Sales of non-fungible tokens (NFTs) have soared in recent months reaching $87 million. Some elite auction houses have been selling NFT-based artworks for millions of dollars. The number of marketplaces and NFT artworks keeps on growing, adding more fuel to the already hyped topic.
The interest in NFTs is natural, considering the sums of money circulating there. But can the technology be used in other fields rather than speculations?
NFTs are unique digital assets linked to a digital ledger called blockchain. As the name suggests, blockchains consist of blocks that are time-stamped and linked together by hash.
The connection makes all operations within blockchain entirely transparent. It’s also prone to malicious actions, because if one block is compromised, others immediately stop “recognizing” it, thus making the whole chain unusable.
NFTs provide businesses with new opportunities in terms of data protection and secure ownership transaction. Still, there are many legal considerations within the topic and we are going to dive deeper into some of them.
Opportunities that NFTs give businesses
The decentralized nature of blockchain reveals the history of transactions, making it almost impossible to break in, modify, or delete digital assets recorded on it. This feature is useful in data protection, as once a file is tokenized, you can safely share it.
NFTs contain unique identification information and metadata that distinguish one token from another. This is the feature that makes them non-fungible, meaning that you can’t exchange an NFT on another one, since there are no duplicates.
Some NFTs incorporate smart contracts that can be set to automatically fulfill terms when meeting certain predetermined conditions. The contracts may be used to automatically issue payment to an entrepreneur the moment their work is accepted by a customer.
After a smart contract code is written, it is permanently minted into a token on blockchain. It can serve as a digital certificate proving your ownership over a file.
Legal challenges associated with NFTs
Even though NFTs are gaining greater popularity, there are no clear legal rules for the market. The most important of them is that a token itself doesn’t provide you with any IP rights.
Yes, timestamps on a tokenized object may serve as proof in some courts, but the NFT itself gives you no legal ownership over an object. So to be able to defend it as your property, you need to register it first in an old-fashioned way.
By buying an NFT, you acquire a URL to the storage associated with the digital item. The thing is there, but it gives you no ownership over it.
For example, an NFT buyer may think that they purchased the art associated with the NFT, but, in reality, it belongs solely to its creator. And the original creator needs to initiate a proper legal procedure for transferring IP ownership for it to truly become the buyer’s.
Another issue that arises here is data hosting. An NFT and the digital asset linked to it are stored separately. The NFT is secured on blockchain but it is connected to the file via a URL link.
If the asset is transferred to a storage or deleted, then the URL becomes inactive, and the NFT — worthless.
This can be critical when addressing data protection and human error issues. There is no way to correct a mistake in data on blockchain or adapt some terms to new conditions if needed. So if something is wrong with your personal data — that’s it, you can’t exercise data protection laws associated with it.
The NFT technology has great potential in terms of improving data transfer and IP protection. The opportunities it presents in generating revenue streams for digital artists are vast. However, with these opportunities comes the need for a business to act carefully and still rely on the traditional framework of legal protection.
