Law Firms Venture into the Emerging World of NFTs

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Non-fungible tokens (NFTs) make frequent headlines these days. NFTs first attracted major attention in March 2021. Mike Winkelmann is an artist who goes by the name Beeple. He sold a piece of digital art through Christie’s Auction House at $69.3 million.

As the NFT space explodes, novel legal issues abound. Businesses and lawyers are scrambling to understand how NFTs fit within existing legal frameworks. They are also trying to stay abreast of new regulations.

Law firms are ramping up their capabilities as they seek a piece of the action. Their goal is to help NFT clients navigate the complex web of legal issues. These issues involve intellectual property, securities law, and other areas of corporate law. In addition, they anticipate changes to government regulation of NFTs and help their clients respond and adapt their business activities.

What the Lawyers Say

Firms trying to get in the door early include both large international law firms and blockchain-focused boutique law firms. Los Angeles law firms with a significant base of entertainment industry clients report a surge in interest for NFT legal advice.

NFTs Non-Fungible Tokens

Jordan Bromley is leader of the entertainment transactions and finance practice group at the law firm Manatt. He’s witnessed how quickly the firm has been required to ramp up resources to meet the demand for NFT-related advice. “I first heard the term [NFT] in September 2019, when Odesza, the musical artist, was thinking of doing something in 2021. What I thought, at the time, was this was for glorified bragging rights, like a Rembrandt on the wall,” stated Bromley. “This has expanded to various artists on our end, including musical artists and visual artists.”

The list of potential NFT clients is broad. Clients come from a wide variety of backgrounds. They include music creators, media platforms, museums, sports teams, and individual investors and collectors.

Laurel Loomis Rimon is a partner at O’Melveny & Myers, based in Los Angeles. She says, “The NFT issues are drawing in some clients that weren’t deeply involved in blockchain. But the work itself is drawing from work in blockchain, because you have to understand the underlying technology and how transactions occur to understand how a transfer might occur.”

Novel Legal Issues Presented by NFTs

NFTs are unique digital assets. They are non-fungible, which differentiates them from cryptocurrencies, which are fungible. Whereas one Bitcoin has the same value as another, each NFT is related to a unique real-world asset. These assets can be a blog post, art piece, sports highlight or anything else.

This is just one indication that NFTs have long-term staying power. “With NFTs, for the first time, we actually have the ability to create digital scarcity,” says Lewis Cohen of DLx Law, a blockchain-focused boutique law firm.

Cryptocurrencies have raised a host of legal issues. NFTs are likely to raise a similarly large web of novel legal questions. Some are highlighted below.

Intellectual Property

Intellectual property rights are a grey area in the emerging world of NFTs. Usually, copyright law is not a major issue with fine art. People traditionally associate fine art with tangible works. NFTs challenge that notion. Owners of NFTs likely have some expectation to display or use the digital artwork. With respect to digital art sales, IP rights need to be clearly outlined in contracts.

Are NFTs Securities?

On the securities regulation front, some regulators have drawn parallels between NFTs and initial coin offerings (ICOs). This implies that certain NFTs could be classified as securities. If so, the strict disclosure requirements and potential liabilities under the securities laws come into play. The determination of whether certain NFTs are securities will depend on the specific design of the NFTs and the collection of rights that accompany them.

Government Regulations and Enforcement

Potential compliance issues are raised under anti-money laundering regulations such as the Bank Secrecy Act. As with cryptocurrency or token exchange transactions, the Office of Foreign Asset Control (OFAC) can apply sanctions to NFT transfers. Such regulations could impact players in the NFT ecosystem including digital content creators, payment processors, and online marketplaces.

Cybersecurity and NFTs

Because NFTs are created on the blockchain, cyberattacks on the blockchain can lead to lawsuits. Many companies purchase cybersecurity insurance. However, companies dealing with NFTs should ensure that their cybersecurity insurance policy provides coverage of NFT hacking events.

A Growing Future

Signs indicate that the current momentum surrounding NFTs is not merely a bubble. There are many opportunities for the sustained, long-term growth of NFTs. Law firms working through these early-stage complex legal challenges are likely to have an edge over peer law firms.