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NFTs – the new Beanie Baby, or Web 3.0?

Over the past few months, Non-Fungible Tokens (‘NFTs’) have risen drastically in popularity. NFTs represent a novel use of blockchain and are potentially a modern solution to the question of ownership and possession in the digital age.

What is a blockchain?

Blockchains are a form of ‘distributed ledger technology’ (‘DLT’). In simplest terms, distributed ledger technology enables data to be shared and validated within a peer-to-peer network, without the involvement of a central authority. Blockchain technology is the use of DLT to encode transactions (e.g. of a cryptocurrency or NFT) in ‘blocks’ within the database, to verify transactions; the ownership of an NFT can then be easily traced back through the blockchain until it was first introduced into the network.

What is an NFT?

An NFT is a token that sits within a blockchain, representing certain rights which the issuer can grant (such as possession, ownership or the right to enjoy something). For example, someone who owns a (digital) portrait might issue an NFT representing ownership of the portrait on a blockchain (‘minting’ the portrait), and offer the NFT for sale.

When the NFT is sold, the new owner can point to their ownership of the NFT as verification they own the portrait. That transfer is then incorporated into the blockchain, providing an independently verifiable proof of ownership. While NFTs can be incorporated into any blockchain,  Ethereum is currently one of the most dominant chains; in May 2021, Forbes reported that Ethereum was nearing the same market capitalisation as JPMorgan Chase, at $474 billion.

The future of NFTs

NFTs are currently seen to mostly refer to ownership of digital items; however, an NFT could also represent ownership and/or possession of a physical asset, or any other right or entitlement. For example, the US rock band Kings of Leon famously issued an NFT which included the right to a ticket at select shows going forward. Instead, NFTs could become a form of digital, easily verifiable pedigree or proof of title. Alternatively, land ownership could move to a blockchain network, with ownership of each parcel of land attached to an NFT – the Republic of Georgia implanted such a system in 2016 should be implemented. By all accounts it has been successful, with over 1.5 million land titles registered since 2016, and a reported reduction in corruption as owners become independently verifiable, according to the blockchain provider working with the republic, Bitfury.

NFT issues

NFTs face two key challenges.

The first is recognition. Ownership of an asset via an NFT only holds value if that ownership is recognised by either interested buyers for the purposes of an onward sale, or the relevant authorities for enforcement. If you possessed an NFT claiming to give ownership and possession of a house, you would want to be certain the local courts would enforce those rights on your behalf. An NFT could have been issued (or minted) in one country; traded between users in another country; embedded in a blockchain hosted in a third country; and also refer to an asset located in a fourth. Any purchaser will need to be sure of their legal rights (if any) for any issues that might arise in that chain.

The second issue is that NFTs will often link to assets ‘off-chain’. For example, in the case of digital assets, the NFT will include a link to the asset. However, the asset itself is not part of the chain, and could be moved, or even taken offline.

Future steps for NFTs

For NFTs to become widely adopted, the concept will need support, which could take one of a number of forms.

Legislative recognition

We could see specific legislation, setting out a new regime for their administration, purchase, sale and disputes. Such a regime might specify certain fundamental rights that have to be attached to an NFT, rights of redress against the issuer or the blockchain administration, or a categorisation of ‘types’ of NFT (for example, an NFT granting ownership and possession of a physical asset as opposed to one granting the right to enjoy a digital asset). This could include fitting NFTs into current systems, and ensuring they are covered by (for example) consumer rights and fair trading legislation.

Judicial enforcement

An alternative could be a precedent-setting case through the courts. However, such a case will likely be expensive, complicated and somewhat limited in general applicability. There will be issues of jurisdiction and interpretation, and the final judgment will probably relate to the specific (type of) NFT in dispute, rather than setting down more general rules.

Industry code of practice

Finally, we might begin to see a grass-roots system emerge between NFT blockchain providers, setting out an internationally applicable, opt-in code of practice. However, where providers simply set up a marketplace, and have no involvement in initial listings, this is likely to be of limited value, in the same way that Facebook has limited control over products on its Marketplace – such as when the BBC reported on listings included protected rainforest in the Amazon last month.

However, any of these three options are likely to face challenges from the anonymous, international nature of many of the major blockchains – after all, rights of ownership, enjoyment or possession are only valuable if they are recognised.

Further enquiries

If you have any queries about NFTs or distributed ledger/blockchain technology, contact Suzie Miles, Partner in Ashfords’ Commercial Technology team, at s.miles@ashfords.co.uk.

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