Happy Saturday! As promised, a mid-week (now end-week) issue dedicated to NFTs. This is a piece I’m equally excited and nervous about.
Excited because I think NFTs will do a lot of the heavy lifting in redirecting the flow of power from institutions to individuals; the effects of this will touch every industry (law included).
Nervous because most NFT guides are written by crypto megafans who have lasers for eyes in their Twitter profile pictures.
I’m not one of them. I’m a crypto rookie with normal eyes in my Twitter picture. I didn’t even know what an NFT was until two weeks ago, when I saw someone tweet about a guy called Beeple. So, am I the best person to be writing about this?
But I find NFTs fascinating and no one’s written about them with a legal slant, so I’m going to do it - no jargon, no fluff.
Before we get into it: the discussion on NFTs in law is near the end. If you can’t wait, feel free to jump ahead. Also feel free to accept you will probably be very confused.
Feb 27, 2021
First things first: NFT stands for Non-Fungible Token.
Okay… but what does that mean? Most crypto fans waste thousands of words trying to explain the concept of ‘fungibility.’ I don’t want to fall into this trap (no jargon, no fluff, remember?) and think it’s easier to understand what NFTs are by looking at how they’re made.
There are two steps to creating an NFT (per Justin Cone):
1) Make a unique thing: from digital art, GIFs, music, poems and in-game items to collectibles and real estate – the possibilities are endless.
2) Tokenize the thing: A token is a digital link to the thing you’ve made. Tokens live on blockchains, which are like public excel sheets that keep track of everything about your thing: the current owner, the previous owners, the price history. When you 'tokenize’ the thing you’ve made, you’re linking it to a blockchain, which records information and creates a kind of digital passport for your work.
So an NFT is a way to prove the validity and ownership of anything you want. A key point: one NFT can’t be exchanged with another. They’re unique, like rare Pokemon cards or - throwback - Tamagotchis.
Still kinda confused? Maybe the NFT origin story will help. Three years ago, in November 2017, a Canadian startup kickstarted the NFT boom when it released CryptoKitties: a series of digital cards with cute cartoon cats on them. Each cryptokitty is registered to a blockchain, and can be traded and bred to create new ones.
One cryptokitty, Pudding Daintytot - a pink cat nestled between two clouds, with hearts sprinkled over its chest - is currently on sale for $1m.
Other examples of NFTs: - Beeple became the first artist to auction a purely digital, NFT-backed piece of art at Christie’s this week. - The Nyan Cat gif recently sold as an NFT for $580k. - An NBA Top Shot highlight of a LeBron James dunk sold for $208k. - Logan Paul sold $5m worth of NFTs.
What's the point?
At first blush, the NFT craze is a pretty good indicator we might be chugging waaayy too much crypto kool-aid. Why would you fork out thousands of $$$ for a piece of digital art that anyone can screenshot? Or a GIF you can watch online for free?
The internal monologue of - is this genius or the stupidest thing I’ve ever heard - is widespread.Despite cashing out big-time from the NFT boom, digital artist Beeple told Esquire he couldn’t quite shake the feeling that, without some physical object to go along with the NFT, he was selling “magic beans.”
But magic beans can sprout. I have three rebuttals for the ‘NFTs-are-a-fad’ groupies:
First, an NFT = media PLUS a token. People can take a screenshot of your image or GIF, but that doesn’t mean they own it. It’s like taking a picture of the Mona Lisa, getting it printed, framing it in my living room - and saying “well, it looks the same as the original, so it’s worth as much.”
Put it another way: ownership = power; screenshot = no power.
Second, like Jesse Walden says, it’s a good thing if people are screenshotting the image you own. The more a file is shared and seen online, the more cultural value it accrues. This increase in notoriety a) is a marker of social status (people love social status) and b) will drive up the value of the NFT when it comes to reselling.
Third, the Winklevoss twins - a.k.a the guys who claim Mark Zuckerberg stole their idea for Facebook - say the new-age investor would rather have software over hardware in their portfolio. So the fact you can’t see the digital art on your wall, or feel the digital collectible card in your hand, is a little redundant.
“Physicality is a bug, not a feature.” - Tyler Winklevoss.
Long story short: people who say NFT’s are pointless are, themselves, kinda missing the point.
Who benefits from NFTs?
The rocket fuel behind the NFT buzz is egalitarianism: in their current stage of adoption, NFTs are benefitting everyone involved.
Creators make more money by selling content directly to their fans and by pocketing royalties everytime their NFTs are resold. This cuts the umbilical cord between creators and intermediaries e.g. galleries, auction houses, Spotify, Substack and Medium - middlemen whose business models hinge on taking a cut out of creators’ paychecks.
I was on Clubhouse this weekend doing some, uh, research for this issue and fell into a room called: “I sold $78k of NFTs yesterday.” The guy who started the room was an artist called Matty. Matty made a good point: by selling his art as NFTs, he was was able to keep track of each person who owned his pieces, and could target his efforts in the future to this ledger of existing clientele. Matty would never have been able to do this if he sold his art through a gallery, where buyer identities are kept hush-hush.
In practice, though, it’s a little more complicated than opening a cage door and letting creators fly free. Traditional middlemen are only being replaced by new, flashier middleman - e.g. minting platforms and cryptoart marketplaces - instead of being gunned down completely. But these new middlemen are a little nicer, and give creators more leverage than they’ve ever had before. To steal a line from Packy McCormick, NFTs are helping build the Creator Economy’s Middle Class by rewarding original creators every time their work is used.
Consumers benefit too. NFTs give them ‘skin in the game’; they get to play an active role in their favorite creators’ success by directly owning their content, and can maybe even turn a profit in the process.
A good example is the interaction between NFTs and the ‘fandom’ economy. A South Korean entertainment company that represents K-Pop artists recently jumped into the cypto pool by issuing NFTs on a Hong Kong-based exchange.
When asked why, the CEO of the company said:
“Fanbases get digital goods for their favourite artists that they can truly own, and artists and content creators get new and exciting products to offer their fans. Digital event tickets, membership tokens, even digital content rights can all be captured and housed within NFTs.”
By taking digital goods out of their silos, NFTs turn a collection of mutually exclusive walled gardens into a true marketplace where creators and consumers - not institutions - hold the reigns.
NFTs and law
It would be a waste of time, though, to think of NFTs only as the equivalent to collectibles. There have to be better use-cases than digital art, cryptokittes, K-pop, or owning a 10-sec clip of your favorite NBA star dunking.
Other thinkers are already beginning to chart the future of NFTs. Scott Belsky imagines a world where NFTs become holistic assets that entitle you to ‘real world’ experiences. Like buying a Gucci suit that’s accompanied by an NFT establishing you as the owner, which then unlocks a series of entitlements e.g. Snap filters or Fortnite skins.
This is cool and all. But how can NFTs shake up traditional industries? Duncan Cock Foster, founder of Nifty Gateway, a cryptoart marketplace, predicts NFTs will follow a similar arc to bitcoin: “bitcoin started as an asset collected by nerds. Now it’s hedge funds and insurance companies.“
I don’t know much about hedge funds and insurance companies (lol), but I do know about law - and think the use-cases for NFTs in the legal industry are being overlooked.There are two examples I’m pretty excited about.
First, property. Real estate is the quintessential example of a unique asset - no two parcels are the same, which makes it the perfect use-case for NFTs. To buy property, you generally need to sign a deed (a type of formal contract).
Here’s the thing about deeds: they suuuuck.
In the UK,each party has to sign the deed with a witness present or, in the case of a company, two directors. These deeds are often duplicated, triplicated, scanned into databases and distributed. Oh, and things get even more complicated when we bring high-value commercial property and mortgages into the mix. But let’s not worry about that.
The main thing to understand is: property transactions are propped up by stacks and stacks of paperwork. No one likes paperwork. So imagine a smart contract platform where direct ownership in land is represented (and maybe even fractionalized) as NFTs? Where all you have to do to check a property’s past ownership and mortgage history is look at a token that lives on a blockchain?
So. Much. Easier.
Second, company shares. Here’s a loose example of what it’s like to buy shares in a company: 1. A private company with existing shareholders is going through a new funding round (i.e. they want new investors). 2.I like this company and I want to invest, so I agree to buy some shares. A lawyer in a nice suit sits me down and asks me to sign a share certificate. I sign it. 3. This lawyer then goes back to his or her office, photocopies my share certificate and the share certificates of my fellow new investors, compiles them into a thick folder called a ‘Bible’ (not joking) and sends out a copy of the Bible to a) the private company; b) each new shareholder; and c) sometimes existing shareholders too. Again, it’s so much paperwork. Why can’t my ownership of the shares be tokenized as an NFT?I’m sure I’m criminally oversimplifying this, but I imagine a (distant) future where our digital wallets will contain proof of every certificate, license and asset we own.
The legal sector is the cornerstone of this future.
Law can bite, too.
As much as NFTs can thrive within the legal sector, the law can also trample alllll over the potential of NFTs.
NFTs were built for the decentralized, lawless world of digital ownership. We don’t live in a decentralized, lawless world - meaning Ancient laws can stunt NFT development.
A few examples:
1. Someone on Twitter said US college athletes should start selling their own trading card NFTs. An esports attorney replied, saying current state law and NCAA rules limit this: “the NCAA will quash anything where athletes make money.”
2. South Korean regulators who were suspicious of NFTs delayed the licensing of all blockchain games last year.
3. The tax laws surrounding crypto are still kinda weird.
Before benefitting from NFTs, the legal sector has to first step back and facilitate their use. Easier said than done, but I’m optimistic and excited about the future of law-crypto fusion.
That’s it for today’s special issue. Drop me an email if you liked it - or hated it :( - at firstname.lastname@example.org. See you on Monday for our normal programming.
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