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    Abstract:This technological phenomenon, Non-Fungible Tokens, was first created by Kevin McCoy on May 3rd, 2014. He minted his non-fungible token "Quantum", way before the crypto art market exploded.

      This technological phenomenon, Non-Fungible Tokens, was first created by Kevin McCoy on May 3rd, 2014. He minted his non-fungible token “Quantum”, way before the crypto art market exploded.

      Quantum is a pixelated image of an octagon filled with denoting circles, arcs or other shapes which share the same center, with larger shapes surrounding smaller ones and hypnotically pulsing in fluorescent hues. As of today, the one of a kind “Quantum” art piece (2014-2021) is on sale for seven million dollars.

      To understand NFTs, it is important to understand what is meant by “fungible”. Fungible is derived from the Latin verb fungi, meaning to perform. In the broader context, this means interchangeable and relates to whether something can be exchanged.

      Money is fungible, in the sense that you can buy a commodity worth $15 with any $15 note; it doesnt matter which one you use. On the other hand, NFTs cannot be exchanged like for like with another. They are each one of a kind, or one of a limited edition.

      Content sold as NFTs can be created in many ways. It can be computer-generated, which was the basis for the production of 10,000 unique CryptoPunks in 2017.

      NFTs first captured the public imagination when a digital collage by an artist named Beeple sold for US$69 million at Christies in March 2021. Since then, there has been an explosion in the use of these units for storing digital content, which are bought and sold using online ledgers known as blockchains.

      Since that initial connection with art, we are seeing NFTs being used in numerous other ways. Notably, many are being traded as collectables on exchanges like OpenSea and Rarible. Lately, for example, a series of 8,888 adorable “Pudgy Penguins” made a splash, each reflecting its own unique characteristic, with one selling for a record 150 ethereum (about US$500,000).

      Importance of Non-Fungible Tokens

      A non-fungible token (NFT) is unique and can represent any digital asset on the Ethereum blockchain, thus making it scarce, provable, and valuable. The advent of NFTs have created a new medium for artists and creators to showcase their creations or collections. In turn, a revolution is paving the way for artists to create and monetize their work while collectors have full transparency into the authenticity and provenance into their purchases.

      NFT assets can take the form of digital art, collectibles, a creative extension of music, a synergy between all three, or entirely new and unexplored compositions. Creators continue to push the boundaries of creativity using NFTs, adapting them in new and innovative ways.

      You might ask, “Can't I screenshot the NFT without purchasing?” This is true, but you would not be able to sell it at the value of the original. Similarly, if you took a photo of the Mona Lisa it would be challenging to find a collector. Every time the NFT moves on the secondary market, the new owner and the price paid is automatically recorded on the blockchain, which is a digital archive of transactions no one can alter and everyone can see. The idea is that by having these certificates of authenticity be publicly available for everyone to view online, NFTs can guarantee the provenance of any asset they are connected to.

      “The underlying thing that you're buying is code that manifests as images,” said Donna Redel, who teaches courses on crypto-digital assets at Fordham Law School. “You're buying a different format of art.” Similarly, you must keep in mind “You're not buying the picture,” said Jake Brukhman, founder of cryptocurrency investment company CoinFund. “You're buying the property rights to the picture.” NFTs, by design, are tools that artists can use to authenticate their work, independent from dealing with the traditional machinations of the legacy art world (provenance). Given this ability to create scarcity of digital work, NFTs also give artists the ability to set their own rates for their creations - and control of their secondary market - in essence democratizing access to new markets for artists all over the world.

      Limited Rights?

      Yet whether it is a remarkable piece of digital artwork or a cute digital penguin, NFTs are essentially tradeable jpegs or gifs. Unlike physical collectables, an NFT owner will not be able to display the asset in their home – except on a screen. They might think they could display it on a website, but this isnt necessarily the case. So what is someone actually getting when they buy an NFT, and what do they truly own from a legal perspective?

      NFTs allow the owner of a limited work or collection to reach their audience directly. Whereas previously it was not possible to sell something like the first ever tweet, or a taco-themed gif, or indeed a piece of art online, now individuals, companies or cultural organisations can do so as long as they are the rightful owner.

      The creator can do this because, according to UK copyright law, copyright arises automatically when a work is created – as long as it reflects the “authors own intellectual creation”. This means that the creator of a work is the owner of the copyright, and can do what they want with it.

      When someone buys an NFT from the creator, they obtain ownership in the sense that it becomes their property. After all, an NFT is a digital certificate of ownership representing the purchase of a digital asset, traceable on the blockchain.

      But the NFT holder does not have any other rights to the work. This includes those offered under copyright law, such as the right of communication to the public (in other words, making the asset available to the world at large), or the rights of adaptation or reproduction.

      The trouble with online content is that, by virtue of its digital nature, it is easy to share, copy and reproduce. Buyers of NFTs need to understand that they would be infringing the copyright if they engage in such activities without the permission of the right holder. The only way such rights can be transferred is through the terms embedded in the NFT, in the form of a licence.

      There have been some NFTs where the buyer has been granted the right to use the copyright in a limited way. For example, owners of CryptoKitties NFTs have been allowed to make up to US$100,000 in gross revenues from them each year. In other cases, creators have specifically restricted all commercial use of the work. For example, the Kings of Leon stipulated that their NFT music was for personal consumption only.

      Buyers therefore need to be clear that the main reasons to buy an NFT are the speculative investment and the pleasure of having something unique from an admired artist, brand, sports team, or whatever. Unless the terms allow it, buyers will only have a limited ability to share the creative work on public platforms or to reproduce it and make it available for others.

      Incidentally, buyers should also be aware that the blockchain cannot absolutely know whether a creative work is authentic. Someone can take another persons work and tokenise it as an NFT, thereby infringing the rights of the copyright owner. You need to be sure that you are buying something that originated from the creator.

      In short, NFTs are probably here to stay, but they clearly raise ownership questions relating to copyright law. This may not be immediately clear to most people, and its important that you understand the limits of what you are getting for your money.

      What's Next?

      While the history of NFTs is intriguing, the future of NFTs has endless opportunities as the new space transitions from raw and experimental to exceedingly more useful and mainstream. Through tokenization, programmability, collaboration, royalties, and more direct connections between artists and collectors, NFTs may soon be a technology vital to everyday life.