5 Legal Considerations When Buying NFTs: A Guide for New Investors

Non-Fungible Tokens have been around since 2017. But, only in 2021, the $69-million-sale of a Beeple artwork and frenzy around Jack Dorsey’s first tweet have made it clear: NFTs are already taking the world by storm.

At the same time, just like most innovations in their early adoption phase, NFTs carry significant risks for sellers and buyers alike. And, the lack of regulations surrounding NFT transactions makes the legal implications of buying NFTs all the more complicated.

Let’s start by understanding the essential considerations new investors must make to avoid legal complications.

NFTs: An Overview

Non Fungible Tokens are the digital representation of a physical asset that carries a unique and non-interchangeable value.

Each NFT transaction is recorded and stored on the Ethereum blockchain, thus providing transparency and traceability to sellers and buyers.

Thanks to these unique features, NFTs - which are nothing more than a piece of code written in the blockchain - have been adopted across a range of industries to authenticate digital and physical assets.

Being a revolutionary technology still in its infancy, much is yet to be understood about both the potential and legal implications of NFTs. But one aspect needs to be clarified: despite how high the asking price is, owning an NFT is not exactly the same as owning the physical asset associated with it.

Know What Rights are Transferred To You

Purchasing an NFT is not as easy as ordering goods via an online marketplace. A lot of due diligence should go into truly understanding what you actually own after buying an NFT.

And, often, this does not include the ownership of the underlying physical asset or its intellectual property rights, which will remain with the artwork’s creator.

When you are sold an NFT, make sure to review the terms of the contract and understand how your license to use intellectual property rights (IPR) works. A Smart Contract - usually encoded within the NFT itself - will define how you can use or display a particular digital or physical. Or, it might simply offer you benefits over it, but no other rights.

Ultimately, you should assume that, unless it is explicitly clarified, you have no rights over the underlying asset, and any physical manifestations or copies of your NFT can be seen as IPR infringements.

Beware of What Affects Your License To The NFT

While NFTs represent a brand new asset class, they are subject to similar laws to the ones outlining the sale of tangible artworks.

If specified in the contract or Smart Contract encoded in the NFT, the new owner can display the artwork publicly without the permission of the artist. This is known as the “first sale doctrine” - the same principle that allows traditional artwork’s new owner to lend their copy to a museum.

Watch Out For Copyright and Intellectual Property Infringements

Whether you buy an NFT directly from the creator or third-party seller, it is important to understand what rights are transferred in the transaction. A standard NFT transaction will not strip its original creator of copyrights, and will not automatically grant the new owner any rights over the underlying physical asset.

Without reviewing the contractual terms you are bound to when purchasing an NFT, it is easy to think that, after the sale, you can now copy, display, or reproduce your copy. However, this can easily lead to infringement claims from the artist and the following legal implications.

Depending on the terms of your contract, you might not be able to do much more with your NFT besides simply displaying it within domestic settings.

Understand How Your Liability is Limited

Because of encoded Smart Contracts - which are not immediately visible to the buyer - and the naivety of new investors, it is easy to misinterpret the rights that are effectively transferred in the transaction.

If this happens, you might be able to take legal action against the buyer. And, as new regulatory systems are being introduced in countries around the world, you might even be protected under local consumer protection laws - which can condemn encoded contracts that don’t meet transparency standards.

However, as a buyer, you might be subjected to a limitation of liability, and only receive partial compensation for any eventual financial loss deriving from the transaction.

Protect Your Rights by Choosing a Reputable Trading Platform

The most powerful tool you have to protect your rights and ensure high levels of transaction transparency is to choose a trustworthy and reputable online investing app like SoFi.

Brokers, sellers, and investing platforms are required to meet high transparency standards and define their role in the transaction.

This can help you find legal protection as a consumer, as well as give immediate access to clear and easy-to-understand legal terms.

Do You Need An Attorney?

If so, post a short summary of your legal needs to our site and let attorneys submit applications to fulfill those needs. No time wasted, no hassle, no confusion, no cost.

Posted - 04/12/2022