NFTs: Debunking three of the biggest misconceptions

Whether you love them or loath them, think that they are a mere ‘flash in the pan’ or the future of business and investment, the dramatic rise of the non-fungible token (NFT) market cannot be overstated.

Although they’ve been around for several years now, 2021 saw NFTs explode in popularity, with the NFT associated with Mike “Beeple” Winkelmann’s digital artwork titled ‘Everydays: The First 5,000 Days’ being sold at auction for $69.3 million and instantly becoming the most expensive non-fungible token ever sold.

By the end of 2021 the list of names that had jumped head-first into the market included recording artists such as Kings of Leon with the release of their latest album, the NBA with the highly successful ‘Top Shot’ trading card system, and the US manufacturer Charmin, which introduced digital toilet paper into the world. It has been reported that 2021 saw sales of NFTs reach a staggering $25 billion.

Kings of Leon sold an NFT album version, which included front-row seats guaranteed. For life. (Source: Rolling Stone Australia)

Whilst most people should at least have heard of NFTs by now, there is an exorbitant amount of misinformation and misunderstanding of the nature of NFTs and the operation of the market.

This article debunks three of the most commonly recounted myths surrounding NFTs.

MYTH 1: An NFT is a work of art, a song, photo, video or other asset that sits on the blockchain

There are two key errors in this statement.

Firstly, an NFT is not the asset itself but is rather a representation of a unique record of digital data that is tied to a (usually digital) asset by cryptographically associating that token with the asset. In other words, the NFT is the digital key to find and access the asset (referred to as a digital signature or “hash”), but is otherwise completely separate to the asset itself.

Secondly, it is not the asset but the NFT that is stored on the blockchain’s digital ledger, most commonly on the Ethereum blockchain. The asset to which the NFT points lives somewhere else “off chain”. For example, digital assets may be stored on the InterPlanetary File System (IPFS), a peer-to-peer file system for storing and sharing data.

MYTH 2: By buying an NFT, the purchaser automatically assumes ownership of the underlying asset

By purchasing an NFT, the buyer does not automatically take ownership of the underlying asset or the copyright and other intellectual property rights (IPR). Generally speaking, and unless otherwise agreed, ownership of the IPR in the underlying asset remains with the IPR owner, which is usually the seller of the NFT.

The buyer simply takes ownership of the NFT that provides an unalterable link to the underlying asset.

The purchase of an NFT may include other associated rights by way of the terms of sale – and that may even include the transfer of possession of the underlying asset and/or the copyright and other IPR – but it is dependent on the terms of the applicable contract on a case-by-case basis.

MYTH 3: Once the buyer has purchased the NFT, they have complete freedom to exploit the underlying asset

The rights that are being granted to a buyer with respect to the underlying asset to which the purchased NFT relates depends entirely on the contract governing the terms of sale of the NFT.

For example, when purchasing an NBA Top Shot collectible NFT, which relate to specific highlight videos from NBA history, the buyer is only being granted a limited license to “use, copy, and display the Art…for your own personal, non-commercial use” (see NBA Top Shot’s Terms of Use).

Top Shot is essentially an NFT marketplace that allows users to buy, sell and collect influential NBA scoring Moments.

This commonly-adopted approach by NFT platforms is largely reflective of the more ‘traditional’ art world. When a buyer purchases a physical painting, they will gain the right to display that physical copy of the painting within their own home, but rarely the right to reproduce and sell copies of the painting or print the image on a t-shirt, as the underlying copyright in the original work remains with the copyright owner.

Whilst it is best practice for there to be clarity upfront as to what rights are being sold by way of a simple contract for sale, typically in the form of terms of sale/service or so-called “smart contract”, many NFT sales take place without such terms in place.

Buyer due diligence is vital in order to fully understand exactly what rights you are purchasing when buying an NFT, and what restrictions there are on the buyer’s ability to display, use, reproduce and/or otherwise exploit the underlying asset to which the NFT relates.

This article originally appeared on The Industry Observer, which is now part of The Music Network.