Non-fungible tokens (NFT) have always been fascinating to our team in terms of the complex challenges that they present to lawyers. Back in the days and even until recently NFTs were mostly used by digital artists as a way to make profit from their art. Nowadays, with the Ethereum NFT revolution the popularity of these tokens grew so fast that their market exploded. As new users entered the NFT marketplaces and the proves skyrocketed, some legal problems that have been neglected became evident. One of them was the adequate NFT license agreements.

The CryptoPunks case

CrpytoPunks are perhaps the most recognizable non-fungible tokens in the present days. The collection was dropped in June, 2017 as one of the very first examples of tokens as collectible items. Noone expected them to become that viral. Our team is currently working with a client that has obtained one of the CryptoPunks for a price exceeding USD 500 000 and prices are even rising. However, as the owners of these crypto assets now try to make profit out of them that goes beyond the one from speculative trade, laws become an issue.

When you buy a CryptoPunk, what exactly do you get? Is it merely an ERC-20 token or do you also get the piece of art that is referenced in it? More precisely, do you get a license to use the image in your commercial activities, like printing it one mugs or making it a part of your company logo? Can you modify the image for marketing purposes and to what extent? These are all matters of copyright law. The original copyrights owner, which in this case should be Larva Labs, decides what kind of license to grant to the owners of the CtyptoPunks tokens. However, no NFT license agreement was drafted back in the days and later the problems became obvious. Larva Labs have supposedly adopted the NFT public license and later have presented their own version of an NFT license but these are all non-official. There is no legal bond between the NFTs and the respective license contract. Thus, the use of NFTs in commercial activities is currently quite ambiguous and, in all honesty, risky.

How do you license an NFT?

Not all NFTs are related to art. Some of them include various rights that are attached to them by their original creator. For example, I am also working on a project that attaches NFTs to physical items and grants the token holder the right to receive part of the profit from the sale of these physical items over a certain period of time. These types of NFTs look a lot more like securities rather than a representation of copyright over a piece of digital art. The question remains, though. How do you determine what rights and obligations come with the ownership of the token? How are they transferred or claimed. In order to deal with this issue, the issuer of the tokens and the buyers need a contractual relationship. This relationship is governed by a written agreement and the best way to do this is to apply rules that apply to all NFTs from a certain collection in advance. Below are a couple of examples on how to do this.

The NFT public license

There is an NFT public license available. It is only applicable to NFTs that represent pieces of digital art. It is a very simple license agreement that is meant for artists to refer to. It grants some rights to the owners of the tokens including commercial rights but also allows the authors to retain some rights for themselves. The public license is good enough for what it is intended to achieve – put some order in the otherwise vague world of rights over NFTs.

As an artist who drops NFTs, you can always reference the NFT public license for your work and in most cases it will be good enough. However, it is only useful for digital art and it doesn’t offer any ways to modify the agreement even slightly.

Drafting a specific NFT license agreement

Before you drop a collection of NFTs to the market, you need to consider what you want to achieve with the tokens. What kind of relationship do you intend to form between yourself and the owners of the tokens? In order to make your NFTs more popular you will also have to explain the concept of your NFTs to the public. This is usually done through some sort of a whitepaper that is presented to potential buyers. It explains what makes your work unique and what buyers can expect in terms of rights that are associated with the tokens.

An NFT license agreement is a prospectus (whitepaper) that is transformed into a legal text – one that creates a legally binding relation and assigns certain rights and obligations to the parties involved in it. It explicitly governs what the buyers of the tokens can do and what not. You, as the creator of the NFTs, retain some rights while transferring or licensing the rest to the owners of the tokens. The rights granted under the NFT license agreements should only be transferable with the respective tokens.

nft license agreement

So, how do you draft an NFT license agreement?

First of all, if you are not confident, don’t draft it yourself. Find a lawyer to help you with the legal text. Contact our team and we will gladly help you or contact anyone else that can do the job. This will save you a lot of trouble.

Below, I will list some key points that you may want to consider for your NFT license:

  1. Put the license in the smart contract. It is just text, so it won’t cost a fortune to include it in the smart contract.
  2. Always link the transfer of rights to the transfer of your tokens. You don’t want buyers to create a legal mess afterwards.
  3. Be precise when describing what the buyers get in terms of rights and how to claim them. Leave no ambiguities.
  4. Consider statutory compliance issues especially for utility and security tokens. Is what you are planning to drop legal?
  5. Get to know the taxation issues that arise from the drop. Are you generating a taxable profit from the sale?
  6. Make a human-readable version as well that supports the legal text of the license (make it easy for your buyers to understand your terms).

Do you really need an NFT license?

The point of the license agreement is, like any other agreement, to create some sort of legal certainty between the parties. If you are a digital artist that is just now exploring the possibilities of NFTs, you may be good to go with just the NFT public license. As I said, it is good enough in what it aims to achieve.

For more complex projects you will need something tailor-made and I can’t stress enough on how important this actually is – not only for you but for the investors in your projects and the final buyers of the tokens. Please, don’t neglect it. I know that the crypto economy is wild and law is totally incapable of putting order into it whether such order is necessary at all. Still, it is up to us to take care of our projects and this includes the legal aspects of them.

If you have reached so far, thank you for reading this. The fact that people now want to learn about NFT license agreements is actually awesome. If you need help in drafting your license, consider contacting us at 00359887345666 or info@taxmonkey.bg. If anyone claims to know the legal aspects of crypto, they are either mistaken, or lying. We are trying our best though!