June 22, 2021
By Lory Kehoe, Zakie Twainy
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NFTs are virtual data units stored on a blockchain—often used to certify unique ownership of a digital asset that could represent a myriad of digital and real-world items, such as art, music, games, videos, or collectibles.1 The recent surge of interest in NFTs, which the media has described as a “bubble,” is most clearly illustrated by a couple of recent events.2 For instance, Mike Winklemann, a digital artist known as Beeple, sold an NFT for approximately $69 million through Christie’s auction house in March 2021. This made him one of the top three most valuable living artists, despite, before October 2020, the highest price paid for one of his prints being $100.3 Similarly, a New York Times reporter sold an NFT image of his column on NFTs for more than $558,000.
Developments such as these have created an interest in the sector, as demonstrated by Google Trends (see Figure 1).5
Source: Google Trends. Numbers represent search interest relative to the highest point on the chart for the given region and time. A value of 100 is the peak popularity for the term. A value of 50 means that the term is half as popular.
With interest surging, buyers are flooding the market, incentivizing more digital artists to create and sell their art as NFTs. In early May, the most searched NFT term on Google was “buy nfts,” but the second most searched was “sell nfts.”6 The desire to be able to trade these assets has created the need for the infrastructure to perform these transactions. Enter the NFT marketplace, a website or mobile application that connects NFT sellers and buyers and facilitates the overall shopping experience.
In the last four months, notable investors and celebrities alike have made investments in these NFT marketplaces, as shown in Figure 2 below, which signals that NFTs may not be a “fad” as originally believed.
The operational models of the NFT marketplaces vary quite widely.
While there are more traditional NFT marketplaces, platforms that simply connect buyers and sellers, similar to eBay or Etsy, there are also hybrid marketplaces, in which a company’s business model of creating digital experiences is supported by the NFT marketplace itself, and specialized marketplaces that focus on one type of asset.
Prominent and traditional marketplaces such as OpenSea and Rarible have a spectrum of items for sale, e.g., art, trading cards, and collectibles, for wide ranging prices. As of the publication of this paper, NFTs for sale on those platforms ranged from a Bored Ape Yacht Club NFT that listed for over $18,000, to an image of Elon Musk’s face superimposed on DaVinci’s painting Salvatore Mundi with one hand holding a dollar bill and the other holding a fishbowl with a jumping Dogecoin in it for approximately $148. The OpenSea and Rarible models differ, however, in that OpenSea includes the minting of the NFT as part of their process,7 whereas with Rarible, a seller has to pay to mint the NFT before the sale.8
Hybrid marketplaces, such as Genies, which closed a $65M funding round in May 2021, is a company that allows buyers to create custom avatars and is building tools and a marketplace where a consumer can create or buy customized wearable NFT goods, such as digital Gucci and North Face jackets, for those avatars.9 Dapper Labs, as another example, owns a series of gaming franchises and also co-created and operates Top Shot, an NFT marketplace with over $500 million in sales for animated trading cards for the NBA.10
Moreover, some marketplaces specialize in only a single type of NFT. For example, SuperRare, which raised $9M, is a marketplace that only focuses on higher-end digital art and has a more sophisticated user interface with more curated inventory. During a recent four-hour period, for example, SuperRare listed prices ranging from $564 to $1.2 million.11
Finally, companies such as Bitski are developing technology that helps NFT creators set up their own storefronts, similar to Shopify in the retail space.12
Once a consumer purchases an NFT from one of these marketplaces—what does that mean?
With the purchase of an NFT, you are buying a verifiable digital token that represents the buyer’s ownership of the asset on that blockchain. The "non-fungible" part of the name means the tokens are unique and cannot be exchanged, which sets them apart from fungible “tokens,” such as cryptocurrencies, that can be used as a medium of exchange.13 However, even the buyer purchases an NFT representing a share of a particular piece of digital art, you are not necessarily acquiring any intellectual property rights in the art itself.
Jordan Romanoff, BNY Mellon’s Vice President and Counsel for Intellectual Property, Brand Protection and Marketing, explained.
“When lawyers talk about copyright rights, whether for a piece of digital art or a movie, we are referring to the ‘bundle of rights’ that a copyright owner receives under the law. These rights include the right to reproduce the work, make a derivative (or a sequel) of the work, distribute copies of the work, publicly perform the work, or publicly display the work. With NFTs the issue is a bit more complicated.”
He made the comparison of rights obtained via ownership of physical art, such as a Jeff Koons sculpture, versus shares of digital art purchased as an NFT.
“With the purchase of a piece of physical art (such as a sculpture), you naturally have the right to display the art in your home or possibly exhibit it at a museum. However, if you want to distribute t-shirts using an image of the sculpture or reproduce the sculpture for a friend, you may not have the right to do so as the copyright rights may still belong to the artist. Applying those same principles to NFTs, the purchase of an NFT for a piece of digital art does not inherently provide the NFT owner with any of the copyright rights I described earlier—not even the right to display the digital art in your home.”
So, what can be done to solve for this issue of ownership? In general, the rights that flow to the purchaser of a NFT are determined by the copyright owner, but the transfer of rights can be facilitated by the marketplaces themselves.14 For example, Dapper Labs, operator of NBA Top Shot platform, created a template NFT license that NFT sellers can adopt to outline what rights are being licensed to the NFT buyer. The license clarifies that the buyer of the NFT receives (i) a personal license to use and display the art associated with the NFT, as well as (ii) a commercial license to make merchandise that displays that art associated with the NFT, a license subject to a $100,000 gross revenue per year limit.15
Romanoff continued, “The issue of IP ownership can also play a role in determining whether an NFT can even be issued. If the underlying digital asset involves the work of multiple copyright owners, the ‘seller’ of the NFT would need authorization to issue the NFT from each of the rights owners as a derivative work. For example, when TikTok star Nathan Apodaca wanted to sell an NFT of his viral skateboarding video which included the Stevie Nicks song Dreams, and the Ocean Spray logo, it was reported that he was required to remove the music and blur out the logo before the NFT could be issued.”16
If you’re not an art fan, you still may want to pay heed to NFTs. Ultimately, NFTs are a vehicle by which one can sell specific ownership rights of an asset, without granting full benefits of the ownership itself, provided that the asset’s value is not dependent on physical use. Although NFTs are trending primarily in the art world at the moment, there are other assets , such as diamonds, gold or land, that could be the next NFT trend. The marketplaces will need to adapt to these new asset categories to survive.
Dylan Hunzeker, an investor at Struck Capital Crypto, which invested in NFT marketplace Pylons, explained her vision for the future of the NFT marketplaces: "In the future, there will be numerous marketplaces for NFTs, in the same way that there are numerous stores for goods and services. Further, NFTs will transform the global macro economy by becoming a key component in Web3 applications."
Lory Kehoe, BNY Mellon Director of Digital Assets and Blockchain, concurs with Hunzeker’s sense that the NFT market will expand.
“NFTs are digital assets where we are seeing increased interest from our clients, whether that be NFTs of art or sporting moments,” said Kehoe, “Look at Kinsale Spirit’s recent auction of a digital representation of a rare cask of 20-year single malt which raised over €80,000.17 The convergence of digital and physical experiences are what NFTs can enable. As digital assets continue to evolve, we’re closely watching NFTs and exploring how we support clients today, and in the future.”
1 Liu, Evie. “The World's Largest Crypto Exchange Is Launching an NFT Marketplace. What to Know.” Binance, the World's Largest Crypto Exchange, to Launch NFT Marketplace, Barrons, 27 Apr. 2021, www.barrons.com/articles/binance-crypto-exchange-nft-marketplace-51619557589.
2 Monica, Paul R. La. “The NFT Bubble Might Be Bursting Already.” CNN, Cable News Network, 5 Apr. 2021, www.cnn.com/2021/04/05/investing/nft-prices-falling/index.html.
3 Kastrenakes, Jacob. “Beeple Sold an NFT for $69 Million.” The Verge, The Verge, 11 Mar. 2021, www.theverge.com/2021/3/11/22325054/beeple-christies-nft-sale-cost-everydays-69-million.
4 Tavernise, Sabrina, and Kevin Roose. The Daily - Cryptocurrency's Newest Frontier on Stitcher, 13 Apr. 2021, www.stitcher.com/show/the-daily-10/episode/cryptocurrencys-newest-frontier-83131840.
5 Source: Google Trends. Information as of 5/4/2021
6 Source: Google Trends. Information as of 5/4/2021
9 Quarmby, Brian. “Dapper Labs-Backed NFT Avatar Platform Raises $65M in Funding.” Cointelegraph, Cointelegraph, 4 May 2021, cointelegraph.com/news/dapper-labs-backed-nft-avatar-platform-raises-65m-in-funding.
10 Matney, Lucas. “Bitski Raises $19 Million from a16z to Become the 'Shopify for NFTs'.” TechCrunch, TechCrunch, 6 May 2021, techcrunch.com/2021/05/06/bitski-raises-19-million-from-a16z-to-become-the-shopify-for-nfts/.
11 List prices over the period of 8 am EST to 12 pm EST on 5/24/21 on marked as has sold on https://superrare.co/market?market-options
12 Matney, Lucas. “Bitski Raises $19 Million from a16z to Become the 'Shopify for NFTs'.” TechCrunch, TechCrunch, 6 May 2021, techcrunch.com/2021/05/06/bitski-raises-19-million-from-a16z-to-become-the-shopify-for-nfts/.
13 Davis, Riccardo A. “NFTs: What Are They, And How Do They Work?” Kiplinger, Kiplinger, 6 May 2021, www.kiplinger.com/investing/602743/nfts-what-are-they-and-how-do-they-work#.
14 “Key U.S. Legal Considerations for NFTs.” Key U.S. Legal Considerations for NFTs | Jones Day, Apr. 2021, www.jonesday.com/en/insights/2021/04/nfts-key-us-legal-considerations-for-an-emerging-asset-class.
15 Mahmood, Ghaith. “NFTs: What Are You Buying and What Do You Actually Own?” The Fashion Law, 5 May 2021, www.thefashionlaw.com/nfts-what-are-you-buying-and-what-do-you-actually-own/.
16 Smith, Dylan. “Sorry, Fleetwood Mac Isn't Doing a 'Dreams' NFT Auction.” Digital Music News, 23 Mar. 2021, www.digitalmusicnews.com/2021/03/22/fleetwood-mac-nft-auction/.
17 Taylor, Charlie. “Kinsale Spirits Raises over €80,000 from NFT Auction of Rare Whiskey Cask.” The Irish Times, The Irish Times, 4 May 2021, www.irishtimes.com/business/agribusiness-and-food/kinsale-spirits-raises-over-80-000-from-nft-auction-of-rare-whiskey-cask-1.4555016.
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