NFTs, or non-fungible tokens, are the latest trend in the world of cryptocurrencies. Recently, reports of hallucinatory prices being paid for NFTs have begun to circulate. But what is it exactly? We found out for you.
An NFT is actually no more or no less than a non-replicable digital certificate that proves ownership of an intangible object. It is an indivisible virtual currency that is linked to a virtual good. The digital creation remains available to the general public, but by purchasing an NFT you can show to the outside world that you are the owner and you get an authenticated replica of a digital medium that is unique. You can compare it to a certificate of authenticity.1 In other words, it is often a matter of prestige, which immediately explains why the super-rich are willing to pay big money to be the exclusive owners of a copy of a digital work. NFTs have quickly become real collector's items.2 The value is not in the item itself, but in the authenticity and uniqueness it represents.3
A few examples:
- Earlier this year, $2.5 million was offered at an auction for Twitter founder Jack Dorsey's first tweet from 2006.4
- Also the internet sensation of 10 years ago, Nyan Cat, a GIF animation of a flying cat was sold for a hallucinatory sum of almost half a million euros.5
- The record sale is still in the name of the digital artwork "Everydays: the First 5000 days", a composition of the first works of artist Mike 'Beeple' Winkelmann for a whopping $69.3 million.6
- The use of NFTs is also gradually gaining ground closer to home. This spring, Club Brugge will launch 'Club Moments', a marketplace for NFTs where the football club offers exceptional items or even goals as non-fungible tokens.7
Pros
NFTs have proved to be the answer to the problem that certain creations on the internet were just shared and copied, making it very difficult for the creator to prove ownership. As a result, creators of digital creations were often not rewarded for their work. NFTs were therefore developed as a way of ensuring that the original artists could make money from their works.8
Because NFTs use blockchain technology, it is unquestionably clear who owns the certificate, and especially who does not. Only the buyer of a nonfungible token will have a digital key to claim ownership and the ability to trade the certificate. This is because a cryptographic hash function has been incorporated into the NFT. In this way, the blockchain can check the code and determine who is the exclusive owner of the NFT.9 In this manner, NFTs can also be used in the fight against counterfeit products.
Blockchain is kind of a digital journal where transactions can be stored without being deleted or modified. Each new block that is stored will always contain information about the previous block, creating a transaction chain of data.10 In other words, Blockchain acts as a kind of digital notary without the need for a third central party. In this way, one can generate (digital) income without intermediaries.
Another big advantage is that one can create NFTs for anything you want to give a value to. Think of digital images, memes, GIFs, music, tweets, the list is endless. This also offers many possibilities for the future. Since NFTs are unique, they could, for example, be used to store birth certificates or identity cards. But also ticket sales of concerts or festivals could soon take place via NFT. Each ticket is unique and could in principle be sold as NFT.11 For example, earlier this year rock band Kings of Leon auctioned a number of golden tickets via NFT which gave you access to VIP treatment at a live concert.12
Cons
Given the fact that NFTs use blockchain technology, this requires a huge amount of computing power from computers. This processing power consumes a huge amount of electricity and energy, which raises the question of whether it is ecologically justified to assign values to digital creations using blockchain.
NFTs, like other virtual currencies such as Bitcoin, are not yet universally regulated by a government in the way that traditional investment products are. Given the volatile market in which crypto currencies circulate, investing in NFTs always involves risk. Just as a hype has a huge peak, it is also characteristic of a fad that the interest of the public declines over time.
Nevertheless, today there are many voices saying that crypto and blockchain in general could be the future. For this reason, we are keeping a close eye on the evolution of these products.
Ownership
An NFT makes you the owner of a copy of a digital artwork, not the original. It is merely a digital receipt that you own a signed version of something, not the object to which it relates.
It is important to always keep in mind that the creator of the digital work that is tokenised in NFT can continue to make copies of the work and can sell these 'unique' versions. So more unique versions can be made from the same source. This will cause the value of the NFT to be diluted. The rarer an NFT is, the more value it has. So just because you tokenise a work with an NFT, does not mean you are also the legal owner of the underlying work. You will only be the holder of the digital certificate that you have attached to it.13
Copyright
The question of whether an NFT is an intellectual property right must be answered negatively. When purchasing an NFT, only the economic ownership will be transferred and not the copyright of the work. However, under certain conditions, a non-fungible token will have a copyright component. For example, the buyer of an NFT can obtain a licence to use the work or you can agree that the original creator will receive a royalty each time the NFT is sold on.
Furthermore, it is technically possible to complement the sale of NFT’s with a copyright, but this will have to be explicitly programmed in a smart contract. That is a computer program where the parties' agreements are recorded and from the moment certain conditions are met, the computer program will automatically execute the agreement and transfer the copyright.14
Conclusion:
An NFT is therefore no more or no less than a digital certificate in the blockchain that proves the ownership of a copy of a digital artwork. The creator or buyer of an NFT will not become the owner of the digital work himself, but will only become the owner of the unique certificate that is linked to the digital work.
In a nutshell, the rise of NFTs offers many future perspectives, but also leaves many questions unanswered. Is it ecologically justified to attach values to digital creations via blockchain that require an enormous amount of electricity and energy? What about a legal framework for NFT’s? After all, it is likely that non-fungibles tokens will become a normality in our society within a few years. According to some business leaders and experts, it is the new industrial revolution of tomorrow.15
To be continued…
If you have any questions after reading this article, please do not hesitate to contact us at joost.peeters@studio-legale.be or 03 216 70 70.
1 https://www.jubel.be/juridische-aspecten-van-niet-fungibele-tokens-nfts/
2 https://www.vrt.be/vrtnws/nl/2021/03/09/digitale-kunstwerken-via-nft/
3 https://lawfox.nl/blog/juridische-problemen-bij-nft-non-fungible-tokens/
4 https://www.vrt.be/vrtnws/nl/2021/03/09/digitale-kunstwerken-via-nft/
5 https://www.nu.nl/tech/6155919/rijk-worden-van-digitale-kunst-deze-nfts-leverdenveel-geld-op.html
6 https://www.nu.nl/tech/6155919/rijk-worden-van-digitale-kunst-deze-nfts-leverdenveel-geld-op.html
7 https://www.tijd.be/ondernemen/sport/club-brugge-gaat-doelpunten-verkopen-als-nfts/10360555.html
8 https://www.jubel.be/juridische-aspecten-van-niet-fungibele-tokens-nfts/
9 https://lawfox.nl/blog/juridische-problemen-bij-nft-non-fungible-tokens/
10 https://www.arnold-siedsma.be/nieuws/is-een-non-fungible-token-nft-een-ie-recht
11 VAN MALDEGEM, P. “Digitaal eigendom verkopen? Dit zegt de fiscus”, De Tijd, 11 december 2021.
12 https://cryptobriefing.com/kings-bag-1-4-million-ethereum-nft-auction/
13 https://lawfox.nl/blog/juridische-problemen-bij-nft-non-fungible-tokens/
14 https://www.arnold-siedsma.be/nieuws/is-een-non-fungible-token-nft-een-ie-recht
15 https://www.tijd.be/dossiers/de-vooruitblik/hoe-blockchain-en-het-metaversum-eennieuwe-economie-laten-groeien/10356199.html; https://www.tijd.be/cultuur/kunstmarkt/ook-cryptokunst-is-voor-sotheby-s-kunst-metgrote-k/10368701.html
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