How to Mint an NFT and Not Get Sued (Maybe)

How to Mint an NFT and Not Get Sued (Maybe)

If you're like the me of a few weeks ago, you might have heard of these weird things called NFTs and probably have no idea what they're actually about. Even worse, you might think you know what they're about but you haven't thought deeply enough about the possible risks of buying or selling them.

I spent the last week or so researching NFTs so that I could understand 1) what they actually are and 2) why the market for NFTs seems to be going literally insane right now.

Why would I use my time thusly? Well, mostly because a friend saw my contract for selling souls and asked me to write them a contract governing the sale and use of NFTs no matter how many times I protested that IANAL.

They didn't care, so here we are. But more importantly, why should YOU care about NFTs?

I'm not 100% convinced you should yet. They're interesting. They have some utility--primarily as a collectible and investment vehicle at the moment. Finance at its finest. But there's potential for more.

People talk about using them as a new way to compensate artists for their work, but with gas fees approaching $200 per transaction (more on that shortly) that's already breaking the bank for a lot of artists to even sell their NFT. It's also a blockchain verified transaction that you can (in theory) embed terms into, giving a peer-blessed analysis of the deal you struck.

That's kinda neat. But since you still have to deal with regular courts, its utility compared to a regular contract is questionable.

I was also still having a lot of trouble wrapping my head around what an NFT actually IS. If I sold NFTs of my blog posts, what am I selling? The rights to use them? The rights to display them? Anything at all?

For a contract or sale to be legally binding, there has to be "consideration." No consideration, no deal. Consideration is a fancy way of saying "something of value." If you're not actually exchanging something of value, your contract might not hold up. This is not that big of a deal when you're selling cryptokitties for $10 a pop, but a much larger deal when most NFTs are selling for a minimum of $500-$2000.

Why is it a big deal? Because if someone pays you $10k for an NFT of your art, and then you go spend that money on ice cream or avocado toast or other sexy NFTs, you don't want them hauling you into court and claiming that they didn't actually receive consideration for the deal. So the question of what you're buying when you buy an NFT becomes pretty important, and it needs to be pretty clear to all parties involved what that definition actually is.

As it turns out, you're not buying much in the standard model.

Popular sites like OpenSea and Zora explicitly state that you're not buying ANY rights to the underlying work when you buy an NFT. You're literally buying the Non-Fungible Token, or the blockchain code that the NFT contains. You can think of it like an artist's print.

This would be fine in principle, until you start thinking through some questions around usage rights intrinsic to intellectual property law. When I, as an artist or a writer or whatever, create an original digital work, I have full usage rights to that work to do what I want.

I can use it as the book cover for an obscene novel. I can grant fringe religious groups permission to use it in their marketing material. I can print shirts with the image or words I came up with on them. I can do any of this because I have all rights reserved to myself.

More importantly, I can enforce those rights. If YOU take the image I created and try to do any of those things with it, I can sue you for damages and I might have a case if you've damaged my reputation or are using my work in a way I disapprove of.

With a physical print, this is fairly straightforward. You can use that print privately and show your friends and even display it in a public collection (I did sell you the physical item, after all), but you can't reproduce it. You can't sell physical or digital copies of it.

With what's essentially a digital print of my work with no rights associated, you have even fewer rights because there's no physical copy you bought. This obviously hasn't been tested in court yet (they're so new), but precedent suggests some significant restrictions here.

With no rights, you can't technically legally print it. You can't reproduce it. You arguably can't even display it in ways that would otherwise not be fair use, such as by displaying it on your website. It's not at all clear. You bought a thing with NO RIGHTS ATTACHED.

You literally have a right to own, sell, or transfer the code, which is supposed to be unique, although this is no way enforceable because no one signed a contract specifying terms of the sale.

In spite of this, people are buying them like crazy. Grimes made a cool $6 mil. @jstn is all in and it seems like he's doing pretty well. People clearly value these. In a lot of ways, it's like any other cryptocurrency. Just less liquid, because it has to appeal to the buyer.

It will be interesting to see whether a wave of lawsuits is incoming to challenge the validity of the purchases of some of these NFTs on the basis that the buyer thought they were buying more than they were. Odds of that go up considerably if NFT prices tank, and it's not at all clear who would prevail there! We might see some pretty significant clawbacks for anyone who sold an NFT for a large chunk of cash with very ambiguously defined terms. I have no idea how the how the legal system would view these. Again, IANAL.

Furthermore, it'll be interesting to see how the price of Ether affects all this too. If I attempt to nullify an exchange on the basis that I received no consideration or was misled as to the content of the deal, do I get the cash value of the deal back or do I get my ETH? What if the case takes 2 years to settle and the value of ETH has quadrupled in that time? Suddenly the artist who I paid 5 ETH to for their work may need to cough up $40,000 to satisfy a court order that they restore my ETH. Totally unclear! Wild west baby.

You might say this seems ridiculous, but consider that someone could make an argument that they bought the NFT as a store of value assuming it was secured by the underlying work and they would have simply held the Ether otherwise. Suddenly that scenario doesn't seem as crazy.

Or consider that a judge might decide that a reasonable person would assume some measure of rights would come with the sum that was exchanged for the work. You, as the artist, might suddenly discover that you sold more of your IP than you expected to.

It's true that this could also go the other way, and that the person who bought the NFT might just be SOL when the dust settles, but at least their maximum loss is whatever they originally paid for the NFT. The proposition seems MUCH riskier for artists to me.

The more I thought about it, the more I realized I didn't want to make any kind of sale of an NFT without a LOT more clarity around the terms between the buyer and seller. This is what a contract is for. Even when you sell a print you get a receipt (a bill of sale).

But how do you do this in a setting in which NFTs are trading hands like crazy and no one is paying too much attention to how the legal system is going to deal with all of this when things go sideways? It's an interesting question.

When my friend asked me for a contract to govern the sale of an NFT, they had originally referenced my contract for the sale of a soul, so I started drafting something not quite that intense but similar to the standard business contracts I use for contractors.

But when I sent them a draft and we started talking about it, we realized there was no way this was going to work. One of the issues is that NFTs often kick back a percentage of every subsequent sale to the original artist (10-15%).

Not only is the language required to govern such a complex instrument REALLY intimidating, but you somehow have to bind not only the two parties involved at the initial sale but every future party who might receive the NFT to terms they hadn't agreed to beforehand.

Plus, no one out in the murky world of anonymous NFT crypto marketplaces is going to be digitally signing your binding derivative contract prior to making a purchase of your NFT. It really amps the difficulty of resale, which makes the NFT even less liquid.

We scrapped the idea of the contract because it just wasn't going to work here. I had to come up with some other way to help them ensure that the terms of the NFT were outlined to protect all the parties with a little more than a handshake, but less than a 10-page signed doc.

After thinking about it for a bit, I realized that you couldn't bind any future purchaser in any real way that still allowed a level of fluidity, but as the creator you could specify terms of use and make a pledge about what you were willing to do.

Even better, you could codify that information into the NFT itself or into a reasonable reference point on a stable marketplace. Not only that, but you could grant a limited license to use the NFT in common ways as part of the NFT, which would count as valid consideration.

I ultimately ended up with a short, tight, universal terms of use to accompany the sale of any NFT, that anyone could use anywhere to shore up the legal case and give the artist some additional protection.

This is about as short as contracts ever get.

I would not personally sell any of my writing or art NFTs without using it.

By including these terms in the description of the NFT itself, you can very clearly specify the terms and expectations for all parties involved, regardless of the current owner, and in theory it should even increase the value of the NFT because there's pledge of uniqueness.

Lots of people seem to think this is baked into the NFT itself and wonder why you would need this, but it's not clear that the legal system would agree, and also you're not thinking about it deeply enough.

Take this example:

Yeah, that sounds great! Shoot, it's coded in. Totally bulletproof. Oh, wait, except I'm clever, and I decide to conduct a private sale for USD wire transfer for a particularly valuable NFT and I transfer it to you on the network free of charge other than gas fees. Oops.

That's just the most obvious workaround I can think of at the moment. There are probably all kinds of other ways these are ripe for abuse without clearer or embedded terms tied directly to the NFT.

So again, NFTs are nifty. Buy them, sell them, do what you want with them. But personally, I'm not going to sell any NFTs without very clear language like this (at a minimum) tied to them, to protect both myself and the buyer. It's win-win. You'd be silly not to.

Not only that, but if you want to, take the terms I wrote and modify them how you like. They're licensed under the creative commons and they're a decent starter template for an area with no precedent anyway. IANAL, but it's better than nothing.

Amusingly, the very first thing I did with these terms was use them to sell an NFT of the same terms for 1 ETH to the person who asked me to draw them up.

Wild times, kids. Wild times. Have fun with NFTs, don't accidentally screw yourself, and be safe.