What Are Non-Fungible Tokens?

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A new form of blockchain-based virtual token has taken the world by storm in the form of non-fungible tokens, or NFTs for short. NFT trading has reached billions of dollars in the last quarter alone, making them an attractive opportunity for many.

But what exactly are NFTs? How does one get started in NFT investing? And what are the legal implications of NFT trading? We’ll explore these questions in this article.

Description of Non-Fungible Tokens (NFTs)

Non-fungible tokens are unique tokens that correspond to an underlying asset. Unlike fungible tokens like Bitcoin and Ethereum, they aren’t interchangeable. A good way to think about it is in terms of cash versus real assets. Cryptocurrencies are like cash, with each coin having a set dollar amount. If you and another person swap one Bitcoin for another, you each still have one coin.

NFTs, on the other hand, might be thought of as deeds to a piece of real estate, or a certificate of ownership. The underlying asset might be real property, original artwork, or even collectibles in a game. NFTs aren’t interchangeable since each one represents a unique asset.

Ways to Use and Invest in NFTs

NFTs present numerous opportunities for individuals, small business owners, investors, and large corporations. Some of the ways to use non-fungible tokens include:

  • Selling rights to intellectual property, such as digital artistic works
  • Creating collectibles in online games
  • Transferring web domains
  • (Potentially) facilitating transactions involving real estate
  • Selling ownership in a company through fragmented NFTs

NFT trading is still a young market with the technology in its early stages of adoption in most industries. However, it may represent many opportunities for businesses in all industries in coming years.

Legal Implications of NFTs

While there are many potential opportunities for individual content creators, investors, and businesses of all sizes, there are some legal aspects that should be noted.

Commodity and Security Laws

In some cases, the Commodity Exchange Act may apply to NFTs, potentially requiring that transactions occur on registered derivatives exchanges. In addition, they may be bound by laws governing manipulative trading practices.

It’s less likely that they will be considered securities, though fragmented NFTs may be an exception since they would likely pass the Howey Test (i.e. they would be sold with the promise of profit resulting from another party’s efforts).

IP Laws

Intellectual property is a major concern when it comes to NFTs, especially those that represent digital assets such as artwork, music, or written works. In particular, when someone purchases an NFT with underlying content, there may be some confusion as to what IP rights are actually transferred to the buyer. As such, clear verbiage in the purchase agreement is crucial to preventing liabilities in this area.

Data Management, Privacy, and Security

The data stored in an NFT needs to be carefully managed, especially since private data may implicate data privacy laws. Security is another major concern, especially when it comes to users and the information they use to access their accounts. If that information is compromised, it could result in significant damages.

Getting Started

Getting started using NFTs is a bit easier than getting into other forms of investment, but it’s still important to do your due diligence and account for potential changes in the legal matters involved. A cryptocurrency attorney can help you through that process. If you have questions on how to get started, contact an attorney today.

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