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Expert Insights

27 October 2021

Who? Where? What on earth is an “NFT”!?

What is it?

An “NFT” or “Non-Fungible Token” is a type of digital asset that records ownership of another, generally non-physical digital asset like a JPEG image, GIF, short video or even a Tweet on a blockchain.

Put another way, an NFT is a “Non-Replaceable Token” meaning only one of its type can ever be created and recorded on the blockchain it is connected to. Every computer plugged into that blockchain network will hold a record that the holder of the NFT owns the asset it relates to.

How can an NFT have value?

This can be a tricky concept for traditional thinkers, particularly as NFTs often relate to digital content that can be easily copied and accessed by all.

Instead, you should first think about your own engagement in the “digital world”. When was the last time you collected a paycheque in cash? Presumably you just opened your smartphone and checked the little numbers on your banking app, right? Those little numbers on the screen indicate you’ve been paid and you can go and use your card to tap and spend those little numbers on physical items. Your bank, the card issuer, the shop and the shop’s bank all know you own those little numbers and the transactions are authorised.

In a similar way, if you own an NFT, everyone on the blockchain network knows you own it, and that’s where the value comes from. If you chose to sell it, you could be paid by the buyer in cryptocurrency on the blockchain and exchange that crypto to fiat currency and spend it in the ”real” world, if you chose to.

The value of the NFT just depends on what the marketplace thinks your digital asset is worth. Does anyone really think GameStop shares were worth $347.51 on 27 January 2021? In a free market economy, any asset, digital or physical, is worth what somebody else is willing to pay for it at a given time.

Where are NFTs being traded?

NFTs are being traded in a variety of locations. The highest value “headline grabbing” sales are often through the digital art platforms that allow you to buy, sell, trade and display your items such as “Foundation”, Gemini’s “Nifty Gateway” and the Twitter focused Valuables (🔓Valuables (cent.co)) platform. Foundation and Nifty utilise the Ethereum blockchain and Valuables runs on the Polygon (formerly Matic) blockchain.

In the sporting world, NBA Top Shot (NBA Top Shot | Officially Licensed Digital Collectibles) leads the way allowing fans to own their very own ‘minted’ moments from NBA matches. The platform runs on the Flow blockchain developed by Dapper Laps and has so far racked up over US$700m of sales in less than a year.

Do NFT holders LEGALLY own these digital assets?

This is often not the case. Many NFT trading platforms simply produce a minted NFT to act as a certificate of ownership within their own platform. This certificate sometimes includes a copy of the original metadata, but not always. The “smart contract” on the blockchain often only records the transfer of the NFT and the purchase price, it will not necessarily transfer legal ownership of the IP.

Any buyer who wants to legally own the digital asset linked to an NFT (including all associated IP) should seek legal advice before completing the purchase to ensure the smart contract includes the relevant detail.

CRS’ Commercial and IP lawyers have already successfully assisted a number of clients in the purchase, sale, auction and creation of NFTs, ensuring the legal title and all associated intellectual property rights are transferred correctly.

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