Editor's Note: This article is the first in a series by Katten attorneys examining NFTs and various novel legal issues raised by NFTs, including in copyright law and beyond.
When the artist Beeple sold a non-fungible token (“NFT”) of his digital artwork for an eye-popping $69 million at a Christie’s online auction in March 2021, only about 178,000 wallet addresses had bought or sold an NFT on an Ethereum marketplace. Today, that number stands at over three million. Although headline-grabbing scandals and continued regulatory uncertainty over the treatment of digital assets in the intervening years have cast a cloud on cryptocurrency markets, major corporations and brands have spearheaded efforts to bring NFTs to the consuming public. More recently, an update to the Bitcoin protocol source code named Taproot that enabled a limited form of smart contracts on the protocol has inspired a burgeoning marketplace for Bitcoin NFTs called Ordinals and STAMPS.
The market for NFTs remains persistent, generating approximately $24.7 billion of trading volume in 2022 as compared to $25.1 billion in 2021. This enduring and growing interest in NFTs reflects their unique appeal in a world replete with fungible digital assets (approximately 22,932 according to Forbes) — each NFT is literally unique, and can be used to buy and sell interests in music, art, and collectibles. This feature of NFTs thus allows brands to engage with consumers through digital media while relying on the benefits of blockchain technology, namely a tamper-proof and transparent way of verifying ownership and authenticity. NFTs can also be programmed to automatically pay their creators a portion of the resale value of the NFT each time the NFT is resold on a secondary market, thus providing artists and creators a new way to monetize their creations.
Some have compared NFTs and their distinguishing features (i.e., uniqueness and exclusivity) to physical collectible goods. In fact, an issuer of NFTs recently likened its NFTs to baseball cards in an attempt to dismiss a class action lawsuit in which the class action plaintiffs alleged, among other things, that the NFTs were sold to purchasers as unregistered securities. What makes NFTs arguably more expansive in scope than physical collectibles such as baseball cards or rare coins, however, is that the metadata in an NFT that refers to the underlying source material may point to virtually any digital content or data, including content that the issuer of the NFT may not hold ownership rights to. This feature of NFTs, combined with the pseudonymous and immutable nature of blockchain transactions, has raised novel and complex issues of intellectual property, privacy and copyright law for brands, creators and consumers alike. We examine these issues in our upcoming continuing series on NFTs.