An NFT is a data unit that is stored in a digital ledger, a so-called blockchain, and that certifies a digital certificate … [+]
NFTs, or non-fungible tokens, are a way of proving ownership of a digital file that differs from a copyright. They have become a hot commodity for people with a keen interest in digital art to buy, trade, and sell on online marketplaces, and peaked in March 2021. Many suggest slamming NFTs almost like digital trading cards think. Some even sold for over $ 69 million.
There are a lot of gray areas on what can and can’t be sold as NFT as this is such a new field. What is preventing someone from taking someone else’s art and shaping it themselves? The legal complexity surrounding the world of NFTs is something that the legal world is still catching up to. Anita K. Sharma, Esq., An entertainment attorney with 20 years of experience and an additional background as a filmmaker, answered 10 frequently asked questions about the legalities of coining and selling an NFT.
Anita K. Sharma, Esq., Entertainment attorney and founder of Sharma Law.
Anita K. Sharma
10 NFT questions answered by an entertainment lawyer
Jackson Weimer: What is your background, both as a lawyer and as an artist / artist?
Anita K. Sharma, Esq .: I have been practicing entertainment law for almost 20 years. After graduating from law school, I started out with entertainment finance at a large law firm in New York. When I became disillusioned with big corporate life, I left the company to open my own practice and mainly represent indie filmmakers. A few years later, I decided to go to film school to train to be a producer (I wanted to do what my clients did!). It was an amazing experience to sit on the other side of the table and see and learn the creative side of business instead of legal. Ultimately, I realized that my passion was representing talent and bringing their creative visions to life. I believe that my background as a filmmaker adds tremendous value to my clients because I understand the creative process from their point of view – I was literally able to create content for them. I would still like to produce, but unfortunately I don’t have the bandwidth at the moment.
Weimer: How does the court currently define an NFT?
Sharma: I don’t think a court defined what an NFT is, but the generally accepted definition in the industry is that an NFT is a digital certificate of ownership for a particular digital asset (think of that as similar to the title of a car) . . The “non-fungible” part means it can’t be exchanged for something of its own (unlike cash, which is fungible, meaning I can give you two $ 5 bills for one $ 10 bill). An NFT can easily be verified as authentic, and that makes an NFT a potentially sought-after groupage: there is a clear origin and indisputable ownership structure.
Weimer: If someone buys an NFT, what is they legally buying / owning?
Sharma: Most NFT sales only convey a license to use the digital copy of the creative work and the copyright owner retains the copyright. This means that ownership of the virtual artwork is not guaranteed when purchasing an NFT. The digital contract for the sale of NFTs must explicitly provide for a transfer of copyright in a signed script so that the buyer actually owns the copyright in the art. The buyer definitely owns the tokens that are placed in their digital wallet when purchasing the NFT, but this does not automatically confer copyright.
When purchasing an NFT, pay close attention to: (i) the essential terms of the NFT sales platform; these vary from platform to platform and even from NFT to NFT. For example, purchasing an NFT does not automatically give you the right to reproduce, resell, or use it for commercial purposes and / or (ii) the digital contract that governs the sale of the NFT to understand exactly what it is for Bought an NFT sale as the contract sets out what rights a buyer has in relation to the digital copy of the creative work they receive.
Weimer: When did you first have a client who wanted to talk about NFTs? What was it like to learn about them? What resources did you use to learn more about NFTs?
Sharma: I started learning about NFTs before customers approached us. I knew NFTs were rapidly growing and we needed to be able to advise clients on this. Learning about NFTs and blockchain is fascinating and difficult – I don’t think the concept of blockchain is easy to understand and it takes time. I have read many reliable sources and also watched videos because I think visuals are very helpful in understanding how NFTs work.
Weimer: What if I coined an NFT of someone else’s work and sold it? If this becomes a major issue, what laws are in place (or need to be) to ensure that the actual creator of an NFT is properly assigned?
Sharma: Without delving too deeply into copyright law, the foundation is that the copyright owner has the exclusive right to copy, distribute, modify, publicly perform, and publicly display the work. The copyright owner also has moral rights that protect the author’s right to attribution and integrity. One cannot necessarily simply change / destroy / edit / add a work of art without the permission of the original creator. Unless expressly transferred to someone else, the copyrights remain with the creator. Copyright has been around for decades, and it applies to NFTs. I think people think regular laws don’t apply to blockchain, but they do. The mere assignment of an actual owner of the underlying IP of an NFT does not automatically give the creator of an NFT the right to use it.
Weimer: Do you generally agree that most lawyers in your field don’t really understand NFTs?
Sharma: I cannot speak to what lawyers in my field know or do not know. I would just say that NFTs are emerging and evolving and legal issues are about to be discovered and treated as they arise.
Weimer: How does the Parody Law affect NFTs?
Sharma: Parody falls under the established “fair use” doctrine of copyright law. Put simply, “fair use” allows the use of copyrighted material for certain limited “fair” purposes without the permission of the copyright owner. In general, this means that you can use a copyrighted work for commenting, criticism, reporting, teaching, research, and / or parody without seeking permission from the owner. Any parody-type NFT could be considered fair use, but it should be noted that the courts will determine on a case-by-case basis whether a use is actually fair use based on a number of different factors. Just because an NFT is a parody does not automatically mean that it falls under “fair use”.
Weimer: Situation: I do some original digital art, but I used some copyrighted characters from a Nintendo video game in my art. I then go ahead and stamp this as NFT. Then I’ll sell it for a couple of grand. What is the likelihood that a large company will find out I used their copyrighted art to create my own NFT? What are the legal ramifications if they find out and are mad enough to sue me? Is it any different than selling art on the street with copyrighted signs?
Sharma: A company like Nintendo probably has people just hired to find its IP on the internet. They also have programs that automatically scan and find IP violations. Using IP without the owner’s permission is known as IP violation and an NFT creator can be sued for it. Selling artwork with copyrighted characters is also an infringement unless you have permission from the copyright owner. A good example is DC Comics, which recently sent a letter to all of their creators (including freelancers) warning that unlicensed use of NFTs is prohibited. This came after an artist made $ 1.85 million selling NFTs, including characters he drew for DC Comics.
Weimer: Many believe that NFTs have a terrible footprint on our environment. Do you see this as a potential challenge for customers interested in making their own NFT?
Sharma: Yes, I definitely see it as a challenge. Most of my clients are very purpose-driven and environmentally conscious. I think if they get ahead with NFTs we need to try to find ways to offset the carbon footprint.
Weimer: Twitter concluded this week that NFTs are dead as the early hype subsided and the market collapsed. Do you think so, or do you think NFTs have a longer future that we may not be ready for?
Sharma: I definitely think there is a bigger future when people better understand how to create and sell digital art (be it via NFTs or a variation) and how to determine the true value of it.
This conversation has been edited and reduced for the sake of clarity.