Non-fungible tokens (NFTs) provide new avenues of investment and secured lending opportunities for borrowers and lenders alike but also raise number of legal considerations.
NFTs are unique, digital assets that are linked to a blockchain which allows for certification of a NFT’s authenticity and ownership. In contrast to cryptocurrencies, which may be replicated or exchanged for like value, NFTs are representations of specific tangible or intangible assets. Such assets are often in the form of works of art or other collectibles but any number of assets may be represented by NFTs provided that they are unique. News sources indicate that sales of NFTs reached approximately $25 billion in 2021.
Among other legal considerations is the question of intellectual property rights in relation to a NFT. The purchase of a NFT is not equivalent to an assignment of any 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 in an express, written agreement in a smart contract. A prospective purchaser of a NFT must understand if they are acquiring the token for personal use or if they will acquire a right to copy, modify or publicly display such NFT. As well as buying and selling, NFTs may also be potentially used as collateral for loans. A number of online platforms now offer owners of NFTs the opportunity 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 come to terms with respect to the interest rate and other terms of their agreement. But unlike with respect to loans backed by conventional collateral, in which case a lender may possess a clear understanding as to how to perfect its interest in the secured collateral, the respective rights and defenses of the parties in the event of a borrower default and the relative priority of the lender’s claim upon the secured collateral in the context of borrower bankruptcy, such considerations remain comparatively unsettled regarding NFT backed lending.
In light of the unsettled financial and legal questions, a party seeking to buy, sell or finance a NFT should strongly consider seeking experienced, legal guidance.