NFTs: Technology & Legal Issues

6.1 NFT Technology

Non-Fungible Tokens (NFTs) are unique digital assets on a blockchain, each with distinct properties that differentiate them from fungible tokens like Bitcoin or ETH. Understanding the technical architecture is essential for legal analysis.

Fungible vs. Non-Fungible

ERC-721 Standard

The foundational NFT standard, defining the minimum interface for contracts to be considered NFT-compatible.

interface IERC721 {
    // Returns the owner of a specific token
    function ownerOf(uint256 tokenId) external view returns (address);

    // Transfers token from one address to another
    function transferFrom(address from, address to, uint256 tokenId) external;

    // Approves another address to transfer the token
    function approve(address to, uint256 tokenId) external;

    // Returns the URI for token metadata
    function tokenURI(uint256 tokenId) external view returns (string);

    event Transfer(address indexed from, address indexed to, uint256 indexed tokenId);
}

ERC-1155 Multi-Token Standard

A more efficient standard supporting both fungible and non-fungible tokens in a single contract.

Metadata and Storage

• On-Chain: Token ID, owner address, transfer history
• Off-Chain: Image file, attributes, description (via tokenURI)
• IPFS: Decentralized storage, content-addressed (if pinned)
• Arweave: Permanent storage with upfront payment

6.2 Ownership vs. Licensing

The most fundamental legal misconception about NFTs: purchasing an NFT typically does NOT transfer ownership of the underlying intellectual property. Understanding this distinction is crucial for legal practice.

What NFT Buyers Typically Get

• Token: Ownership of the unique on-chain identifier
• Personal Use: Right to display for non-commercial purposes
• Resale: Right to transfer/sell the token
• NOT: Copyright to the underlying artwork (usually)
• NOT: Right to create derivatives (usually)
• NOT: Commercial usage rights (usually)

License Spectrum

Case Study: Bored Ape Yacht Club License

BAYC grants owners broad commercial rights:

• Unlimited commercial use of the owned ape's image
• Right to create and sell derivative works
• License transfers with token sale
• Yuga Labs retains underlying IP for collection-wide uses

This has enabled BAYC holders to create restaurants, merchandise, and media projects using their ape images.

6.3 Intellectual Property Issues

Copyright Infringement

A significant portion of NFTs are minted using copyrighted content without authorization. Issues include:

• Art Theft: Minting others' artwork as NFTs without permission
• Fan Art: NFTs of copyrighted characters (Disney, anime, etc.)
• Impersonation: Fake collections claiming to be from known artists
• AI-Generated: Training data copyright concerns

Trademark Issues

• Brand NFTs: Unauthorized use of brand names/logos
• MetaBirkin Case: Hermes sued artist for "MetaBirkin" NFTs depicting the Birkin bag - Hermes won (2023)
• Domain Names: ENS/blockchain domains with trademarked terms

Right of Publicity

NFTs depicting celebrities or public figures without authorization may violate right of publicity laws, which vary by jurisdiction.

Royalty Enforcement Problem

The royalty "crisis" of 2022-2023:

1. Royalties are off-chain agreements, not on-chain enforcement
2. New marketplaces (Blur) allowed optional or zero royalties
3. Creator revenue dropped 60-80% as traders sought lower fees
4. Projects exploring on-chain enforcement mechanisms (ERC-2981, operator filters)

6.4 Regulatory Considerations

Securities Analysis

Whether NFTs are securities depends on the specific facts, applying the Howey test:

• Investment of Money: Yes - purchasing NFT
• Common Enterprise: Varies - community benefits vs. individual art
• Expectation of Profit: Key question - art appreciation vs. speculation
• Efforts of Others: Does project team drive value?

Anti-Money Laundering (AML)

High-value art has long been used for money laundering. NFTs present similar concerns:

• Wash Trading: Selling to yourself to inflate prices (estimated 80%+ of some NFT volume)
• Anonymity: Pseudonymous transactions complicate KYC
• Cross-Border: Instant global transfers outside banking system
• Value Manipulation: Arbitrary pricing enables "justified" transfers

Consumer Protection

• Misleading Claims: Overstated utility or promises
• Rug Pulls: Projects abandoned after sale
• Fake Collections: Impersonating legitimate projects
• Hidden Fees: Gas costs, marketplace fees

6.5 Dispute Resolution

Challenges in NFT Disputes

• Pseudonymity: Difficulty identifying defendants
• Jurisdiction: Decentralized, cross-border transactions
• Enforcement: Judgments difficult to execute on-chain
• Evidence: Blockchain provides transaction proof but not intent

Available Remedies

1. Platform Takedown: Request removal from OpenSea, etc.
2. DMCA Notice: For websites hosting infringing content
3. Litigation: Traditional courts if defendant identifiable
4. On-Chain Remedies: Limited - cannot reverse transactions
5. Arbitration: If specified in marketplace ToS