Just like cryptocurrencies, Non-Fungible Tokens (NFTs) present new challenges for the legal system that haven’t been around before NFTs gained mainstream attention in 2020.
And while court cases relating to NFTs are on the rise, few to no laws regulate this novel type of asset.
In 2021, Miramax sued Quentin Tarantino, the eminent film director, after he announced an auction to sell NFTs of his much-celebrated Pulp Fiction. Miramax’s alleged breach of contract and copyright infringement comes to dispute Tarantino’s ownership of the uncut scenes and script from the movie.
This case, like many others, begs the question of NFT ownership, the legitimacy of its existence, and who’s entitled to the proceeds it generates.
More and more content is tokenized as NFTs, including real-life objects like clothes, sneakers, and bags. The rulings on the currently ongoing court cases will set precedents for NFT-related copyright, intellectual property rights, and ownership disputes.
Find out more about crypto and blockchain disputes in How To Dispute a Crypto Transaction and Coinbase and Robinhood Disputes, and NFT Copyright Infringement Disputes: All You Need To Know. More importantly to know more about exchanges, how coins are stored, and what happens if an exchange is hacked, check out Cryptocurrency Exchanges: Custody, Ownership, and Insurance.
How Do NFTs Work?
The premise of NFTs is to represent the ownership of unique items and monetize what would not be otherwise monetizable.
NFTs are created or “minted” through the execution of the stored codes in smart contracts that assign the NFT’s ownership and transferability.
When an artist mints an NFT of his artwork, he is creating a representation of that work on the blockchain, a digital public ledger, that links the work directly to him or the next owner.
In this way, the artwork is forever owned by the entitled creator until they decide to transfer its ownership to a buyer.
NFTs are non-fungible, or non-interchangeable, representations of digital or physical items on a blockchain. These NFTs are identified by the unique data stored within the token itself, contributing to the fact that every NFT is defined and distinguishable by its properties rather than its value.
In some cases, the artist can receive royalties every time their NFTs are resold. The idea of owning your work and the money it generates is indeed alluring to artists, especially digital ones, who seek to protect and safely monetize their works.
However, the risks that may accompany such a lucrative business might offset its benefits in some cases.
What Legal Issues Arise from NFTs?
Just like every technical innovation, NFTs are hardly regulated by law, leaving much space for disputes and crime.
Ownership and Copyright Issues
The most prominent dispute regarding NFTs is ownership. While some of those who are critical of NFTs claim that NFTs can be easily screenshotted and “owned” by anybody on the net, this is the least of NFT traders’ concerns.
Most of the NFT ownership disputes start from ownership ambiguities regarding the items they represent in the first place. Ownership of NFTs doesn’t confer ownership of the underlying items.
For example, NFTs of an artwork that is created, sponsored, curated, or published by more than one person can end up in courtrooms if one party claimed copyright infringement.
Big names are involved in litigation of NFT ownership dispute, such as the aforementioned Miramax suing Tarantino, artists against Ben Moore’s Art Wars, and Free Holdings against Sotheby’s.
In the Art War’s case, the curator Ben Moore minted and sold NFTs of Stormtrooper helmet paintings that were created by a group of artists allegedly without their permission. This resulted in OpenSea, the biggest NFT marketplace, taking down the Art Wars NFTs after receiving a copyright infringement notice from the artists. However, the NFTs are still available on a Looksrare.
Trademark Issues
Trademark issues are also very common with big brand names getting caught in the NFT craze.
Trademark infringement is the use of a business’s brand name, feature, product, or product design. The most recent example of NFTs infringing trademarks is Nike vs StockX.
StockX has been creating sneaker NFTs that can be redeemed for the physical sneakers they represent. Nike sneakers are among the featured sneakers on their NFTs, and though they represent redeemable and actual Nike sneakers, these NFTs triggered a trademark infringement claim by Nike against StockX.
The issue at hand concerns the fashion industry at large and questions the extent to which NFTs can be created and traded within it. As Nike is requesting the taking down of these NFTs, the people who bought them might be left short of thousands of dollars with no recourse.
Another court case of NFT trademark infringement involves the French fashion house Hermes and Mason Rothschild. Allegedly, Rothschild infringed Hermes Birkin bag’s trademark when he minted NFTs that resembled the famous bag under the name “Metabirkins”.
Hermes sued Mason Rothschild in a New York court, requesting a stop to the minting of these NFTs and recouping all the profits that were generated from them. It’s noteworthy to add that Rothschild sold 100 Metabirkins NFTs in a month for a total of $450k.
While the case is still going, the ruling is something to look out for as it might bring some clarity to the trademark issue of NFTs.
NFT Technical Issues
Buyers and sellers are both at risk of marketplace malfunctioning or shutdown issues. Although this is a risk to consider for literally any website on the net, users of cryptocurrency-related platforms are thought to be far more at risk due to the lack of centralization and, of course, regulations.
The Cryptopunks’, a collection of NFTs produced by Larva Labs, V1 issue can be regarded as a solid example of the vulnerability of blockchain technology, smart contracts, and eventually the NFT industry.
Cryptopunks took down the first version (V1) of their NFTs following a purchase that went wrong and introduced V2 NFTs. The error happened when the smart contract that executed the selling operation allowed the buyer to get the NFTs and withdraw his money back.
The V1 NFTs were banned from OpenSea but started trading on other platforms, although Cryptopunks doesn’t want them to be traded.
While this case revolves around copyright infringement as well, it is essentially caused by a technical error rather than a deliberate, or inadvertent even, copyright infringement.
Cryptopunks want the V1 NFTs to be taken down, while the owners are opposing the claim for fears of losing their assets of nearly $50 million.
It’s evident that this case is more complex than the other copyright or trademark infringement cases as there’s hardly any culprit. The whole thing was started by a minor smart contract error that can have severe consequences on either party.
Fraud
The American-based NFT marketplace Beta.Cent.co has recently halted NFT trading on its platform due to an increase in “illegal activity”. These illegal activities involve primarily selling unauthorized copies of existing NFTs, unauthorized minting of content and items, and the minting NFTs that resemble securities.
Another, bigger NFT platform, OpenSea, had tweeted that “Over 80% of the items created with this tool were plagiarized works, fake collections, and spam” before they later on corrected this stat in another tweet that said:
Regardless of which is true, in light of the lack of reliable data, the number of fake NFTs must be significant on the platform.
Besides counterfeit NFTs, buyers of NFTs and users of their marketplaces are at risk of phishing that can cost them thousands of millions worth of NFTs.
Recently, the UK’s HMRC has seized NFTs and other digital assets in connection to VAT fraud allegations.
NFT Dispute Resolution
While most NFT-related claims to this day have been brought to courts, Alternative Dispute Resolution (ADR) and Online Dispute Resolution (ODR) are thought to be better fitted to resolve this type of dispute.
Being one of the latest inventions in the tech industry, NFTs and the disputes resulting from their creation and trading must be handled by tech-passionate and open-minded professionals, which are most likely to be found in ADR firms rather than courts.
ODR can maintain the decentralized nature of NFT trading through completely remote and private processes.
Famous ODR providers, such as JAMS, are adapting to the blockchain, crypto, and NFT technologies through customized resolution processes.