NFTs Are Legally Problematic ft. Steve Mould & Coffeezilla

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- [Devin] Are NFTs a scam or are they the next big thing? Legally speaking, it's a question between Uber and Theranos. Uber was able to sidestep regulation to become a billion dollar company, and basically is interwoven into the fabric of society. Whereas Theranos tried to fake it until they made it, but they ran up against physics and biology and were just a giant fraud. NFTs are probably somewhere in the middle. They're certainly not unicorns that are going to solve all problems, but they're probably not all completely useless. And either way they raise fundamental issues of law. So today we're going to cover only the legal problems associated with NFTs. Others have explained the non-legal issues. For example, Dan Olson of Folding Ideas did a fantastic video called The Line Goes Up, which is not to say that the technology can't overcome these problems, but right now there are some fundamental issues of law with the way that NFTs are used now. And I see three main categories of issues with NFTs, on-chain problems, off-chain problems, and what I call innovations so mundane, no one should care. Now, to get to those issues with NFTs, we first have to define what an NFT is because I think almost everyone gets it wrong. An NFT is a Non Fungible Token. It is an entry on a decentralized ledger, called a blockchain. A blockchain is a permanent unchangeable digital ledger that's used to record transactions in blocks of computer code that are timestamped and linked together. The code will reveal the history of a digital asset, where it originated, who purchased it and any subsequent transfers. And in the digital world, the token can be assigned specific uses and properties. Now, it's non fungible because it is said to be unique. Unlike something like Bitcoin, where every single Bitcoin is interchangeable with another one, it's like $1 bill. Every $1 bill that you possess effectively does the exact same thing as another dollar bill. Same with a Bitcoin. However, an NFT is said to be unique, so they are not fungible with each other. But at this point, let me turn it over to someone more technically minded, my friend Steve Mould, to explain how an NFT actually operates because it's illuminating. So Steve, how does an NFT work? - NFTs work in a very similar way to Bitcoins. We track who owns what Bitcoin on a distributed ledger, as you mentioned. In the case of Bitcoin, that distributed ledger is called the Bitcoin Blockchain, but NFTs exist on a different blockchain, typically the Ethereum Blockchain. The difference between Bitcoin and Ethereum is that the Ethereum blockchain is programmable. You can write programs and publish them to the Ethereum Blockchain. These aren't programs that you would run on your computer, these programs run on the blockchain and they interact with transactions on the blockchain. For example, you could write a program and publish it to the Ethereum Blockchain that launches a new cryptocurrency to rival Bitcoin. But it's not just limited to cryptocurrency, you could use the Ethereum programming language to do all sorts of things, including for example, making NFTs. These programs are called smart contracts, which is misleading because look, here's an example of a smart contract. There's no legal language in there. It doesn't function as a legal document. Though, I can see why they wanted to call them smart contract because they enforce transactional rules on the blockchain. Just like normal software, once you publish a smart contract to the blockchain, you can interact with it by sending it commands. For example, you could send a command telling it to mint a new NFT, or you could send a command to change the owner of an NFT. Smart contracts can be used for much more than just cryptocurrency and NFTs. For example, you could write a smart contract that act as an escrow between people buying and selling NFTs. The definition of an NFT is quite strict. By consensus, we've agreed that if a smart contract behaves in certain specific ways, as defined by a standard called ERC721 and one other, then we call that an NFT smart contract. So how does all this relate to digital art? Well, let's have a look at the most expensive Bored Ape ever sold, that's Bored Ape number 2087. Let's head over to Etherscan, a website for exploring the Ethereum Blockchain. This is the address of the smart contract that mints Bored Ape NFTs. ERC721 contracts can be queried in certain ways. For example, I can use the owner of query to find out who owns a particular NFT. So Bored Ape 2087 is owned by this person. The ERC721 standard also includes something called the token URI. If I put 2087 in here, I get this. This is a URI on the public internet for anyone to see. It's an IPFS address, so let's head over to the Brave Browser and see where that takes us. This is some machine readable JSON code, but let's make it a bit easier to read for humans. And look, you can see that's URI for the ape image itself. And here are some attributes of the ape. For example, its mouth is bored cigarette. The background is purple. The fur is trippy. The eyes are angry. Let's grab this image URI and stick it back into the Brave Browser. And there it is. So when you buy an NFT that's linked to a digital artwork, you are buying a unique location on the Ethereum Blockchain, that points to a text file on the internet for everyone to see. Inside that text file is another URI that points to the image itself, again on the internet for everyone to see. Believe me, there are a bunch of weird technical details that need to be talked about, associated with NFTs, I cover all of that over on my channel, but the bottom line is, when you buy crypto art, you are buying a line in a tamper-proof ledger that points to a publicly hosted image file. - So at the end of the day, to summarize, I think the best analogy for an NFT is not digital property, as a lot of people like to claim. I think the best analogy for what an NFT actually is, is a receipt. It is a receipt of some transaction, a buyer and seller interacted in some way, and an NFT is a receipt of that transaction. That receipt often links to something off-chain, often that is a JPEG. But the receipt itself doesn't really tell you what the transaction was. To know what happened in that transaction, you have to look at the terms of the original sale, the contract. You also have to look at the reference work, often that's a JPEG. But the NFT itself is simply a entry in a digital ledger, that's kind of like a receipt in the real world. Okay, so with that understanding, I think we can get to the first category of legal problems associated with NFTs, which are the problems that are inherent on chain. And for that, I'm afraid we're going to have to talk about fundamental contract theory. Honestly, I didn't think that this video was going to require me to get back to first principles of contract law, the kind of thing that you learned in your first year of law school, and yet here we are. And we need to understand how a contract works, how it binds the parties and what the limitations of contracts are. And I know that sounds super boring, but I'm going to explain that with wrestler and Renaissance man, John Cena, because in 2017, John Cena contracted with the Ford Motor Company to buy the new Ford GT, the new hottest sports car at the time. In order for him to buy that car, he formed a contract with Ford. He offered to pay them hundreds of thousands of dollars and Ford offered to give him a Ford GT. But in particular, there was one term that Ford included in the sales contract, John Cena had to agree not to sell his Ford GT for two years. And that as a perfectly enforceable sale contract. Ford doesn't have to sell that to anyone. And so to make sure that John Cena didn't turn around, flip the car for hundreds of thousands of dollars, they made him promise not to sell the car for two years. What did John Cena do? He turned her around and flipped the car almost immediately and made hundreds of thousands of dollars. So what could Ford Motor Company do? Ford could sue John Cena for hundreds of thousands of dollars. And in fact, they did sue him and they settled for an undisclosed amount. But the really interesting question is, what can Ford do against the person that bought the car from John Cena? And the answer is absolutely nothing because there's no contract between Ford and the person that bought the car from John Cena. The secondary buyer is said to not be in privity with Ford. John Cena and Ford are in privity, they have an actual contract, but there's nothing linking Ford and the downstream purchaser. So what in the world does this have to do with NFTs? Well here's the thing, we talked about how an NFT doesn't really have any attributes in and of itself. When you're buying an NFT, the real thing that you're buying is bound by the contract between the buyer and the seller, those are the primary purchaser and seller. There are some times when there is no contract, we'll talk about that. But theoretically at least, the value of the NFT is decided by the contract terms between the buyer and the seller of the NFT. But one of the huge fundamental problems that we'll talk about a lot in a second, is that in practice, there's rarely any contract between the initial primary buyer and the secondary buyers, and then all of the downstream buyers later on. And on top of that, there is zero contractual privity between secondary buyers and the original issuer of the NFT. That's a real problem when the only value associated with an NFT comes from the initial sale terms. So let's talk about an example of this in practice. Many people are familiar with NBA Top Shots, which was designed by Dapper Labs. NBA Top Shots is an NBA platform that purports to allow you to own moments that happen in the NBA, often small snippets of videos related to NBA plays. Now, when you buy an NBA Top Shot NFT, the transaction's registered on the flow blockchain, which was basically created out of whole cloth by Dapper Labs to facilitate the transactions of NBA Top Shots. When you initially buy an NBA Top Shot, you get limited rights to use and view the NBA Top Shot, only within the NBA Top Shots platform. But here's the thing. NBA Top Shots is a private marketplace. The NFTs only have any real value when you use the walled garden of NBA Top Shots, you have to use their app or their website for the NFT to have any functionality at all. But in a way it works because everyone is on the same platform. Effectively NBA Top Shots is simply a normal Web 2.0 website where you're allowed to buy and sell things only within their specific platform. And the terms of sale travel with the particular NFTs because everyone is buying into the same system. If you somehow got an NBA Top Shot NFT and was able to sell it on a different blockchain, well, odds are the terms and conditions don't flow and you have an NFT that has zero value at all, because it won't even work with the original NBA Top Shots platform. So if you are not NBA Top Shots and you're not forcing everyone to use the same walled garden, how do you buy the secondary purchasers? How do you even know what you're buying when you're buying an NFT? Well, that is incredibly controversial. Now, another famous example is the Bored Ape Yacht Club that is famous for selling NFTs of monkey cartoons. Now, you can buy a Bored Ape NFT on OpenSea, which is a large marketplace for NFTs. When you do, the Bored Ape Yacht Club says that you get access to certain perks. These include getting access to their discord server of like-minded purchasers of Bored Apes. But for the most part, those are perks that are offered off-chain and by the originator of the NFTs. Bored Ape could change their mind because it's questionable whether the terms and conditions travel with the downstream purchasers of every single Bored Ape. If those terms and conditions legally fail, say Bored Ape says they're not in privity with all of those downstream purchasers, and then they decide to cut off access to maybe some bad actors who were spamming the Bored Ape discord. Well, then those purchasers who spent hundreds of thousands of dollars, they have zero recourse, because if they're not in contractual privity, there's nothing that binds Bored Ape to provide those things long term. They may in fact provide those things, but they might not legally be required to. Now, if you're a normal website, you'd probably provide what's called a click wrap agreement. That's one of those contracts that you scroll through and then click I agree. Well, that provides a whole bunch of terms and conditions. Sometimes those bind the users, sometimes that binds the platform itself. Now, when it comes to NFTs, you could provide a click wrap agreement, I don't see that being done very much. But there's a fundamental problem, the agreement isn't necessarily linked to the NFT itself. You could also theoretically put the terms of sale in the reference work that's held off-chain. But again, that is something that is not necessarily connected to the NFT itself, it can change over time. And you still have no guarantee that the buyer has read the terms when the sale is consummated. And as you have more and more secondary purchasers and you get further and further away from the initial sale, the problems just get harder and harder to make sure that all of the downstream purchasers saw and assented to all of the contract terms and to make sure that the prior sellers and the original minter are bound by the same terms to provide the thing that was origin provided when the NFT was minted. And the fundamental question, if you buy an NFT that doesn't have any sale terms whatsoever, what have you purchased? The answer is probably nothing. At least nothing that the law can protect. We'll talk about this later, but one of the off-chain problems with NFTs is that the reference work can change, you can get rug pulled. And if you don't have a contract that says you are entitled to one specific thing, well, the NFT doesn't tell you what the thing was that you were supposed to buy. In a way, an NFT is like a hyperlink and you can't own a hyperlink. So if you buy an NFT that doesn't have contract terms, it doesn't define what you have purchased and you aren't familiar with the terms of conditions, and you want to try and enforce that NFT against someone that you purchased it from, I'm afraid to tell you that I think you own about as much as a hyperlink, which is to say you can't own that. Many people claim that NFTs supplant copyright law entirely. And unfortunately that's not even close. NFTs are a product of contract law, extremely fundamental ideas of contract law. And there are real problems when it comes to enforcing those contracts and creating privity between the original minter and downstream purchasers. Now, one of the things that NFTs can do, is that they can be attributed with some basic programming, so called smart contracts. Now, these smart contracts are basically contracts in the same sense that a microchip is a contract, it's not a legally binding document, it just has a bit of programming to do things when certain conditions are met. And these smart contracts seem to well when they are based on internet native occurrences and simple transactions, the kind of thing like an escrow account where you don't release funds until certain conditions precedent are met. But these smart contracts, these tiny programs are not real contracts, they don't bind the downstream purchasers. And in fact, as we've seen, they can break over time. There are no legal rights that are created as a result of the smart contracts themselves. So for better or worse, lawyers exist for a reason, and programmers are really, really bad at planning for contingencies. And they're also really bad at understanding contract law in general. So the bottom line is that NFTs are a product of contract, the terms under which you bought them. So for all of those who purchased in NFTs, I'm sure that you all checked the terms and conditions before you purchased, right? You got terms and conditions, right? And that brings us to copyright because NFTs do not supplant copyright law, not even close. NFTs are bound by normal everyday rules of copyright. When you buy an NFT, sometimes you get the copyright, but most of the times you don't. Again, it entirely depends on the original terms of sale related to the NFT. NBA Top shots for example, does not give you a copyright in the original video to the NBA. They give you an extremely limited license to use that video in extremely limited places and nothing more. Some other famous examples where people think they're buying the copyright, but aren't include CryptoAds and Bored Ape Yacht Club. With CryptoAds, they basically operate under the Creative Commons Zero License, where if you buy a CryptoAds JPEG, they allow you to do basically whatever you want with them. But again, CryptoAds hangs on to the original copyright. They simply license it to downstream purchasers. Same thing with the Bored Ape Yacht Club, they offer a fairly expansive license, but again, they hold the IP centrally. And you're just simply given a license. You are not buying the copyright associated with the Bored Ape cartoon that you purchased. And with Bored Ape, the license is held off-chain, which means that that license might change over time and you might never even know about it. And often this has very little to do with copyright at all. If you buy an NBA Top Shot, let's say of a particular clip of something that happened in the NBA, you can't enforce that against someone who is displaying that piece of video somewhere else. And on top of that, the NBA can prevent you from displaying that particular video clip, if you're displaying it in a way that conflicts with the license that was purchased through NBA Top Shots, which again is incredibly restrictive. And the issue of copyright is incredibly important because when you're talking about digital art, that's often the only right that the law recognizes. If you don't have the copyright, then you effectively have nothing. And that's important because in a context of NFTs, a lot of the art that is being bought and sold probably doesn't have a copyright at all, it's copyrightable. The ultimate irony is that when it comes to digital art that does have a copyright, ironically, the copyright is a scarce resource. There's only one. Sure you can license it an infinite number of times, or you can assign the copyright, but the copyright itself is inherently scarce. And maybe we never needed to solve the digital scarcity question at all, because it was already solved through regular copyright law. Because a lot of the reference art that's associated with an NFT is called generative art. It's art that's created by AI, or programmatically through a computer. You might have heard of the Ninth Circuit Case, Naruto versus Slater. That is the monkey selfie case where the courts recognize that only a human can create art that has a copyright. In that particular case, there was a monkey that got a hold of a photographer's camera, took a selfie, and the photographer tried exercise a copyright in that particular piece of artwork. At the same time, PETA said that the monkey owned the copyright to that particular photo, and they intervened to try to exercise the monkey's rights on its behalf. And the court found that no one had a copyright because only humans can have a copyright in art. Only humans can create art that is copyrightable. So by extension, if a machine is deemed to be the author of a work, no one can exercise a copyright in that particular artwork. And in the context of NFTs, there's untold numbers of works that are touted as being created by computers that's deemed to be a feature, not a bug. And if that's the case, I don't think that there is a copyright there to begin with. No one can exercise any rights associated with that artwork because no human created it. Even with a very famous Bored Ape Yacht Club, it seems to be just a rehashing of the same elements over and over and over again, which I believe were hashed by a computer rather than person. A person may have created the individual elements once upon a time, but the individual artworks were created by a computer. Now there are some complicated issues related to copyrights of compilations and works for hire, but there is an argument that some very, very expensive NFTs simply don't have a copyright at all. Now in fairness to NFTs, in the real world, when you buy real art, you buy a physical painting, it's normal not to buy the copyright associated with that particular painting. When you buy a novel, you are not buying the copyright associated with that novel. So it's not unusual in the art world to not get the copyright associated with a work. And so, in some sense, it's normal not to get a copyright associated with digital art. The issue here is that digital art doesn't have a physical token. If you aren't getting the copyright associated with the digital art, you're not really getting anything that is protectable under the law. But of course, in the real world, you actually have a physical thing. And that's associated with a legal doctrine called the First Sale Doctrine that when you buy a physical good, whether it is a painting or a pair of Nike shoes, you can basically do whatever you want to that physical good. You don't have necessarily the right to reproduce or otherwise use an image of the thing that you have purchased, but you do have the right to basically do whatever you want with the physical good itself, including selling it to somebody else. Physical works of art are almost inherently scarce as well. A painting can only be painted by a human once. And NFTs are touted as solving the infinite reproducibility problem with digital works. Where legally speaking at least, no NFT can claim to have Providence over an artwork that is itself legally infinitely reproducible. So when it comes to digital art, such as JPEGs, if you're not buying the copyright, I'm not sure legally what you are buying. And as a non-legal aside, I know art is inherently subjective and there's no objectivity in art and claiming that something is good art or bad art is inherently inchoate, but I mean, just look at this stuff, this is bad art. And if you're claiming that this art is inherently worth hundreds of thousands of dollars, apart from an any speculative value, I don't think you're good at art. So that takes us to consumer protection issues. We've seen that there is a vast Gulf between what people think they are getting and what they're actually getting when it comes to NFTs. And these NFTs are widely promoted by a wide variety of different people, including the people that are selling these things and people who are paid to promote them. And it doesn't seem that anyone really knows exactly what they are receiving. Platforms like NBA Top Shots, who you can assume have legions of lawyers, have actually changed a lot of the marketing language that they've used. Historically they used language like owning a moment, but that probably doesn't line up with the idea of getting an extremely limited IP license to view and display the reference work, almost exclusively on the Top Shots platform. Now they use language like scoring in NFT, or collecting in NFT, which to me, is very, very different than the idea of owning a moment. And it almost goes without saying, but I'll say it anyway, you can't own a moment, that is not a thing that the law recognizes that anyone can own. You might as well try and buy a star in a far away galaxy, you can't own that. And it seems like there is a huge amount of misperception in terms of what people think they're getting in terms of ownership. And of course the false promises from the minters are compounding that effect. And whenever you have false promises from sellers and misperceptions of buyers, you run into consumer protection issues. If I was a minter or a seller of NFTs, I'd make darn sure that every single person saw the terms and conditions, so that there was no confusion as to what I was selling and what they were buying, but that's just simply not happening in this industry. And while many people would probably try and claim first amendment protection, the first amendment does not extend nearly as much to buyers and sellers of goods. When you have commercial sales and commercial speech, the first amendment doesn't protect nearly as much as you'd think it would. And as we discussed, many NFTs drop without any terms whatsoever. And for those that do have terms, it's not at all clear that those terms travel with downstream purchasers of those NFTs. NFTs are also a product of programming. And as we've seen time and time again, those programs can fail. An NFT can be corrupted, the reference work can be rug pulled, you can change the reference work, even if you're pointing to an IPFS file, that can change. Who's responsible if the NFT isn't even delivering the things that it was supposed to deliver, if those terms exist? Often NFTs provide the division of royalties and revenue streams, but those often only work if the blockchain is working. You better hope that the blockchain doesn't fork, that the programming works and that it provides for every single contingency that you can think of, because those things break all the time. And there are all kinds of laws that make sure that consumers are protected by contracts of adhesion. There is the ESIGN act that governs whether a click wrap agreement on a website is enforceable, both against the seller and to the buyer. These are effectively the se same kinds of issues that any kind of eCommerce website is going to have to deal with. But effectively every single individual buyer and seller of an NFT have to deal with the same thing, and many people just aren't. Making sure that contract terms are enforceable is a known issue that all websites, whether it's Web 2.0 or Web 3, have to deal with. And you might try and put a contract on OpenSea, if that is the marketplace that you are trying to sell your NFT, but right now there's no guarantee that anyone's going to read it. And if no one's reading the contract terms, you've got big issues in terms of enforceability, let alone privity. And the bottom line is that you have to make sure that consumer are affirmatively consenting to the contract terms. And if you can't prove that that might be your problem, but it also might be the problem of the NFT purchasers. If they wanna make sure that third parties are providing off-chain unlocked goods, well, you'd better have a contract that makes sure that they actually provide those things. And then there's all kinds of securities related legal issues. NFTs are being market mostly as art or collectibles, but at the same time, there is so much hype and so much speculation, people tout them at as incredible investment opportunities, premised on the idea that they will always increase in value. At the moment it's incredibly unclear, but it's possible that the Securities Exchange Commission, the SEC, could classify certain NFTs as security. If they are classified as securities, this triggers all kinds of regulatory issues with potential liabilities. And while it currently unclear, courts will use what's called the Howey Test to determine whether these things are securities or not. That stems from a Supreme Court case. Under this test, a transaction is deemed an investment contract if a person, "Invest his money in a common enterprise "and is led to expect profits solely from the efforts "of the promoter or a third party." This was a huge problem for the ICO, the Initial Coin Offering boom of 2017, because those Initial Coin Offerings ran a foul of the Howey Test and were regulated as securities. Effectively, people offered coins on a blockchain, related to some enterprise, for a thing that had not yet been and created. And as a result, you rarely see Initial Coin Offerings anymore, at least not from companies that are trying to abide by the law. Now, the argument against NFTs securities is that NFTs are finished products, not investment vehicles that need to be managed. If NFTs appreciate in value, it's through principles like scarcity and just market forces, not because of a third party's effort to enhance the NFTs value. And the SEC's 2019 framework says, "Price appreciation "resulting solely from external market forces, "such as general inflationary trends or the economy, "impacting the supply and demand of an underlying asset, "generally is not considered profit under Howey Test." So an increase in value alone doesn't make something a security. However, some of the proposed uses of NFTs are a much closer call and would probably be considered securities if push came to shove. Things like royalty payments to artists, especially if the art hasn't been created yet, would be a much closer call. And even apart from securities related regulation, there seems to be all kinds of just garden variety fraud. The NFT markets are rife with rug pulls and Rickrolls, people who are intentionally scamming other people out of hundreds of thousands, if not millions of dollars. Not in the sense that NFTs in general are a scam, but literally these things are actual scams where they're making false promises, knowing that they're false and then not providing on the thing that they promise to provide. I mean, that is just good old fashioned fraud. But don't take my word for it, I turn to the foremost expert in crypto related scams, Coffeezilla, to give me a recent salient example. - One example of when an NFT project promised and then didn't deliver on what it said it would, was De'Aaron Fox's project, called SwipaTheFox. De'Aaron is an NBA player for the Sacramento Kings and he recently pulled in $1.5 million in NFT sales, in part due to a roadmap where he had promised some pretty extraordinary things, which would give these NFTs some real world utility. For example, one of the perks was gonna be a Metaverse basketball court, five scholarships, charity giveaways, free merch, even tickets to All Star games. These all gave investors the impression that these NFTs might have real world value and be worth buying. However, right after the money came in, De'Aaron Fox issued a statement saying he was too busy with his NBA career to make all that happen and was quitting the project. No refunds, of course. Apparently he wasn't too busy to start the NFT, just too busy to deliver on what he promised. - Then of course, there's all kinds market manipulations. Many of the high dollar amount transactions related to very high ticket NFTs, are not conducted by arms length transactions. They might be wash sales, where an individual sells an NFT to themselves, using a sock puppet, or there might be coordination between two different people who agree to pay a high price for something to prop up the price. Because the blockchain is quasi anonymous, pseudo anonymous if you want to get technical, it's very easy for people to create sock puppet accounts, that they control, so that they can show a price history of their NFT being sold for lots and lots of money, so that some unsuspecting downstream purchaser thinks, well, if that person paid this much, then I'll pay even more and I'll be able to sell it to somebody else down the line for even more than that. Now, this to me raises garden variety issues of fraud. It's just out and out fraud and market manipulation. It could even be a violation of the Sherman Antitrust Act. This is the kind of anti-competitive behavior that the DOJ and FTC likes to crack down on. And often when you get into price manipulation among several different people, well, then you're getting into criminal liability under the Sherman Act. Maybe there's an infinite supply of greater fools when the prices keep going up, but as soon as any particular NFT crashes and a buyer realizes that there was price manipulation before they purchased their NFT, they might come looking for some heads to roll, and there might be some real civil and criminal liability associated with people who were propping up the prices unfairly. And then there's lots of just pump and dump schemes. People who maybe aren't promoting an out and out scam, but are looking to a quick buck. And there's right now a proposed class action against people who promoted Ethereum Max, people like Kim Kardashian, Floyd Mayweather, Paul Pierce, they promoted this token on their social media chains, and right now there's a class action because it was clearly a pump and dump scheme. And the Ethereum Max lawsuit doesn't rely on federal securities law, it relies on pretty normal state based causes of action, like unjust enrichment, violations of California's Unfair Competition Law and the California Consumer Legal Remedies Act. I don't know that we will ever know for certain how many NFTs are sold in wash sales, how many people are trying to drive up the price of these things, but anyone who is manipulating the market here, really faces some truly terrifying civil liability and maybe jail time. And those are just the on-chain problems, that takes us to the off-chain problems associated with NFTs. The first of which is you need to make sure that if you're selling an NFT, you have the rights to the reference work. Recently, an NFT minter called Hitpiece, purported to issue an NFT related to every song on Spotify's database. So they would effectively take the album artwork and mint NFT related to the artist and name of the song. It seems like that raises some very truly terrifying issues in terms of Hitpiece not owning any of the rights associated with any of the songs, artists, or album artwork associated with the NFTs that they claim to be making. Now, interestingly, there is a novel issue of copyright here. Since the NFT doesn't contain the musical work itself, there's an open question whether these NFTs violate the musical copyright. I'd argue they probably do, but that's a separate issue. And on top of that, there is no question that minting an NFT related to a band and their song, using all of those names and their album work, certainly violate the trademark related to this particular band and song and probably a myriad of other attribution related legal issues as well. Then there was another music related NFT project, called Streamer.fm, that claimed that because you could stream music on Spotify and YouTube, they were somehow allowed to mint these NFTs and re-stream the music, which is not how any of this works at all. Fundamentally here, clearing the rights and making sure you have the rights to mint the NFT in the first place, goes back to old fashioned boring concepts of contract and copyright law. NFT and blockchain technology, not only doesn't supplant or replace those bedrock principles of law, they often run head long right into it. And when it comes to this Corpus of Law and brand new NFTs, NFTs are gonna lose. But there's all kinds of minting NFTs without permission. And often you have no way of knowing whether the original minter had the rights and the clearances to mint the NFTs that they are minting. Proponents of NFTs claim that NFTs can prove digital provenance related to works of art, but the truth is often you have no idea if the original minter has any of the rights associated with the work in the first place. And there's absolutely no way to know, except through conducting an investigation completely off-chain. This is actually one of the issues associated with the Quintin Tarantino and Miramax case. In that case, Quentin Tarantino, the director, was trying to min some NFTs related to film Pulp Fiction. And it's a complete miras to try and figure this out because Tarantino retains some rights to the screenplay of the movie Pulp Fiction, but Miramax retains almost all of the rights associated with the movie itself. And it's going to take a lot of litigation to figure out who owns what rights and who has the right to make NFTs related to either the screenplay or the movie itself. And good luck if you think the NFT itself is going to prove the answer to either of those questions. And of course, there's all kinds of good old fashioned regulatory risk. A lot of people have explained that an NFT or a blockchain might make perfect sense in the context of say real estate title, where having a public decentralized blockchain of who buys and sells houses could actually be much better than the current system of a centralized title system. But good luck trying to convince a state or municipality to adopt that. And if your blockchain runs into something that's already highly regulated, like real estate title, you can't wave a magic wand and force the government to adopt your technical solution, even if your technical solution has some benefits over the universally adopted system. One of the biggest issues is, as a downstream purchaser, how do you make sure that you can enforce all of the terms against the previous per purchasers and the original NFT minter? But the problem also goes the other way as well. If those terms do travel down that chain, let's say that you are a band or a YouTube creator, and as part of your NFT, you issue some sort of unlockable content like a meet and greet with a band, and based on the terms of sale, anyone who ever purchases that particular NFT has the right to enforce a meet and greet against the band. Well, as the seller, are you prepared to offer a meet and greet with every single person who ever purchases that NFT down the line? Because depending on the terms of the sale, you might be obligated to provide that. Otherwise you might get hit with things like, breach of contract or fraud, depending on the value of the thing that you have promised to provide. I was talking to a very large YouTube creator who wanted to create an NFT. I'm not going to name him, but I am going to wish him congratulations when he passes a hundred billion subscribers in just a little while, and he wanted to offer a video conference with whoever purchased this NFT 24 hours a day, 365 days out of the year. And I suggested to him that maybe that wasn't a good idea, unless he liked being woken up in the middle of the night and being forced to provide a video conference with every single person who purchased his NFT. And lo and behold, he didn't go through with it, and I think that was a smart thing. I've seen lots of people claim that there is absolutely no downside to creators creating their own NFTs. On the contrary, there's all kinds of potential pitfalls if you not smart about these things. Then there's things like product liabilities, NFTs break all the time. Who's responsible if the link between the NFT and the reference material breaks? Who's responsible if the blockchain forks and your revenue stream is then cut off? These are bedrock ideas of product liability, on top of which it's not at all clear, from the blockchain itself, that the thing isn't functioning. You've gotta do an investigation off the blockchain to know if the thing that's on the blockchain is actually working or not. There's been a lot of talk about minting NFTs related to real world goods, creating an NFT related to a house to track who buys and sells the house, creating NFT related to a car, related to the car itself. But what happens when something happens in the real world that isn't reflected on the blockchain? What happens if the house burns down? What happens if the car gets stolen? Rectifying real world events with things on the blockchain is no easy task and is inherently off-chain. And there are other unintended consequences along with this as well. For example, Alfa Romeo just said that they're going to are offering NFTs related to their cars. And when you take your Alfa Romeo car into being serviced with Alfa Romeo, there will be a history on the blockchain that shows that your car was serviced at such and such a time in such and such a way and that follows with the car. But one of the problems is what happens if you take your car to a non-authorized dealer, that information won't make it onto the Alfa Romeo blockchain. It's one way that Alfa Romeo might force you to use their walled garden. It'd be like DRM for a car, you'd never be able to take your car to any other service place. Now, I am not a computer programmer, these might be technical problems that will be fixed over time. Already we're seeing intermediaries like OpenSea, interpret the data on blockchain and solve some of the issues when it comes to falsely minted NFTs. But if that's the case and we need these intermediaries that are off-chain, it raises the question Why would we want Web 3? In fact, we can do all of this stuff legally using traditional websites and traditional legal mechanisms. Often the Web 3 part of it just makes things worse. Which takes us to the third category of problems with NFTs, which I've called innovation so mundane that no one should care. And the issue here is that there are probably plenty of marginal benefits that NFTs bring to the table for a wide variety of industries, they're just not huge wins that are going to create an enormous amount of wealth for the people with vested interests. It's pretty clear that collectible JPEGs are pretty dumb and that this is a speculative bubble with untold numbers of non arm length transactions, wash sales and sock puppets. It's pretty clear at this point that at least this first generation of NFTs are creating a speculative bubble that is probably going to burst pretty violently. Collectible JPEGs and other collectible digital pieces of artwork, it's probably not going to last. It's pretty dumb and I think people will probably get bored with it. It's also filled with all kinds of non arm length transactions, wash sales and sock puppets that are propping up the prices and just waiting for another person to come around and buy the thing that probably isn't worth the sales price. But that being said, there are probably lots of other uses that are more promising, fractionalized revenue streams, access to unique membership style opportunities, proving certain kinds of Providence and raising equity. But the thing is those uses of NFTs are genuine, but they're really just marginal improvements on current technology, if they are indeed improvements at all. And NFT acolytes are claiming NFTs are a grand slam, but it's probably probably more like a simple walk on single. These improvements in technology are probably useful, but they're also extremely mundane. The technology at use here probably will form some of the unseen backbone of certain transactions, but it just simply won't be get rich quick schemes. It seems likely that the huge market for NFTs as collectibles will probably crash at some point. And when the bubble around JPEGs dies out, what will be left is probably a technology that makes marginal improvements. It's going to create a few millionaires, maybe even billionaires who find novel and practical uses for this technology, but it's not going to create overnight millionaires for everyone that wants to mint some low value NFT going forward. And the reason that that is a problem for NFTs, is that there are many, many people who have staked their entire reputations, as well as their entire finances, on the proposition that NFTs have created a completely new industry and that it can create overnight millionaires in anyone. And when people realize that that's not the case, well, the entire industry may evaporate a overnight, faster than Beanie Babies. Now, of course, NFTs are heralded as this revolution in creator economics, as a way for artists to actually paid what they're worth, but people don't realize that there's real liability and that NFTs could be incredibly dangerous if not outright terrible for creators. I go into great detail based on my experience as a lawyer, but also my experience as a creator myself. Let's just say, there's a reason I haven't minted any NFTs myself. Now, what if I told you that you could watch another LegalEagle video, but this time it's on why NFTs could be dangerous and bad for creators. Well, this full length companion video does exist and it is exclusively on Nebula. Because sadly, if I put it on YouTube, it would probably get demonetized and there's no way you'd ever see it. But Nebula is different. As you've probably heard by now, Nebula is home to tons of exclusive ad free content, like my first full length documentary, Bad Law Words Good, a long form interview with Mark Rober, exclusive videos on legal rights you should definitely use, and anti-SLAPP laws in Kyle Rittenhouse, plus tons more. And all of this exclusive content is only on Nebula, which you can get for free with Curiosity Stream. Of course, the reason why all these videos are only available on Nebula, is because they just wouldn't work here on YouTube. They'd never be viewed because of the way that the site works. But on the other hand, Nebula is a different platform with no algorithm and without any ads, because Nebula is a place where can experiment with content, put things on there that we couldn't put on YouTube. Nebula is a platform for great and unique content made by independent educational creators that you probably already know, like Tom Scott, Thomas Frank, and Thomas Flight, as well as lots of other people not named Tom, like Half As Interesting, Marques Brownlee, RealLifeLore, Wendover Productions, Mike Boyd, MinuteEarth, Neo, Real Engineering, Knowing Better, and so many others. There's tons of exclusive content released multiple times every day. And Nebula is creator owned and operated and we've been developing like crazy. Nebula now has apps for iOS, Android, Apple TV, Roku, Fire TV, and Android TV. And we're thrilled to be partnering with Curiosity Stream because they're the go-to source for the best documentaries and long form educational content on the internet. They even have an entire section devoted to unsolved mysteries in crime. So if you like my videos, you'll love the stuff on Curiosity Stream. And the best way to get access to Nebula and all of this incredible content is definitely through the amazing Curiosity Stream Nebula bundle. With it's current sales price of less than $15 for the entire year, which gives you access to both sites. And to be clear that Nebula subscription is not a trial, it's free for long as you're a Curiosity Stream member. There just isn't a better deal in streaming anywhere, and you get two great streaming sites with content you'll actually watch and enjoy. And what's more, signing up will actually help countless independent educational creators beyond just LegalEagle. So sign up right now by clicking on the button that's on screen right now, which will take you directly to CuriosityStream.com/LegalEagle to sign up. Or you can click on the link that's down below in the description. It's a great way to support educational content and get tons of exclusive content that you'll love. So go watch it right now, or you can click on this playlist over here with all of my other real law reviews. So click on one of these links or I'll see you in court.
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Channel: LegalEagle
Views: 3,045,836
Rating: undefined out of 5
Keywords: Legaleagle, legal eagle, breaking news, case, congress, court case, crime, guilty, jury, latest news, news, not guilty, political, politics, politics news, scotus, supreme court, the trial, trial, Verdict, copyright, law advice, legal analysis, lawyer, attorney, Real lawyer, Real law review
Id: C6aeL83z_9Y
Channel Id: undefined
Length: 46min 28sec (2788 seconds)
Published: Wed Apr 27 2022
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