Harris Bricken attorneys Jonathan Bench and Fred Rocafort sat down to discuss Non-fungible Tokens (NFTs) and the legal issues common to their creation and transfer. A transcription of this talk can be found below.
NFTs (non-fungible tokens) are digital assets, defined by Merriam-Webster as “a unique digital identifier that cannot be copied, substituted, or subdivided, that is recorded in a blockchain, and that is used to certify authenticity and ownership (as of a specific digital asset and specific rights relating to it). Investopedia defines NFTs as “Cryptographic assets on a blockchain with unique identification codes and metadata that distinguish them from each other.”
NFTs can be stored on a blockchain (on-chain) or off-chain, e.g., a website. NFTs are typically powered by a smart contract, but they can be the subject of a conventional contract or assignment. They are generally digital goods (artwork, videos, or GIFs) or rights (concert access, etc.).
NFTs are conceptually different from the underlying assets. The NFT represents a unique copy of the asset rather than the asset itself. NFTs are non-fungible, but multiple NFTs could be minted in connection to a particular item. This is important because ownership of an NFT doesn’t automatically confer IP rights. Those conferred IP rights are set forth in the relevant sales contract.
Jonathan Bench 0:06
Fred, welcome to our first conversation for YouTube on web three topics.
Fred Rocafort 0:12
Thank you, Jonathan. Pleasure, pleasure to sit down and discuss NFT’s today, right?
Jonathan Bench 0:18
Absolutely. So let’s go right into it because we want to keep this short and focused. Tell me what is an NFT from your point of view?
Fred Rocafort 0:27
Sure. Well, whenever I discuss any topic, I like to go first to the black and white definitions and then take it from there. And let’s just start with Merriam Webster, my go to dictionary. An NFT is well first of all, for for those folks who don’t know what NFT stands for, let’s get that out of the way. It’s a non fungible token. That’s what that’s what NFT stands for. And Merriam Webster defines an NFT as a unique digital identifier that cannot be copied, substituted, or subdivided. That is recorded in a blockchain. And this is a key aspect of the definition, right, because there are many digital assets out there. But this is an important part of what defines an NFT. And also part of what links it to to the broader web three conversation. So recorded in the blockchain, and that is used to certify authenticity and ownership. Okay, so So that’s the dictionary definition. Key thing, it’s, it’s a, it’s a digital asset. This is important to keep in mind, because a lot of the news stories that are out there about NFT’s really place a lot of the focus on on the artwork, sometimes that is associated with the NFT’s. But that’s that’s not the NFT, the NFT mechanism can be used to tokenize, hence the non fungible token aspect of it, a variety of things, they can be digital artwork, but they could potentially be real hardcore, to give you an example. And then also important to stress, the unique character of NF T’s and going beyond the dictionary definition, and kind of going into a more editorial tone. One of the themes that surrounds NF T’s, and the conversations about them, is how, in a way, and this is just one point of view, there are others that have other points of view. But one of the things about FCS is that they seek to create this concept of uniqueness in a world that is not generally characterized by uniqueness. So for example, you take any medium, you take a tweet, you take any of these digital digital assets, if you if you will, digital digital representations. They’re not unique, right? I mean, going back to the days of Napster, you put a song into mp3 format, and you can share that with with the whole world. So what NFT’s are doing, according to some folks, and I find this compelling, I find this convincing is trying to create that sense of uniqueness, being able to package certain, the certain digital goods in a way that make them unique and hence make them more attractive, right. So there is very closely linked to the whole idea of NFT’s, this economic function. And so there you go, let’s maybe maybe we can stop there having percent that that general definition. But one thing before Before we continue, and this is going to be relevant to everything else we’ll talk about today. The NFT does not grant by itself ownership over the the subject of the NFT. So taking the most common example, or perhaps the most popular example of entities that digital artwork have, whether it’s whether it’s a board, ape, or whether it’s a pixelized picture of someone or that first tweet ever sent out. The NFT by itself is not going to give ownership over that. That underlying asset, the ownership at stake is over that particular digital asset that demonstrates the uniqueness of that asset and I know that was a bit complex and then there is a lot of complexity and all this it’s inevitable, but maybe we can try to piece this out a little bit more as we as we keep talking.
Jonathan Bench 4:54
Right? So let me see if I can dumb it down a bit for the non IP lawyers in the room. And I deal with a lot of IP because I deal with companies that have assets when we’re packaging companies together to the assets for sale. And when I think about it, like this, this definition of digital asset is very good, right? I mean, when you’re, if you’re a finance person or accounting person, when you’re looking at the balance of assets in a company, and what’s what’s, where’s the value derived from? You are looking at tangible assets and intangible assets. And that’s to all of the assets fit into one of those two buckets. And so for me, when I think about it, as I was blogging about this yesterday, trying to try to understand NF T’s even better and try to explain it better for especially for our cannabis audience. I, I like being able to break it down into Okay, is it tangible or intangible asset? First? Second, we’re talking intangible asset. And then exactly what are the rights that that go along with that asset? Like you said, Do you own the primary rights? Can you license to others? Or are you a recipient of the license for that asset?
Fred Rocafort 6:00
Yeah, exactly. And one thing to point out, and we alluded to this, but just to just to stress for our audience, the fact that NFT’s are about more than these digital artworks that we are seeing one commentator that I recently heard, and then again, I find I find this this structuring, to be useful said that in general terms, there’s two kinds of NFT’s they are the ones that will provide that that are connected to a digital good. So you’re talking about things like, like memes, you’re talking about artwork created digitally. And then there’s the second category that is concerned with rights. And this is where, for example, the purchase of an NFT might give you in addition to let’s say that, that image, that meme, it might also give you rights in the real world. So for example, let’s say in the music industry, you could offer an NFT, that gives you preferential access to concerts or to you know, one on one sessions with your with your with your favorite artists. So it’s important to point that out that this is not a monochrome where NFT’s are only about buying, you know, these arguably works apart. There’s there’s other applications that that can, can can be, well, there are other applications for entities as well as well.
Jonathan Bench 7:39
But at the risk of sounding too much like a lawyer would say the fine print of the terms and conditions are really where it comes down to this right. We’ve used the term this header term NFT. And, and it can mean a lot of different things depending on how it’s used just like any intellectual property, right, can, right I’m selling you something, okay, great. I understand that I’m getting this but really tell me everything about it. And so I think it comes down to understanding exactly what is available, and then does the the rights that you’re getting with that NFT actually match up with the value you’re willing to pay.