or raise prices.
Antitrust laws are designed to protect competition and ensure that consumers have access to a variety of choices. If NFTs lead to the conglomeration of power amongst a few companies, that could violate these laws.
It’s still the early days of NFTs, so it’s hard to say how they will impact the competitive landscape. Nevertheless, antitrust regulators will be watching them closely.
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- Data Privacy
As interest in buying and selling NFTs grows, there are bound to be concerns about data privacy. After all, NFTs are digital assets that can be stored on a blockchain, which means that the NFT’s transaction history is public — accessible to anyone.
This could pose a problem for those wishing to keep their NFT purchases private. For example, someone buying an NFT related to a sensitive topic (such as pornography or political activism) may not want their name attached to that purchase.
There are a few ways to avoid this issue. First, people can use pseudonyms when buying and selling NFTs. Second, there are NFTs that are not stored on a blockchain (such as those stored on centralized servers). Also, people can seek out NFTs with built-in privacy features (such as those using zk-SNARKs).
Of course, data privacy is not an issue unique to NFT buyers and sellers. It is also an issue for any platforms that facilitate NFT transactions. For example, OpenSea — one of the largest NFT marketplaces — recently came under fire for selling user data to third-party advertisers.
- Financial Regulation
NFTs are currently unregulated in most jurisdictions, meaning that there is a risk they could be used for money laundering or other illegal activities. However, this lack of regulation is not solely a bad thing, as it also means there is more potential for innovation and creativity.
A few countries’ regulations for NFTs are starting to take shape. For example, in the United States, the Securities and Exchange Commission has said that some NFTs could be considered securities, which would subject them to federal securities laws; in China, the central bank has reportedly issued a warning about the risks associated with NFTs.
For the most part, however, NFTs still exist in a legal grey area. This could change as more countries and jurisdictions start taking closer looks at this new technology.
- Taxes
When it comes to NFTs, taxes are currently a bit vague. The IRS guidance is minimal. Thus, there is some uncertainty about how to handle them from a tax perspective. If your clients (or you!) are thinking about buying or selling NFTs, it is important to consult a tax professional to ensure you are complying with every applicable tax law.
Olga V. Mack is the CEO of Parley Pro, a next-generation contract management company that has pioneered online negotiation technology. Olga embraces legal innovation and had dedicated her career to improving and shaping the future of law. She is convinced that the legal profession will emerge even stronger, more resilient, and more inclusive than before by embracing technology. Olga is also an award-winning general counsel, operations professional, startup advisor, public speaker, adjunct professor, and entrepreneur. She founded the Women Serve on Boards movement that advocates for women to participate on corporate boards of Fortune 500 companies. She authored Get on Board: Earning Your Ticket to a Corporate Board Seat and Fundamentals of Smart Contract Security. You can follow Olga on Twitter @olgavmack.
