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Digital Assets

Ownership of NFTs: What you Need to Know

By:

Hugh Meyer

Non-fungible tokens (NFTs) are widely misunderstood. When purchasing an NFT, most people think they have purchased a piece of digital artwork or a jpeg on a blockchain somewhere. However, that is not accurate. The NFT simply points to the artwork or image. To fully understand NFTs, you need to understand licenses, types of copyrights, and transfers. In this first of a two-part series, we discuss copyrights and transfers of NFTs. First, let us look at what you buy when you purchase an NFT. We are grateful for the work of Galaxy Asset Management (https://www.galaxy.com/).

What You Get with the Purchase of an NFT:

Most people think you are actually purchasing the image. However, that is not the case. Instead, you are getting the following:

  1. A digital token that has a unique cryptographic address containing metadata that points to the location of the image. The metadata is stored on a blockchain; however, the location of the image is typically stored off the blockchain. Usually, the image will be stored somewhere like Amazon Web Services or within the Interplanetary File System (IPFS).
  2. A license granting the NFT owner rights to display or commercialize the image the NFT points to. The license is granted by the NFT Project that created the image.

Understanding the Digital Token

A non-fungible token is a line of code written on a blockchain, like every other digital asset. The two main criteria making the token non-fungible are the tokenID and the contract address. The presence of both of these are the core metadata that makes the token non-fungible.  No two Ethereum tokens have the same tokenID and contract address. What separates a non-fungible token from a fungible token is the governing standard.


There is a third element that is typically associated with these tokens, and that is the tokenURI. The tokenURI is the metadata that contains a link to the  JSON object containing the URL to the IPFS link location of the digital content associated with the NFT. This tokenURL gives protocols like Open Sea or Twitter Blue the information needed to display the artwork associated with an NFT.

The License

An NFT pointing to an image does not give you rights to the image. You need a legal agreement between the person holding the NFT and the person holding the copyright to the image that specifies the rights the NFT holder has to the image. Your rights do not come from the fact you have the NFT but from the fact you have a license associated with the NFT.

The NFT owner does not typically own the digital content displayed by synchronizing your digital wallet with Open Sea. Instead, ownership is retained by the person or entity holding the copyright for the image- the NFT project.

In the United States, copyright is the only legally recognized form of digital content ownership. If you do not have the copyright to the content, you do not technically own the content. Rather, you have a license to use the content. The copyright holder dictates the terms of the license and acts as something of a digital content landlord, and the licensee becomes a digital content tenant.

With most digital content, the licensor, licensee relationship does not cause any issues. However, NFTs are not most digital content. NFT Projects go to great lengths to create thousands of unique images that no one else can own. People who purchase NFTs are doing so with the expectation of owning a rare work of art, not a copy of a rare work of art.

Someone else does own the rare work of art, though. In this case, the NFT Project. You own a token that points to the image containing the rare artwork. In a sense, the person who has the NFT is simply renting the image, and the NFT Project is the true owner of the image because they have a copyright to the art.

Why this matters to you!

Only the person who holds the copyright can control who displays the image. Even if you have the license associated with the NFT, you only have the rights expressly granted to you by the license provided by the copyright owner. NFT ownership grants you a license to use images that your NFT points to but are owned by someone else, it is essential to understand copyrights. Please contact Rich or myself with any questions or to be connected to an attorney with expertise in this area.

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The information above is provided for general informational purposes only and does not constitute financial advice or an offer to purchase securities. Individuals should not apply information to a specific situation and should consult their financial professional. Highline Wealth Partners is not responsible for any errors in or omissions to this information, or for any consequences that may result from the use of this information. Please read the full disclaimers and disclosures here.

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