What do you need to know about non-fungible tokens (NFTs)?
The world of digital finance is not limited to cryptocurrency. Another type of digital asset is a non-fungible token, or NFT. “Fungible” means “being of such nature or kind as to be freely exchangeable or replaceable, in whole or in part, for another of like nature or kind”. For example, the appliances in your home are fungible. You can replace them for cash or a similar item. Cryptocurrencies are fungible; they can be exchanged on a one-to-one basis. Something that is non-fungible is unique and can’t be exchanged for anything else. A non-fungible token is a digital asset that contains identifying information which is stored in smart contracts. It is a unit of data that, like cryptocurrency, lives on a blockchain.
What do NFTs represent?
The purpose of NFTs is to establish a record of ownership. They are digital representations of assets. NFTs can include:
- Art (everything from pixel to abstract art)
- Music (artists can tokenise their music, granting purchasers the rights the artist wants them to have)
- In-game goods
- Sports (collections of digital art based on celebrities and sports personalities)
- Virtual worlds (anything from avatar wearables to digital property)
- Domain names (ownership of domain names for websites)
- Other media
However, owning an NFT for something like a work of art is not the same as owning the physical or original artwork itself. When you own an NFT, you possess a digital certificate of ownership or a digital representation of the artwork, but you do not own the tangible object.
Although NFTs can’t be exchanged for anything else, they can be traded. They are purchased and traded online, generally using cryptocurrency, and are often encoded with the same underlying technology as many cryptocurrencies. An NFT is a unique digital identity that is recorded on a blockchain and used to validate ownership and authenticity. It cannot be duplicated, subdivided, or substituted. The NFT’s ownership is recorded in the blockchain and may be transferred by the owner, making NFTs marketable and tradeable.
However, unlike banknotes that can be exchanged for another (assuming it has the same value) each NFT is distinctive and, as such, cannot be directly substituted for another token. No two NFTs are the same. For this reason, NFTs shift the crypto paradigm by making each token unique and irreplaceable, rendering it impossible for one NFT to be “equal” to another. NFTs have been compared to digital passports because each token contains a unique, non-transferable identity to distinguish it from other tokens. They are also extensible, meaning you can combine one NFT with another to create a third, unique NFT.
Examples of NFTs
A famous example of an NFT is the cryptokitty. CryptoKitties is a video game that allows players to buy, sell, and create NFTs using the Ethereum blockchain. These NFTs represent virtual cats. Each cryptokitty is unique in its form and price. They “breed” with each other, producing new offspring with different traits and values than their “parents”. Cryptokitties became worth $20 million of ether from users seeking to purchase, feed, and nurture their virtual cats, with some enthusiasts spending more than $100,000. (Some of you may remember the Tamagotchi craze from the late 1990s and early 2000s. Tamagotchi was a handheld digital pet that the owner had to feed, clean up after, and entertain. Failure to care for one’s “pet” resulted in it “dying”. Cryptokitties are Tamagotchis for the digital native generation, with a much higher price tag!).
NFTs and IP
Like cryptocurrency, regulation around NFTs is in its infancy, and further advanced in the US than elsewhere. Intellectual property (IP) rights and the relationship between IP and NFTs are issues that are just beginning to emerge. There are a number of lawsuits underway in the US that are likely to establish the precedents that will inform future legislation. For example, in Nike vs. StockX, Nike filed a trademark suit after StockX, a company that resells sneakers, announced it would use NFTs to allow buyers to track ownership of physical products resold on the StockX platform and to confirm authenticity. Nike argued that the NFTs were distinct digital products with independent value and that StockX was profiting from Nike’s IP.
The US Copyright Office and the US Patent and Trademark Office are carrying out a joint study into issues of trademark, patent, and copyright law and policy arising from the use of NFTs. The results of this study will hopefully provide some guidance on the direction of intellectual property laws and protections for NFTs and the metaverse.
South African law
How does South African law treat NFTs? We have looked at intellectual property law and cryptocurrency regulation in previous articles, but the specific legal landscape for NFTs and the metaverse in South Africa is not clear. We have our own legal system and intellectual property laws, and it’s likely that these issues are being addressed uniquely within that context.
For instance, South Africa’s Copyright Act, the Electronic Communications and Transactions Act, and other related laws may have specific provisions or interpretations that could apply to NFTs and the metaverse. How South African courts interpret these laws in the context of NFTs and the metaverse could also shape the legal landscape in the country.
For more information
Until there is greater clarity and understanding around NFTs and their associated IP, we advise you to proceed with caution in purchasing any digital assets, including cryptocurrency. Be aware of the risks and avoid investing money you can’t afford to lose. If you have questions about IP protection or any aspect of digital asset management, contact Simon on 086 099 5146 or email email@example.com.
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The information on this website is provided to assist the reader with a general understanding of the law. While we believe the information to be factually accurate, and have taken care in our preparation of these pages, these articles cannot and do not take individual circumstances into account and are not a substitute for personal legal advice. If you have a legal matter that concerns you, please consult a qualified attorney. Simon Dippenaar & Associates takes no responsibility for any action you may take as a result of reading the information contained herein (or the consequences thereof), in the absence of professional legal advice.