Legal issues with non-fungible tokens | Adler Pollock & Sheehan PC

Non-fungible tokens (NFTs) offer new investment opportunities and secure lending opportunities for borrowers and lenders, but also raise a number of legal considerations.

NFTs are unique digital assets that are linked to a blockchain that helps certify the authenticity and ownership of an NFT. Unlike cryptocurrencies, which can be replicated or exchanged for similar value, NFTs are representations of specific tangible or intangible assets. These assets often come in the form of artwork or other collectibles, but any number of assets can be represented by NFTs as long as they are unique. News sources indicate that NFT sales reached around $25 billion in 2021.

Other legal considerations include the issue of intellectual property rights in relation to an NFT. The purchase of an NFT does not constitute an assignment of intellectual property rights, such as copyrights or trademarks. In order to transfer or assign the intellectual property rights underlying an NFT, the assignment must be expressly agreed in writing in a smart contract. A potential purchaser of an NFT should understand whether they are acquiring the token for personal use or whether they will acquire a right to copy, modify, or publicly display that NFT. Besides buying and selling, NFTs can also potentially be used as collateral for loans. A number of online platforms now offer NFT owners the option to mortgage their NFTs in exchange for cryptocurrency, government-issued currency, or in exchange for other NFTs. As with conventional loans, the lender must determine the value of the NFT collateral and the parties must agree on the interest rate and other terms of their agreement. But, unlike conventional collateral-backed loans, in which case a lender can have a clear understanding of how to perfect its interest in the secured collateral, the parties’ respective rights and defenses in the event of borrower default, and priority relative to the lender’s claim on the secured collateral in the context of the borrower’s bankruptcy, these considerations remain relatively uncertain with respect to NFT-backed loans.

In light of unresolved financial and legal issues, a party seeking to buy, sell or finance an NFT should seriously consider seeking experienced legal counsel.

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