NFTs And The Enduring Allure Of Digital Collectibles – Fin Tech

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.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.