My Kingdom for an NFT: The Quest for Exclusive Ownership in the Digital World

Haley C. Chow

Technology Strategy & Analysis

Client Bulletin

April 30, 2021

If you have ever acquired a vintage baseball card or bought a pair of shoes during a midnight SNKRS drop, you might have experienced the feeling brought on by exclusive ownership of something rare. Non-fungible tokens, or NFTs, combine limited supply with ownership verification features to evoke this feeling. As such, NFTs have become a spiritual extension of markets that thrive on scarcity. In recent weeks, they have seen a groundswell of attention due to several high-profile sales by meme originators, musicians, and artists. Maybe you’ve watched the SNL “NFTs” skit on repeat, but how do digital tokens relate to Lebron’s latest slam dunk [1]?

What Are NFTs?

NFTs are essentially a unique electronic certificate that verifies the owner of a piece of digital media [2]. This electronic file is stored on a “blockchain,” an electronic ledger where transactions like ownership changes can be verified by a network of computers.

“Non-fungible” means these tokens are not interchangeable, unlike other types of digital assets reliant on blockchain technology such as Bitcoins. While there is no distinction between Bitcoins, just as there is no functional distinction between different physical dollar bills, each NFT or set of NFTs are distinct once they are created [3].

NFT generating, or “minting,” creates an immutable file on a blockchain. At the same time, it can be publicly verified by other computers on the network that have access to the blockchain and maintain its integrity [4]. Due to the nature of the minting process, a new NFT is guaranteed to be unique on the blockchain on which it is generated.

Blockchain Alternatives

The majority of NFT minting occurs on Ethereum blockchain, most notable for its eponymous cryptocurrency. However, the NBA has recently cultivated a distinct NFT market of its own, called Top Shot. Instead of using Ethereum, Top Shot leverages Flow, a developer-friendly blockchain intended for platform-building [5]. The Top Shot marketplace acts as a digital trading card market, where individual “cards” are officially licensed highlights.

When a basketball game produces a “highlight reel” moment, that video clip is disseminated throughout social media for several days, racking up replays as its reach extends beyond hardcore basketball fans to the general public. Regardless of who owns the select number of Top Shot Moments, the video very likely remains generally accessible.

Therefore, it is easy to imagine an alternative approach where, instead of using NFTs and blockchain, the NBA might create their own ecommerce marketplace and sell a limited number of officially licensed videos. Using NFTs and blockchain may add an extra degree of legitimacy due to public verification of ownership, but ultimately the NBA Top Shot group already exercises a significant amount of control over their NFT product. Each Top Shot transaction is governed by terms and conditions for how the clip may be used after being sold [6]. To accomplish the same goal, the NBA could require a similar set of terms and conditions (or an even more restrictive set) for highlights sold without NFT technology.

Market Risks

There are often risks inherent in new technologies, and NFTs have demonstrated risks assumed by both creators and buyers. NFTs often take the form of a digital version of a piece of art. In these situations, purchasing an NFT does not, on its own, transfer copyright of the original work [7]. The purchaser might believe they are receiving a one-of-a-kind piece of digital content, but the original author of the work may be able to create other similar or even identical NFTs, and the original work could still be sold.

NFT marketplaces take different approaches to handling copyright ownership. Some allow the author to transfer their copyright to its new owner and others tightly regulate the availability and curation of NFT releases [8]. For NFTs that include sound recordings or portions of other copyrighted works, rights might be violated in attempts to sell the NFT. For certain types of copyright, especially music composition copyright, rights ownership can be difficult to identify. Determining the correct parties to authorize the initial sale may never occur, and both buyer and seller risk the invalidation of their transaction by the proper rightsholder.

Another risk involved in buying NFTs concerns their value. As with other digital asset markets, the prospect of bubbles forming in the market and elevating prices is ever-present, and an NFT bought today for several thousand dollars might resell for a small percentage of the original price in the future. Coupled with copyright issues, wading into the NFT market as a buyer could be a very risky venture.

Potential Benefits

While certain aspects of NFTs can complicate copyright, there are also certain advantages that could be borne out of the NFT digital marketplace. Some legal systems outside of the United States employ artists resale rights laws. Since 1920, France has implemented a royalties system called droit de suite in which certain sales or resales of art require a fee to go to the original artists or their heirs [9]. The more removed these pieces are from their original creation, the more difficult it is to enforce the royalty payments. With NFTs and smart contracts programmed into transactions, a copyright authority could make the transfer of ownership and the commission payment inseparable.

Regardless of the risks and potential benefits, as the world transitions into one that increasingly values digital assets, NFTs may become more prominent. This is only partially due to their current status as “new technology of the moment.” At their core, NFTs capitalize upon the thrall of familiar scarcity-based markets, adapted for the digital age.

[1] https://www.youtube.com/watch?v=mrNOYudaMAc&ab_channel=SaturdayNightLive
[2] https://www.latimes.com/business/technology/story/2021-03-11/nft-explainer-crypto-trading-collectible
[3] https://www.latimes.com/business/technology/story/2021-03-11/nft-explainer-crypto-trading-collectible
[4] https://www.latimes.com/business/technology/story/2021-03-11/nft-explainer-crypto-trading-collectible
[5] https://www.onflow.org/primer
[6] https://www.lamag.com/article/nft-law-copyright/
[7] https://www.lamag.com/article/nft-law-copyright/
[8] https://docs.mintable.app/zilliqa/basics/how-to-create-an-item-to-sell
[9] https://www.senat.fr/rap/l05-308/l05-30833.html#:~:text=Institu%C3%A9%20par%20la%20loi%20du,oeuvres%20originales%20sur%20le%20march%C3%A9.&text=Les%20artistes%20ou%20leurs%20ayants,leur%20propre%20droit%20de%20suite.