NFT market sees ‘innovative’ dealmaking, but also a ‘lack of standardisation and transparency’

11 November 2021 By Jerome Doraisamy
Alana Kushnir

Photo Credit: Justin Ridler

The advent of non-fungible tokens is leading to more creative transactional approaches, but misleading and deceptive conduct is “alive and well in this space”, said one director.

The explosion of non-fungible tokens (NFTs) – a digitally unique token that is not interchangeable with other digital assets – in the mainstream market raises numerous questions. For example, Guest Work Agency founder and director Alana Kushnir (pictured) outlined, “when you buy an artwork, what do you own? And what rights do you have in relation to that work? The answer is not as black and white as you may think, and never has been”.

It is critical that lawyers of all stripes understand, she told Lawyers Weekly, that blockchain and other advanced technologies like artificial intelligence and extended reality environments would “start to creep into other more ‘traditional’ areas of legal practice”.

As such, she said, “a basic understanding of intellectual property, privacy and consumer laws is essential. And remember, the difference between giving good and great legal advice is not only having technical acumen. Having a solid understanding of the industry your client operates in is just as important”.

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This argument – especially as it pertains to NFTs – is supported by Piper Alderman partner Michael Bacina, who in May of this year said that the blockchain space “moves so fast and has such a technical barrier to entry that it is easy for something to be overlooked”.

“NFTs are an extension of supply chain-style blockchain use cases and are only likely to continue to rise in popularity over time,” Mr Bacina advised.

Innovative dealmaking

There is much to be excited about given the rise of NFTs and blockchain-based technology more generally, Ms Kushnir outlined, including and especially “increasingly innovative artwork deals”.

These deals, she said, see one purchasing art in a transaction whereby they and the vendor are tinkering with the concepts of personal property ownership and intellectual property rights.

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“For example, some artists are selling NFTs together with physical objects, while others are granting NFTs purchasers the right to join secret online communities that communicate via platforms like Discord,” she noted.

“There are also those which play on the speculative value of NFTs, like celebrity artist Damien Hirst, who is selling 10,000 unique hand-painted dot-covered works on paper, each one corresponding to an NFT. Buyers have one year to decide if they want to keep the NFT, in which case the physical artwork will be burned, or they can choose to keep the physical work and give up their rights to the NFT.”

Such a scenario, Ms Kushnir mused, raises a number of legal queries.

“For example, when you own an NFT, do you own the artwork or do you merely own a digital certificate which points to the artwork? It’s like owning the deed to a house – do you treat the deed as a separate asset to the house?”

Misleading and deceptive conduct

Six months ago, Mr Bacina flagged a handful of issues with the advent of NFTs in the digital transactional space, including data privacy concerns around the visibility of publicly verifiable chains of ownership of items and whether or not digital assets can be recognised at law as real-world assets.

The issues raised by Mr Bacina are “excellent”, Ms Kushnir noted, and added that she is particularly concerned about terms of service and use with regard to NFTs. This, she insisted, is a “really important area that lawyers in this space need to be aware of”.

I’ve read dozens of terms of service of many NFT marketplaces in the past year or so, and it still surprises me that as we head towards the end of 2021 (time moves really quickly in the blockchain space!), that some of the most popular platforms either do not have terms of service or, if they do, they don’t make them available to users before they sign up for an account or connect their wallet,” she submitted.

“And, for those that do have website terms of service, there’s still a lot of inconsistencies in terms of what they cover. These issues make it really difficult for users to understand the risks involved in interacting with a certain platform, as well as minting, buying and selling NFTs.”

This “lack of standardisation and transparency”, Ms Kushir surmised, “coupled with many a slick marketing spiel”, means that consumer law issues like misleading and deceptive conduct are “alive and well in this space”.

“That said, there are a few initiatives which are looking to combat these issues, like the COALA NFT Licensing Task Force, which I’m a part of. We’re planning to develop semi-public licenses that apply to everyone holding a particular type of NFT,” she added.

“COALA has been doing some really important work in the blockchain space in the past few years, including publishing a DAO Model Law in June of this year, which was referenced as a useful starting point for the regulatory structure of DAOs (Decentralised Autonomous Organisations) in the October report of the Senate select committee on Australia as a technology and financial Centre.”

Evolving nature of legal practice

When asked how the advent of NFTs has changed the day-to-day nature of Ms Kushnir’s practice, she said that it has evolved rather than changed.

“For example, before the NFT hype, I could have been negotiating and advising on collaboration-type agreements between brands and artists (which I still do); however, these days, I’m also negotiating and advising on collaboration-type agreements between blockchain-based platforms and artists,” she said.

“What these technological advancements have also afforded me is the opportunity to provide consulting services beyond traditional legal advice to those interested in getting involved.

“I’ve really enjoyed working with a number of DAOs and more traditional company-owned NFT platforms on implementing best practice standards when it comes to working with artists and making the platform user’s journey more transparent and accessible.”

It is Ms Kushir’s hope that Australia’s legal profession will “start to take more seriously” the crucial role that artists are playing in propelling this area forward, both in terms of how the technology is continuing to evolve and how the law and legal tools can be used to better support these advancements.

“Artists have always been at the forefront of technological advancements, and that’s not going to end any time soon,” she concluded. 

NFT market sees ‘innovative’ dealmaking, but also a ‘lack of standardisation and transparency’
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