NFTs
– the vapourware
of Blockchain
technology? What do Beeple, Jack Dorsey, Cryptokitties, Grimes, and William
Shatner have in common? They’ve all made money, and in some cases
headlines, by selling NFTs. The internet has been buzzing about NFTs
for some time now – but even if you’ve heard of them, you may still find
yourself asking “What is an NFT?” and “Why are they so popular?”
Inspire June 2021
So, what is an NFT?
6 An NFT is a non-fungible digital
token that uses the same blockchain
technology as many cryptocurrencies.

Using the blockchain ledger, NFTs
can be identified and tracked.

Typically, cryptocurrency tokens such
as bitcoin on the blockchain ledger
are fungible assets, they can be
readily interchanged for something
else – for example, one bitcoin can
be exchanged for another. Legal
tender, such as bank notes, are a
fungible asset as a $100 note can
be exchanged for two $50 notes or
five $20 notes. NFTs however are
unique and cannot be exchanged,
much like a one of a kind painting.

Marc Chagall’s “Paris through the
Window” is non fungible because
it is one of a kind. The painting can
be copied and photographed but
there will only ever be one original
“Paris through the Window”. NFTs
use blockchain technology to give
themselves a digital uniqueness,
the originality and scarcity of which
makes them a collectible item.

In theory, when you buy an NFT you
acquire a token which contains the
digital artwork or music file, along
with the signature of the artist and a
history of all transactions associated
with that digital artwork or music
file. As we will see, there are some
limits to the technology that make
the purchase of an NFT less clear.

But what are you really buying?
There are two aspects to
the purchase of an NFT to
consider, one how is the digital
asset associated with the NFT
stored and two, whether you
acquire any rights, including
the intellectual property in
the underlying digital work.

Dealing with the technological
aspects first, purchasing an NFT
gives you a token which contains
meta data and a link to a website
where the digital work is stored,
not the digital work itself. Despite
NFTs being blockchain technology,
NFTs associated with digital
files like artworks or music are
generally not stored ‘on-chain’
due to the prohibitive cost and
time of replicating files across all
users in the blockchain. Therefore,
buyers are provided with a link
to the web address where the
digital work can be found. Using
the painting analogy, NFT’s have
been described as providing the
directions to the gallery in which
the artwork is on display, rather
than providing the artwork itself.

The main issue with this method
of storage is that webpages can
become defunct if someone
fails to pay the hosting fees,
there are other issues with the
network, a hard drive fails or the
owner of the domain redirects
the link to something other than
the digital asset. Given the
technological limitations the whole
system relies heavily on trust.

Further, when you buy an NFT
you don’t acquire ownership
of the underlying work or the
rights associated with it. You are
paying to own the unique token
and not the content that the
token is associated with. From
a copyright perspective that
means the artist who created
the work will continue to be the
copyright owner, and have certain
exclusive rights to control the
use of the work. In order for the
copyright in the underlying asset
to be assigned it would require
a signed agreement between
the parties to the effect that the
copyright owner is assigning their
intellectual property rights to the
buyer of the NFT. In the absence
of such assignment, all of the
underlying intellectual property
rights will continue to be owned
by the artist or copyright owner.




It would seem somewhat foolish,
at least to this lawyer, to outlay
significant amounts of money
on NFTs without an agreement
with the seller that sets out:
1. What the buyer can, and can’t
do, with the underlying digital
asset, including in relation to the
intellectual property rights and
commercialising the work;
2. If the licence is for a fixed term,
what happens upon the expiration
of that term particularly where
the licence permits for derivative
works to be created or products
created incorporating the work;
3. Who is responsible for the
maintenance, security and
protection of any webpage or
URL where the digital art is stored,
including, but not limited to, the
hardware and payment of any fees
associated with the webpage;
4. Liability and indemnity provisions
to allocate risk between the buyer
and the seller; and
5. Representations and warranties as
to the ownership of the underlying
work, noting that the risk of fraud
is rife with NFTs.

NFTs give us an
insight into the direction
that the digital economy
may be headed and
provide new business
models for artists
to exploit their
intellectual property.

Licenses are a critical part of
everyday business for many
organisations, artists and creatives.

There have been a few attempts at
NFT licenses including one by Dapper
Labs, the creators of CryptoKitties,
however these licenses largely deal
with intellectual property issues by
trying to balance the rights between
the copyright owner and the licensee,
rather than the risks associated with
the potentially ephemeral nature of
the storage. It can be challenging to
document all the necessary rights,
responsibilities and obligations in any
copyright license agreement – even
where the subject matter is generally
understood, let alone when you have
a digital work stored ‘off-chain’.

Whilst NFTs may have some issues
that need to be addressed, they
should be considered as more than
merely a passing fad. NFTs give us
an insight into the direction that the
digital economy may be headed and
provide new business models for
artists to exploit their intellectual
property. Whilst the technology
isn’t quite there yet, NFTs provide
the possibility that in the future
intellectual property owners
could use the blockchain ledger
technology, smart contracting and
carefully drafted agreements to
have greater control over how their
creative works are used and to
benefit financially from such use.

Inspire June 2021
Should NFTs come
with contracts, smart
or otherwise?
7 Melissa Wingard | Special Counsel
BA(Eng&Hist) LLB(Hons) GradDipLegPrac
GradDipAppFin&Inv MCyberSecOps
melissa.wingard@pof.com.au