What Do You Actually Own When You Own a Non-Fungible Token?

• Author: John M. McNichols
• Pages: 2-3

Published in Litigation News Volume 47, Number 1, Fall 2021. © 2021 by the Ameri can Bar Association. Re produced with per mission. All rights re served. This info rmation or any porti on thereof may not be c opied or disseminated in any f orm or

by any means or stored in an el ectronic database or r etrieval system w ithout the expre ss written cons ent of the American Bar A ssociation.

By John M. McN ichols, Litigatio n News Associate Editor

What Do You Actually Own When

You Own a Non-Fungible Token?

What Is an NFT ?

NFTs are a newfound appli cation of blockchain, t he digital-

ledger software t hat allows users to record data in perma-

nent and unalterable form acro ss a widely distributed and

decentral ized network . Although blockchain is k nown pri-

marily as the te chnological foundation for cryptoc urrencies,

the “coins” of which are intention ally uniform and inter-

changeable, there is not hing inherent in the design or con-

cept of blockchain th at requires data un its to be fungible.

Like the coins of a cr yptocurrency, NFTs are “tokens,”

i.e., units of data t ransferrable between partie s and then

recorded in the blockcha in. But unlike cryptocu rrency, NFTs

derive value from the fact th at they are intent ionally and

inherently one- of-a-kind items ; by denition, t hey are “non-

fungible.” Once an N FT is recorded in t he blockchain , it

becomes an una lterable and externally veriable reco rd of

the authenticity of a pa rticular t hing, supplying the critical

elements of scarcit y and integrity to assets that a re otherwise

difcult to commodify.

Although origi nally designed to authenticate digit al

art, NF Ts have since been adapted to ne arly every form of

media. Earlie r this year, the rock ba nd Kings of Leon sold

their new album in N FT form, generating a reporte d $2

million. Twitter founder Jack D orsey made nearly $3 mil-

lion for charity by sel ling an NFT of his rst t weet. And the

University of C aliforni a-Berkeley made headline s when it

© Getty Image s

Charlie Bit My Finger,” a 56-second home v ideo of

British toddler H arry Davies-Carr and h is infant

bher Charlie, was one of YouTube’s earliest viral

sensations. The 2 007 video returned to the head-

lines in May 2021, when the b oys’ family sold it

as a “non-fungible token” (NF T) for more than $760,000. It

commanded the exorbita nt price because the buyer could be

sure the video was the f amily’s origina l clip, not one of the

many thousands (if not m illions) of identical copies available

on the internet.

Before the advent of NF Ts, creators of digita l art and

other electroni c media faced severe li mitations on their abil-

ity to monetize t heir work given the ease with which any-

thing digit al can be replicated and shared. N FTs solved this

problem by allowing ar tists to place a digital authentication

on their origin al work, akin to a signature on an oil pa inting.

The results have bee n extraordinary. One month before the

sale of “Charlie Bit My Finger,” Chri stie’s sold an NF T col-

lage by digital a rtist Beeple for $ 69 million, t he third-highest

sale price ever for a work by a livin g artist.

But the dramatic r ise of NFTs has not gone without contro-

versy. Skeptics compare their em ergence to the dot-com bubble

of the 1990s and cal l into question what, if anythi ng, the

owner of an NF T actually owns. There is no of cial agency

guidance rega rding NFTs’ asset class, nor is it clea r which, if

any, agency has authority to reg ulate NFT transaction s.

2 | S ECTION OF LITIGATION

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