Key NFT Legal Considerations for Your Startup

Non-Fungible Tokens (NFT), alongside blockchain and cryptocurrencies, have recently risen in popularity and are projected to explode even further. Only having taken off in 2021, NFTs are a relatively new concept, but have caused a massive stir amongst NFT startups and innovative ventures. Australian NFT startups have quickly clued onto the booming industry and are making inroads into the NFT sector with the success of projects including Immutable X and Crypto Gaming United. Though, the technology is undoubtably exciting, there are still some crucial factors you should consider when engaging with NFTs. From ownership rights to drafting the right NFT legal contracts, we have outlined all your legal considerations below.

What is a Non-Fungible Token (NFT)?

A Non-Fungible Token in a non-replicable and non-interchangeable digital certificate of a digital asset. ‘Non-fungible’ means that its unique and cannot be replaced or exchanged like ‘fungible’ assets such as bitcoin. Though NFTs can’t be divided or replaced, they can be re-sold using a smart contract on a blockchain (virtual ledger that records digital ownership and transactions) with a unique address. NFTs have also been categorised as a virtual art collection, encompassing anything from drawings, music, cards, and even memes.

How do NFTs Work?

Most NFTs are created using smart contracts as part of the Ethereum blockchain. Ethereum is a cryptocurrency with a blockchain that stores extra information to accommodate NFTs.

The Legal Implications of NFTs

The Ownership of NFTs

When you purchase an NFT through an online NFT trading platform, you will typically obtain the work’s ownership rights. However, depending on the terms of use or terms of service associated with the NFT, the artist may still retain the reproduction or copyrights of the NFT (like the sale of physical artwork). As The Verge explains: anyone can buy a Monet print, but only one person can own the original. If the seller wants to assign the copyrights to the NFT buyer, there will need to be an NFT legal contract in place to outline this as the assignment does not automatically occur upon purchase.

If you are an NFT seller, we recommend looking at NFT licenses as this will outline your rights as the seller as well as the buyers’ rights. Some licenses may give the buyer the rights to post the NFT online or listen to the soundtrack on a personal device. Usually, NFTs will pay you a percentage every time the NFT is sold or changes hands.

Terms and Conditions

If your startup is involved with NFTs you must ensure that you develop thorough terms of services or terms and conditions to outline the rights of each party. Key considerations of an NFT legal contract will include the rights of the creator and the original buyer. For example, if an NFT is being onsold from the original buyer, then the artist will no longer be a party to the contract between the original buyer and the new purchaser. If you are an artist or a creator, we recommend conducting your due diligence or consulting a commercial lawyer if you want to retain your rights. Additionally, you will need to draft detailed NFT legal contracts if you are looking to sell or purchase NFTs.

Need Help? Contact Us

Although there is always a smart contract in place when selling or buying NFTs, we recommend speaking to a commercial lawyer about drafting additional NFT legal contracts for your legal protection. At Allied Legal, our team of expert commercial lawyers can assist you in the drafting of transfer licensing or the development of comprehensive terms and conditions. To learn more about how we can help, you can connect with us on 03 8691 3111 or send us an email at hello@alliedlegal.com.au.