NFT Transactions Jump to $ 7 Billion by the End of 2021

“NFT” was 2021’s word of the year. This isn’t too surprising — they’re everywhere! The market cap for NFT transactions jumped from roughly $ 400 million at the beginning of 2021 to over $ 7 billion by year’s end. What’s next and how can brands and other content creators leverage NFTs to bring value?

What is an NFT?

“NFTs” are non-fungible tokens, the ownership of which are recorded on a blockchain. NFTs are often associated with digital objects (for example, images or other digital works). While the purchaser or acquirer gets ownership of the token, they often only get a limited license to the digital object.

What is the point?

Isn’t this just a digital picture I can “right-click” and save on my desktop – why are people paying any money for this — much less amounts like 69.3 million dollars?

At the most basic level, NFTs are simply a way to record and track ownership of a digital asset.

And, just as buying a poster of the Mona Lisa is not the same as owning the original painting, screen shotting an image is not the same as owning an NFT. Much like with all other forms of collectibles, owning the original is special.

Further, NFTs are dynamic digital assets, which may have meaning and utility in both the digital realm and the real world. And because blockchains are programmable, it is possible to create NFTs with features that allow them to expand their purpose over time.

Is it just digital collectibles?

NFTs can represent ownership or rights in any asset (physical or digital) and / or entitlements. Entitlements can function like membership cards or tickets, providing access to events, exclusive merchandise, and special discounts – as well as serving as digital keys to online spaces where holders can engage with each other, or even offering unique exploitation rights.

Why should I care?

All of this gives NFT holders value over and above simply owning the token— Owning an NFT can make you a collector, an investor, a member of a club, a brand shareholder, and a participant in a loyalty program all at once.

And, they provide creators with a vector to build a highly engaged community around their brands and even attract a non-traditional market. Additionally, NFTs’ programmability supports new business and profit models. For example, creators can program an NFT’s smart contract to collect a royalty each time the NFT is resold so that a share of the transaction goes back to the original creator.

Most importantly, NFTs probably aren’t going away anytime soon — they are the digital key to unlocking 2022’s word of the year — Metaverse.

Am I Prepared?

This field is rife with legal issues — from licensing and other intellectual property issues to data privacy, advertising, and marketplace considerations. Because innovation in this space is only in its infancy, careful consideration of potential, forthcoming legal issues will be necessary.

While it is advisable to enlist the help of a competent attorney to advise on your NFT strategy, the following are some of the topics you should consider:

  1. Licensing. Make sure that any digital assets (or other underlying intellectual property) associated with the NFTs are subject to a proper license, which limit scope and that such license is implemented correctly to ensure enforceability of its terms. For example, creators and brands should be aware that relying on existing marketplace platform service terms are not enough! To learn more about this topic, read our whitepaper: Protecting IP and Limiting Liability when Licensing IP for Digital Art and NFTs.

  2. Intellectual Property Strategy and Brand Protection. Due to the unique aspects of NFTs, creators need to be mindful of potential infringement issues when using third party IP and should consider novel IP protection strategies for their original creations. For example, brands that exist in the physical space need to change their protection strategy to cover the digital realm. To learn more about this topic, read our whitepaper: NFTs and Intellectual Property: What IP Owners and NFT Creators Need to Know.

  3. Regulatory Compliance. NFTs are increasingly becoming the focal point of heightened regulatory oversight. As these issues continue to evolve, it is critical to remain appraised of the latest developments. To learn more about some of the most recent regulatory activity, read here: US Crypto Regulatory Enforcement Ramps Up – NFTs Now More in Focus.

Note that the Metaverse comes with its own host of legal issues.

Copyright © 2022, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume XII, Number 110

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