The non-fungible token (NFT) mania has inspired Ethereum fans to spend more than $224 million on crypto collectibles so far in 2021 through marketplaces OpenSea and Rarible, but many buyers may not understand what they actually own.
“An NFT is not that different from any other crypto purchase in that you are buying control over information in an entry in a ledger,” said attorney Nelson Rosario, one of the founders of Smolinski Rosario Law.
NFT buyers don’t actually own the media files associated with their blockchain receipts, whether those files are JPEGs or GIFS or MP3s. The best way to know which aspects of the NFT craze will outlast this trendy boom is to look at the history of comparable assets. As it turns out, people have been making crypto collectibles for nearly seven years.
Zebedee co-founder Christian Moss, who has been working on blockchain-based games since 2014, said he stopped making Bitcoin-based collectibles because transaction fees shot up. To make matters worse, some buyers viewed tokens as investments instead of as toys.
“They were tokens on Bitcoin,” Moss said. “A lot of developers ended up trying to pump their tokens and prices. … It felt like people who played those games felt like they were investors on the board. I don’t want my game to be an investment vehicle. Then players might try to sue me if they lost their tokens. It changed the dynamic of the game.”
These days, Moss helps people earn small amounts of bitcoin by playing mainstream video games like Counter-Strike. That way, there’s no confusion about how to value virtual assets; cryptocurrency is money and in-game assets are toys.
“NFTs aren’t game items at all; they are receipts,” Moss said. “If you have the receipt, you might be able to get an item in a game, but they can’t allow a Zelda sword NFT [in Counter-Strike], for example, because that might be copyright infringement. There are legal implications there.”
Indeed, legal implications are the crux of the NFT trend. Whether a court would protect the receipt-holder’s ownership over a given file depends on a variety of factors.
“It’s great if the artist intends to transfer any copyright for a work of art to an NFT purchaser, but can that be perfected to the point where a court of law or copyright office would recognize that transfer? That gets into additional questions of jurisdiction,” Rosario said. “Brands and platforms need to make sure they have the right agreements in place to govern these relationships.”
With regard to NFT sellers who take screenshots of other people’s content and profit from a corresponding NFT, Rosario said it’s hard to say whether that violates any laws.
“You probably start by looking at Twitter’s terms of service and begin the investigation there. It really depends,” he said, adding that impersonation or stealing someone’s passwords are different issues entirely.
And there are still open questions beyond copyright issues and fraud, such as sanctions and porn regulations.
Finding a space for adult content
A growing number of adult content creators are selling erotic NFTs on platforms like Rarible, often earning hundreds of dollars per photo. One such artist, PolyAnnie, said she has earned more from selling NFTs on Rarible alone than her average annual earnings across platforms like OnlyFans, Patreon and ManyVids combined.
“I sold 90 NFTs, bringing in 10.11 ETH in five months,” she said. “I purchased 18 NFTs from other creators, too.”
Some jurisdictions have age-verification requirements for platforms with adult content, while other jurisdictions make platforms potentially liable for child porn or revenge porn if the platforms don’t heavily moderate explicit content. As such, platform providers tend to be conservative about their terms of service.
“A lot of these NFT platforms don’t want to deal with the risks of sexually oriented content,” PolyAnnie said.
That’s why some sex workers have had their content censored by platforms like Rarible. As for the most popular NFT platform, OpenSea, which raised a Series A round from a16z earlier this month, CEO Devin Finzer said his team moderates the platform and limits search results for adult content, so those NFTs can only be found by someone going directly to the creator’s profile.
“We haven’t exactly nailed it down, but one option is a separate section of our site for that type of content,” Finzer said.
That’s why PolyAnnie says she’s part of a small cohort of people working on adult-content-friendly NFT platforms like Leafless and Non-Fungible Porn.
“The adult industry actually cares a lot about making sure only consenting adults are involved in this content, so people are safe and we don’t get shut down,” PolyAnnie said. “Even if someone impersonated me, [the NFT] wouldn’t come from my wallet.”
From her perspective, NFTs offer less famous performers a unique opportunity. Before she started selling NFTs last year, PolyAnnie said she didn’t have a sizable, tech-savvy fanbase. She had already been performing for years, everything from fire dancing to naked yoga. The crypto scene was completely new to her, yet she was able to cultivate a new audience within months and offer them unique products. For example, some of her NFTs have an “unlockable” link to exclusive photo collections or free trial codes for platforms like OnlyFans.
Sure, an NFT buyer could share her exclusive photos rather than trade the NFT. However, that would harm the asset’s resale value. On the other hand, if the buyer trades PolyAnnie’s NFT on OpenSea, she earns 20% of the resale profits. This creates a mutually beneficial dynamic for creators and consumers, she said. Plus, that blockchain receipt means fans can check if the NFT was originally issued by the performer’s crypto wallet or verified profile.
“I’ll be able to have better relationships with my supporters than I could in the past. I now have fans that have been buying my NFTs that are trying to hype up my brand and resell them,” PolyAnnie said. “Even if someone were to steal or pirate it or whatever, it would still be connected to me. Someone could verify that I was the creator.”
While those immutable blockchain records are especially useful for adult content creators, they may make it harder for NFT artists in countries like Cuba and Iran as some platforms look to identify and limit users in sanctioned jurisdictions.
Following the law on identities
It’s still unclear how financial sanctions relate to NFT trades, although Rosario said these compliance standards will focus more on platforms than ordinary NFT users.
When asked if OpenSea will use geo-blocking for sanctioned jurisdictions, Finzer said: “We will be putting more measures in place to consider sanctions.”
Crypto companies like BitGo and BitPay were already fined for allowing interactions with users in sanctioned jurisdictions, including Iran and Cuba, where the United States forbids financial transactions. Rosario said it would be wise for NFT startups to be “mindful” of such regulations.
“It would be a best practice to make sure they are not allowing transactions with blockchain addresses that the Office of Foreign Assets Control [OFAC] has put on the Specially Designated Nationals And Blocked Persons [SDN] list,” Rosario said. “This is something people in the U.S. Treasury are probably thinking about at the moment.”
All of these legal challenges mean artists may need to lawyer up. Otherwise, their art might be used in a variety of ways and places that impact the original artist’s reputation. Such was infamously the case with cartoonist Matt Furie, whose iconic Pepe frog was used symbolically by white supremacists.
Giorgio Angelini, the filmmaker behind “Feels Good Man,” said he felt ripped off when a Pepe-inspired NFT sold for more money than he raised for a Pepe documentary that debuted at the Sundance Film Festival. In short, someone was willing to spend more on a blockchain receipt for a low-effort meme than a movie about Pepe’s IRL creator, which took roughly two years to make.
“I can appreciate what these people are doing. But it’s hard to separate those making NFTs in good faith versus bad faith, like pump-and-dump schemes rather than fan art remixes,” Angelini said. “To really defend your copyright is something only companies like Disney can do. … I had to get really bad for a big law firm to help Matt pro bono, as a public service.”
Angelini added that he has no qualm with the Pepe NFT seller, in particular, and that he’s also exploring ways to capitalize on the NFT trend. Aside from these legal costs, Angelini said the upside is that NFTs can help “democratize” established media sectors like fine art and film.
“This could help allow artists [to] participate in the resale market. Otherwise, galleries basically control artists,” Angelini said. “The whole film industry is controlled by three streaming conglomerates, and they were all skeptical of Pepe and the culture behind it. … We’re figuring out how to engage with NFT markets. If we do make a film NFT, we want it to be special, not a throwaway.”
The NFT market is just getting started, but where is it headed?
It’s not just regulations: It’s reliability
All things considered, a blockchain receipt like an NFT is only valuable if the underlying blockchain is reliable.
“I remember so many gamers going over to the new blockchain in 2015, Ethereum, because the fees were low. But that was just kicking the can down the road,” he said.
As Moss pointed out, high transaction fees limited crypto collectibles and made them too expensive for many types of games. Gaming companies with NFTs tend to circumnavigate this issue by hosting transactions on their own platforms, meaning users choose whether to use the blockchain at all. There are legal precedents for responsibility when assets are stolen from a centralized exchange or service provider. It remains to be seen, in court, what might happen if the blockchain network itself gets manipulated.
“If you issue an asset on the blockchain that is worth more than the base asset, you give an incentive to miners to undo a block or reverse a transaction, which would jeopardize all the transactions in that block,” Moss said, noting multimillion dollar NFTs outweigh the Ethereum network’s tokens that allegedly secure the receipts, since ether currently sells for under $2,000.
There may be legal questions related to the open-source blockchain network, beyond the NFT companies, which will only become clearer if future lawsuits seek compensation for losses attributed to the blockchain system rather than a rogue thief. All the hype around NFTs assumes Ethereum is sufficiently diverse and decentralized, making the blockchain immutable. That may not always be the case.
In terms of alternative blockchain ecosystems, Kraken CEO Jesse Powell said Bitcoin’s Lightning Network could technically offer NFT solutions.
“There were NFTs even before Ethereum, with colored coin projects on Bitcoin,” Powell said. “If we’re just talking about a digital representation, a certificate of ownership, then maybe what matters is the privacy of the blockchain. Can they use or transfer the NFT without everyone knowing about it? What kind of metadata can the blockchain store? What can we know about the token without having to rely on a second layer?”
Along those lines, Genies CEO Akash Nigam, head of an avatar company founded in 2017 that raised $52 million so far, said his company will authenticate digital goods using the alternative Flow blockchain, rather than focusing only on Ethereum.
“Over time it will all become interoperable,” Nigam said. “[The NFT] travels with you and you can use it to log in and unlock potential functionality, depending on the platform.”
Nigam said his startup is working with “thousands” of influencers selling such digital goods across platforms, although it remains to be seen how many fans will use blockchain networks or crypto wallets. So far, Genies helped celebrities like Shawn Mendes and soccer player Mesut Özil sell NFTs, in addition to working with brands like Gucci. There are several fashion brands and designers tiptoeing into the NFT space, looking for that sweet spot between niche crypto tools and mainstream audiences.
For his part, Powell said he honestly isn’t sure which blockchain networks will dominate the NFT economy in years to come, whether it’s Ethereum, Bitcoin, Flow or something else entirely. As such, Powell said he is curious to see if companies like Twitter or Instagram will enter the NFT space by offering galleries or even direct sales, abstracting away all the crypto hassle so that users don’t handle blockchain receipts at all. Any such initiative will face the same blockchain scaling issues that Bitcoin fans have been grappling with for years. Technically speaking, NFT tools can’t promise both infinite scaling and liquidity plus self-sovereign immutability. Blockchains are slow and challenging, which is why they offer reliable records.
“The bitcoin hype cycles also appear to move in four-year cycles,” said angel investor Paul McKellar. “The cliche is that bad traders tend to buy when the market is up a lot, and they are excited. … At this point, we’re seeing altcoins [crypto assets beyond bitcoin] try the same things old altcoins failed to deliver on four years ago, and four years before that.”
Social networking platforms could accept payment for NFTs in any currency, especially considering Twitter CEO Jack Dorsey owns the bitcoin-friendly company Square. For now, all Powell knows is there is surging demand for NFT-adjacent crypto assets.
“In just January and February alone, Kraken has processed more than $116 billion in trading volume,” Powell said. “We’re definitely keeping an eye on NFTs and it is something we are very interested in. … But, as someone who used to have an art gallery and sell digital goods in video games, some of these NFTs won’t be able to be resold for what they are selling for now. The market is flooded.”
Powell said he isn’t going to add NFT trading options to his exchange because he believes it is ill-advised to view NFTs as a tool for gambling or savings. He does own two NFTs himself, neither of which were expensive. He said they were just a fun way to support artists.
“People are going to want to show this stuff off, wherever they have a social profile or a status component of their identity,” Powell concluded, imagining how the future of NFTs might play out on sites like Twitter. “If it’s something I enjoy and want to support the artist, I consider it sunk costs.”
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