NFT: Why They Are Bought

You’ve probably heard that many foreign companies are actively buying and selling NFT tokens. Many remember the rapid rise and stagnation of this strange industry. Let’s try to figure out what this beast is, why lawyers are suspicious of it, and why foreign companies need them.

Let’s drop all the masks right away: an NFT is not confirmation of the transfer of rights to an object or intellectual property rights. By its nature, an NFT is simply a unique (non-interchangeable) digital signature in the metadata of a file that is linked to a record in a registry (blockchain).

Let’s say there’s an artwork, its owner creates an NFT and sells it. What happens from a legal perspective? A record is created in the registry, code lines are added, and either only the NFT (registry entry and metadata) is sold, or the NFT is sold along with a contract for the transfer of rights to the object or intellectual property. This means it’s either a complicated licensing agreement or simply a transfer of rights to the registry entry and metadata. Unfortunately, most contracts in this field are of the latter type: many exchanges do not involve any sublicensing agreements.

The problem is that in many jurisdictions, a contract for the transfer of intellectual property rights can only be in writing. It’s doubtful that an NFT constitutes something in writing, and it is certainly not a contract.

Can the transfer of an NFT occur through a smart contract? Probably, but I personally doubt that a smart contract is a contract in writing by itself. And that’s not even touching on the issue of who can add entries to the registry! For example, the Unified State Register of Real Estate (EGRN) confirms property ownership, but it’s centralized and managed by the state, which enters information about transactions and encumbrances. But if the registry is so decentralized, what can it confirm? Only the fact of the entry, nothing more.

But why do companies buy and create them? It’s possible to structure a database about certain objects, for example. Or simply to make money. I’m not accusing anyone, but it seems to me that this is most likely just money laundering. The trade of art has long been one of the cleanest ways to launder money:

If the buyer sets the price, then it’s possible to legally move money from point A to point B. But over time, more barriers are being erected in this area: increased scrutiny from authorities, customs duties, taxes, protection of cultural heritage, etc. And here come NFTs: you can sell anything for anything, even to an anonymous counterparty. NFTs are even sold in respectable auction houses for a modest auction fee, not just in the darknet.