During the pandemic, the non-fungible token (NFT) market expanded, whereas the conventional artists, performers, and on-site galleries had struggled with Covid-related lockdowns. On the other hand, artists, enthusiasts, entrepreneurs, and companies have been trying to capitalize on the possibilities of NFTs and fully grasped the market operations.
With billions in NFT sales, the industry is confronted with legal challenges ranging from copyrights, anti-money laundering, and patent rights to legislation and estate planning. On the other hand, NFTs can open up new markets and routes for creators, as well as enhance how we purchase and acquire assets of all kinds and conduct ownership transactions more effectively.
Top Legal Issues That You Should Keep in Mind
Hosting and Storage of Data
Typically, an NFT and the intellectual property it represents are stored separately. The NFT is a digital asset that is kept just on blockchain whereas the digital asset is linked to the NFT through a connection.
The connection will break if the digital asset is erased or the hosting provider fails or otherwise goes offline. In such a case, the NFT will be useless since it will no longer be connected with the digital asset and there will be no way to back it up. This can lead to business disruptions and regulatory issues depending on how the NFT is used.
With NFTs, copyright and licensing rights are crucial elements. The buyer typically owns the token but, may simply obtain a license to the asset that the token represents. Keep in mind that the asset’s copyright is typically retained by the asset’s author.
Various licensing conditions, ranging from personal and extensive commercialization rights to non-commercial rights, can be applied. Whatsoever, corporate model you choose, the customer rights should be conveyed evidently and accurately in both licensing conditions and marketing messages.
On the other hand, inaccurate marketing can lead to a variety of legal cases and other problems. The conditions of the license should be clear.
The issue of taxation seems to be another subject where the legislation has not yet kept up with the rise in popularity of NFTs. There is a limitation of law while dealing directly with NFTs.
NFTs are a slightly distinct type of digital asset because they are individually identifiable and hence cannot be ‘pooled’ for CGT purposes. CGT appears to apply to profits or losses on the disposal of NFTs, and they are very certainly subject to taxation, however, the exact tax situation is unclear.
One of the attractions of tokenizing digital art for artists is that they may be compensated when their work is initially sold, and then get profits when it is resold by other parties. Once you’ve created and sold anything, you’ll get compensated several times. But, the only time you get programmed royalty payments is when the NFT is auctioned through the same NFT platform.
As consumer preferences for NFTs grow, the businesses must be mindful of the legal ramifications. Numerous third-party stakeholders are engaged in various phases of an NFT, from conceptualization to potentially being auctioned.
While some of the third-party risks connected with NFTs and their design, promotion, and sale are recognizable to legal teams, others are unique to the NFT and blockchain world.