Can NFTs really be above the Law?

“I fought the law and the law won” – a phrase immortalized in a song and in our reality. Now at the frontier of NFTs, is it even possible for them to thrive and exist outside of legal frameworks

They can’t and shouldn’t.

Yes, NFTs are based on new technology, but their purposes such as to create an asset/product or to better effectuate a digital transaction are nothing new. NFTs as tokenized assets have two fundamental features: They are assets and they are digital.

Imagine buying a home or a car and not requiring any legal documentation. In the digital world, when you buy a Spotify subscription, a Turbo tax software download or skins in a gaming app, the seller ensures that your purchase is subject to legal terms.

Every business KNOWS they need legally enforceable terms governing their products and solutions and the ones who don’t end up with problems. Yes, most of us never read the fine print, but we know they are there and understand they exist for a reason.

Those terms exist to protect both the sellers and the buyers of those products and services. And the legal framework for the creators and buyers of those products and services is what unlocks the ability to create sustainable value streams around them. This is the goal of NFTs and tokenized assets as well, right?

For some, crypto and blockchain are part of an ideological philosophy and that is okay and good for them. But for others, blockchain and NFTs are a way to solve problems, open up economic opportunity for more, and just do certain things in a better way.

Why Legal Terms are Necessary

First, let’s address a popular saying in the crypto world: “Code is Law.” It’s a catchy phrase and makes for good discourse at dinner parties. But here’s the thing—it’s an ideology that cannot work in the real world – at least not today. If code were law, then hacking to access and take data or funds would not be theft.

Someday there might be ecosystems that develop online for specific and defined purposes where members opt in to a code is law framework but even those- need to rely on current law to accomplish that.

The better framework is Code + Law. Legal terms serve as this rulebook for fairness especially when you are creating things that affect other people and businesses. Terms make sure everyone knows what’s up for sale, any strings attached, and what rights the buyer gets. These can be relied upon and most important they provide a clear rulebook of transparency. This framework helps set a fair market price for whatever is being sold and this is where we want NFTs as tokenized assets to get to.

Think about NFTs just like any other thing you can buy—whether it’s a song online or a piece of land. If we want NFTs to go mainstream, we have to make sure they play by the same legal rules that are intended to give industry legitimacy and to give both sides of a transaction – a clear deal.

The Legal Terms Gap in NFTs

Missing Terms
Now, let’s get into the heart of the issue—most NFTs are essentially flying blind with no legal terms attached. This is due mostly to the lack of understanding about how NFT smart contracts work. They have no legal framework, are not “contracts” in a legal sense and nothing in them establishes or protects rights.

Take this scenario: A musician drops a new song as an NFT he intended to be for personal listening. He doesn’t include legal terms specifying this. Fast-forward, a marketing agency buys this NFT, to use the song for a commercial advertisement they are creating. When the song airs in the ad, the agency unknowingly oversteps the bounds the musician had intended. When the musician complains, he is unable to prove what the specific scope of use was for the buyer of the NFT.

Now both parties are mired in a quagmire of unintended and messy legal implications, and sadly, it’s more common than you’d think in the NFT space. Absence of explicit terms undermines enforceability, sows discord among creators, buyers and sellers, and can even tank the asset’s value.

Disputes that could have been easily settled now fester, damaging both reputations and the broader NFT market. There has been some press around this problem such as when buyers bought the Dune NFT thinking they had certain IP development rights or when Moonbirds owners woke up one day to find out that they lost exclusive rights they thought they had to their Moonbird IP.

NFT Terms as part of broader Terms of Use on Websites

Now, some creators are trying to bridge this gap by posting legal rights and terms on their websites for the NFTs but not doing anything else to bind them to the NFT assets themselves. The decentralized world of NFTs means these assets aren’t confined to a single website or app. They’re out there in the wild, blockchain-enabled universe. So, sticking terms on a website is like hiding them in a drawer. I, as many other expert lawyers, believe it clearly fails to meet the legal “clear and conspicuous” mandate for enforceability when in a Web3 world.

The Urgency of Legal Structure in the NFT Space

The takeaway: This goes beyond the fine print and legal jargon – it’s about the very foundation on which a sustainable, trustworthy ecosystem for NFTs and tokenized assets can be built. As laws evolve to meet the pace of digital assets, not taking any steps now will prove to be a costly oversight.

Yes, there’s uncertainty on the legal landscape ahead, but isn’t it better to navigate with a compass rather than wander in the dark? The next step is clear: NFT creators must establish clear rights and terms that define the use of IP in, and protect, their NFT assets, aligning them with existing legal frameworks and guidelines to optimize for enforceability and value.

Legal leads to Value

Remember, in the world of NFTs, value should not just be a byproduct of market hype; it’s intrinsically tied to the rights that they represent and these rights hold weight only when they are legally enforceable.

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If you are interested in getting more and deeper insights about the tokenized asset economy movement, check out Amyli’s Sustainable Tokens Newsletter.