NFTs Are Legally Problematic ft. Steve Mould & Coffeezilla

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NFTs Are Legally Problematic ft. Steve Mould & Coffeezilla

NFTs Are Legally Problematic ft. Steve Mould & Coffeezilla

– [Devin] Are NFTs a scam orare they the next big thing?Legally speaking, it’s a questionbetween Uber and Theranos.Uber was able to sidestep regulationto become a billion dollar company,and basically is interwoveninto the fabric of society.Whereas Theranos tried tofake it until they made it,but they ran up againstphysics and biologyand were just a giant fraud.NFTs are probably somewhere in the middle.They’re certainly not unicornsthat are going to solve all problems,but they’re probably notall completely useless.And either way they raisefundamental issues of law.So today we’re going tocover only the legal problemsassociated with NFTs.Others have explainedthe non-legal issues.For example, Dan Olson of Folding Ideasdid a fantastic videocalled The Line Goes Up,which is not to say that the technologycan’t overcome these problems,but right now there are somefundamental issues of lawwith the way that NFTs are used now.And I see three maincategories of issues with NFTs,on-chain problems, off-chain problems,and what I call innovations somundane, no one should care.Now, to get to those issues with NFTs,we first have to define what an NFT isbecause I think almosteveryone 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 permanentunchangeable digital ledgerthat’s used to record transactionsin blocks of computer codethat are timestamped and linked together.The code will reveal thehistory of a digital asset,where it originated,who purchased it and anysubsequent transfers.And in the digital world,the token can be assignedspecific uses and properties.Now, it’s non fungible becauseit is said to be unique.Unlike something like Bitcoin,where every single Bitcoinis interchangeable with another one,it’s like $1 bill.Every $1 bill that you possesseffectively does the exact same thingas 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 someonemore technically minded,my friend Steve Mould,to explain how an NFT actually operatesbecause it’s illuminating.So Steve, how does an NFT work?- NFTs work in a verysimilar way to Bitcoins.We track who owns what Bitcoinon a distributed ledger,as you mentioned.In the case of Bitcoin,that distributed ledger iscalled the Bitcoin Blockchain,but NFTs exist on a different blockchain,typically the Ethereum Blockchain.The difference betweenBitcoin and Ethereumis that the Ethereumblockchain is programmable.You can write programs and publish themto the Ethereum Blockchain.These aren’t programs that youwould run on your computer,these programs run on the blockchainand they interact withtransactions on the blockchain.For example,you could write a program and publish itto the Ethereum Blockchainthat launches a newcryptocurrency to rival Bitcoin.But it’s not just limitedto cryptocurrency,you could use the Ethereumprogramming languageto 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 seewhy they wanted to callthem smart contractbecause they enforce transactionalrules on the blockchain.Just like normal software,once you publish a smartcontract to the blockchain,you can interact with itby sending it commands.For example,you could send a commandtelling it to mint a new NFT,or you could send a commandto change the owner of an NFT.Smart contracts can be usedfor much more than justcryptocurrency and NFTs.For example,you could write a smartcontract that act as an escrowbetween people buying and selling NFTs.The definition of an NFT is quite strict.By consensus, we’ve agreedthat if a smart contractbehaves in certain specific ways,as defined by a standardcalled ERC721 and one other,then we call that an NFT smart contract.So how does all thisrelate to digital art?Well, let’s have a lookat the most expensive Bored Ape ever sold,that’s Bored Ape number 2087.Let’s head over to Etherscan,a website for exploringthe Ethereum Blockchain.This is the address of the smart contractthat mints Bored Ape NFTs.ERC721 contracts can bequeried in certain ways.For example,I can use the owner of queryto find out who owns a particular NFT.So Bored Ape 2087 is owned by this person.The ERC721 standard also includessomething called the token URI.If I put 2087 in here, I get this.This is a URI on the publicinternet for anyone to see.It’s an IPFS address,so let’s head over to the Brave Browserand see where that takes us.This is some machine readable JSON code,but let’s make it a biteasier to read for humans.And look, you can see that’sURI 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 URIand stick it back into the Brave Browser.And there it is.So when you buy an NFT that’slinked to a digital artwork,you are buying a unique locationon the Ethereum Blockchain,that points to a text file on the internetfor everyone to see.Inside that text file is another URIthat points to the image itself,again on the internet for everyone to see.Believe me,there are a bunch ofweird technical detailsthat 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 linein a tamper-proof ledgerthat points to a publiclyhosted image file.- So at the end of the day, to summarize,I think the best analogy foran NFT is not digital property,as a lot of people like to claim.I think the best analogyfor 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 receiptof that transaction.That receipt often linksto something off-chain,often that is a JPEG.But the receipt itselfdoesn’t really tell youwhat the transaction was.To know what happened in that transaction,you have to look at theterms of the original sale,the contract.You also have to lookat the reference work,often that’s a JPEG.But the NFT itself is simplya entry in a digital ledger,that’s kind of like areceipt in the real world.Okay, so with that understanding,I think we can get to the firstcategory of legal problemsassociated with NFTs,which are the problemsthat are inherent on chain.And for that, I’m afraidwe’re going to have to talkabout fundamental contract theory.Honestly, I didn’t think that this videowas going to require meto get back to firstprinciples of contract law,the kind of thing that you learnedin your first year of lawschool, and yet here we are.And we need to understandhow a contract works,how it binds the partiesand what the limitations of contracts are.And I know that sounds super boring,but I’m going to explain thatwith wrestler andRenaissance man, John Cena,because in 2017,John Cena contracted withthe Ford Motor Companyto 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 hundredsof thousands of dollarsand Ford offered to give him a Ford GT.But in particular,there was one term that Fordincluded in the sales contract,John Cena had to agreenot to sell his Ford GTfor two years.And that as a perfectlyenforceable sale contract.Ford doesn’t have to sell that to anyone.And so to make sure thatJohn Cena didn’t turn around,flip the car for hundredsof thousands of dollars,they made him promise not tosell the car for two years.What did John Cena do?He turned her around and flippedthe car almost immediatelyand made hundreds of thousands of dollars.So what could Ford Motor Company do?Ford could sue John Cenafor hundreds of thousands of dollars.And in fact, they did sue himand they settled foran undisclosed amount.But the really interesting question is,what can Ford do against the personthat bought the car from John Cena?And the answer is absolutely nothingbecause there’s no contract between Fordand the person that boughtthe car from John Cena.The secondary buyer is said tonot be in privity with Ford.John Cena and Ford are in privity,they have an actual contract,but there’s nothing linking Fordand the downstream purchaser.So what in the world doesthis have to do with NFTs?Well here’s the thing,we talked about how an NFTdoesn’t really have anyattributes in and of itself.When you’re buying an NFT,the real thing that you’re buyingis bound by the contract betweenthe buyer and the seller,those are the primarypurchaser and seller.There are some times whenthere is no contract,we’ll talk about that.But theoretically at least,the value of the NFT isdecided by the contract termsbetween the buyer andthe seller of the NFT.But one of the huge fundamental problemsthat we’ll talk about a lot in a second,is that in practice,there’s rarely any contractbetween the initial primarybuyer and the secondary buyers,and then all of thedownstream buyers later on.And on top of that,there is zero contractual privitybetween secondary buyers andthe original issuer of the NFT.That’s a real problemwhen the only value associated with an NFTcomes from the initial sale terms.So let’s talk about anexample of this in practice.Many people are familiarwith NBA Top Shots,which was designed by Dapper Labs.NBA Top Shots is an NBA platformthat purports to allow you to own momentsthat happen in the NBA,often small snippets ofvideos related to NBA plays.Now, when you buy an NBA Top Shot NFT,the transaction’s registeredon the flow blockchain,which was basicallycreated out of whole clothby Dapper Labs tofacilitate the transactionsof NBA Top Shots.When you initially buy an NBA Top Shot,you get limited rights to useand 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 valuewhen you use the walledgarden of NBA Top Shots,you have to use their app or their websitefor the NFT to have anyfunctionality at all.But in a way it worksbecause everyone is on the same platform.Effectively NBA Top Shots issimply a normal Web 2.0 websitewhere you’re allowedto buy and sell thingsonly within their specific platform.And the terms of sale travelwith the particular NFTsbecause everyone is buyinginto the same system.If you somehow got an NBA Top Shot NFTand was able to sell iton a different blockchain,well, odds are the termsand conditions don’t flowand you have an NFT thathas zero value at all,because it won’t even workwith the original NBA Top Shots platform.So if you are not NBA Top Shotsand you’re not forcing everyoneto use the same walled garden,how do you buy the secondary purchasers?How do you even know what you’re buyingwhen you’re buying an NFT?Well, that is incredibly controversial.Now, another famous exampleis the Bored Ape Yacht Clubthat is famous for sellingNFTs of monkey cartoons.Now, you can buy a BoredApe NFT on OpenSea,which is a large marketplace for NFTs.When you do,the Bored Ape Yacht Clubsays that you get access to certain perks.These include getting accessto their discord serverof like-minded purchasers of Bored Apes.But for the most part,those are perks that are offered off-chainand by the originator of the NFTs.Bored Ape could change their mindbecause it’s questionablewhether the terms and conditionstravel with the downstream purchasersof every single Bored Ape.If those terms andconditions legally fail,say Bored Ape says they’re not in privitywith all of those downstream purchasers,and then they decide to cut off accessto maybe some bad actorswho were spamming the Bored Ape discord.Well, then those purchaserswho spent hundreds ofthousands of dollars,they have zero recourse,because if they’re notin contractual privity,there’s nothing that binds Bored Apeto 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’scalled a click wrap agreement.That’s one of those contractsthat you scroll throughand then click I agree.Well, that provides a wholebunch 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 necessarilylinked to the NFT itself.You could also theoreticallyput the terms of salein the reference workthat’s held off-chain.But again,that is something that is not necessarilyconnected to the NFT itself,it can change over time.And you still have noguarantee that the buyerhas read the terms whenthe sale is consummated.And as you have more andmore secondary purchasersand you get further and furtheraway from the initial sale,the problems just get harder and harderto make sure that all ofthe downstream purchaserssaw and assented to allof the contract termsand to make sure that the prior sellersand the original minterare bound by the same termsto provide the thingthat was origin providedwhen the NFT was minted.And the fundamental question,if you buy an NFTthat doesn’t have anysale 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-chainproblems with NFTsis that the reference work can change,you can get rug pulled.And if you don’t have a contractthat says you are entitledto one specific thing,well, the NFT doesn’t tellyou what the thing wasthat you were supposed to buy.In a way, an NFT is like a hyperlinkand you can’t own a hyperlink.So if you buy an NFT thatdoesn’t have contract terms,it doesn’t define what you have purchasedand you aren’t familiar withthe terms of conditions,and you want to try and enforce that NFTagainst someone thatyou purchased it from,I’m afraid to tell you thatI think you own about as muchas a hyperlink,which is to say you can’t own that.Many people claim that NFTssupplant copyright law entirely.And unfortunately that’s not even close.NFTs are a product of contract law,extremely fundamentalideas of contract law.And there are real problemswhen it comes to enforcing those contractsand creating privitybetween the original minterand downstream purchasers.Now, one of the things that NFTs can do,is that they can be attributedwith some basic programming,so called smart contracts.Now, these smart contractsare basically contractsin the same sense that amicrochip is a contract,it’s not a legally binding document,it just has a bit ofprogramming to do thingswhen certain conditions are met.And these smart contracts seem to wellwhen they are based oninternet native occurrencesand simple transactions,the kind of thing like an escrow accountwhere you don’t release fundsuntil certain conditionsprecedent are met.But these smart contracts,these tiny programsare 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 createdas a result of the smartcontracts themselves.So for better or worse,lawyers exist for a reason,and programmers are really, really badat planning for contingencies.And they’re also really badat understanding contract law in general.So the bottom line is thatNFTs 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 checkedthe terms and conditionsbefore you purchased, right?You got terms and conditions, right?And that brings us to copyrightbecause NFTs do notsupplant copyright law,not even close.NFTs are bound by normaleveryday rules of copyright.When you buy an NFT,sometimes you get the copyright,but most of the times you don’t.Again, it entirely dependson the original terms ofsale related to the NFT.NBA Top shots for example,does not give you a copyrightin the original videoto the NBA.They give you an extremely limited licenseto use that video inextremely limited placesand nothing more.Some other famous exampleswhere people think they’rebuying the copyright,but aren’t include CryptoAdsand Bored Ape Yacht Club.With CryptoAds, they basically operateunder the Creative Commons Zero License,where if you buy a CryptoAds JPEG,they allow you to do basicallywhatever you want with them.But again, CryptoAds hangson to the original copyright.They simply license itto 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 copyrightassociated with the Bored Apecartoon that you purchased.And with Bored Ape, thelicense is held off-chain,which means that that licensemight change over timeand you might never even know about it.And often this has very littleto do with copyright at all.If you buy an NBA Top Shot,let’s say of a particular clipof something that happened in the NBA,you can’t enforce that against someonewho is displaying that pieceof video somewhere else.And on top of that,the NBA can prevent you from displayingthat particular video clip,if you’re displaying it in a waythat conflicts with the licensethat was purchased through NBA Top Shots,which again is incredibly restrictive.And the issue of copyrightis incredibly importantbecause when you’retalking about digital art,that’s often the only rightthat the law recognizes.If you don’t have the copyright,then you effectively have nothing.And that’s important becausein a context of NFTs,a lot of the art thatis being bought and soldprobably doesn’t have a copyright at all,it’s copyrightable.The ultimate irony is thatwhen it comes to digital artthat does have a copyright,ironically, the copyrightis a scarce resource.There’s only one.Sure you can license it aninfinite number of times,or you can assign the copyright,but the copyright itselfis inherently scarce.And maybe we never needed to solvethe digital scarcity question at all,because it was already solvedthrough regular copyright law.Because a lot of the reference artthat’s associated with anNFT is called generative art.It’s art that’s created by AI,or programmatically through a computer.You might have heard ofthe Ninth Circuit Case,Naruto versus Slater.That is the monkey selfie casewhere the courts recognize thatonly a human can create artthat has a copyright.In that particular case,there was a monkeythat got a hold of a photographer’scamera, took a selfie,and the photographertried exercise a copyrightin that particular piece of artwork.At the same time,PETA said that the monkeyowned the copyrightto that particular photo,and they intervened to try toexercise the monkey’s rightson its behalf.And the court found thatno one had a copyrightbecause only humans canhave a copyright in art.Only humans can createart that is copyrightable.So by extension,if a machine is deemed tobe the author of a work,no one can exercise a copyrightin that particular artwork.And in the context of NFTs,there’s untold numbers of worksthat are touted as beingcreated by computersthat’s deemed to be a feature, not a bug.And if that’s the case,I don’t think that there is acopyright there to begin with.No one can exercise any rightsassociated with that artworkbecause no human created it.Even with a very famousBored Ape Yacht Club,it seems to be just a rehashingof the same elements overand over and over again,which I believe were hashed by a computerrather than person.A person may have createdthe individual elementsonce upon a time,but the individual artworkswere created by a computer.Now there are some complicated issuesrelated to copyrights ofcompilations and works for hire,but there is an argumentthat some very, very expensive NFTssimply don’t have a copyright at all.Now in fairness toNFTs, in the real world,when you buy real art, youbuy a physical painting,it’s normal not to buy the copyrightassociated with that particular painting.When you buy a novel,you are not buying the copyrightassociated with that novel.So it’s not unusual in the art worldto not get the copyrightassociated with a work.And so, in some sense,it’s normal not to get a copyrightassociated with digital art.The issue here is that digital artdoesn’t have a physical token.If you aren’t gettingthe copyright associatedwith the digital art,you’re not really getting anythingthat is protectable under the law.But of course, in the real world,you actually have a physical thing.And that’s associatedwith a legal doctrinecalled the First Sale Doctrinethat when you buy a physical good,whether it is a paintingor a pair of Nike shoes,you can basically do whatever you wantto that physical good.You don’t have necessarilythe right to reproduceor otherwise use an imageof the thing that you have purchased,but you do have the rightto basically do whatever you wantwith the physical good itself,including selling it to somebody else.Physical works of art are almostinherently scarce as well.A painting can only bepainted by a human once.And NFTs are touted as solvingthe infinite reproducibilityproblem with digital works.Where legally speaking at least,no NFT can claim to haveProvidence over an artworkthat is itself legallyinfinitely reproducible.So when it comes todigital 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 subjectiveand there’s no objectivity in artand claiming that somethingis good art or bad artis inherently inchoate,but I mean, just look atthis stuff, this is bad art.And if you’re claiming that this artis inherently worth hundredsof thousands of dollars,apart from an any speculative value,I don’t think you’re good at art.So that takes us toconsumer protection issues.We’ve seen that there is a vast Gulfbetween what people think they are gettingand what they’re actuallygetting when it comes to NFTs.And these NFTs are widely promotedby a wide variety of different people,including the people thatare selling these thingsand people who are paid to promote them.And it doesn’t seemthat anyone really knowsexactly what they are receiving.Platforms like NBA Top Shots,who you can assume havelegions of lawyers,have actually changed a lotof the marketing languagethat they’ve used.Historically they usedlanguage like owning a moment,but that probably doesn’t line upwith the idea of getting anextremely limited IP licenseto view and display the reference work,almost exclusively onthe Top Shots platform.Now they use language like scoring in NFT,or collecting in NFT,which to me, is very, very differentthan the idea of owning a moment.And it almost goes withoutsaying, but I’ll say it anyway,you can’t own a moment,that is not a thingthat the law recognizesthat anyone can own.You might as well try and buya star in a far away galaxy,you can’t own that.And it seems like there is ahuge amount of misperceptionin terms of what peoplethink they’re gettingin terms of ownership.And of course the false promisesfrom the minters arecompounding that effect.And whenever you havefalse promises from sellersand misperceptions of buyers,you run into consumer protection issues.If I was a minter or a seller of NFTs,I’d make darn sure thatevery single personsaw the terms and conditions,so that there was no confusionas to what I was sellingand what they were buying,but that’s just simply nothappening in this industry.And while many people wouldprobably try and claimfirst amendment protection,the first amendment doesnot extend nearly as muchto buyers and sellers of goods.When you have commercialsales and commercial speech,the first amendment doesn’tprotect nearly as muchas you’d think it would.And as we discussed,many NFTs drop withoutany terms whatsoever.And for those that do have terms,it’s not at all clearthat those terms travelwith downstream purchasersof 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 theNFT isn’t even deliveringthe things that it wassupposed to deliver,if those terms exist?Often NFTs provide thedivision of royaltiesand revenue streams,but those often only work ifthe blockchain is working.You better hope that theblockchain doesn’t fork,that the programming worksand that it provides forevery single contingencythat you can think of,because those things break all the time.And there are all kinds of lawsthat make sure thatconsumers are protectedby contracts of adhesion.There is the ESIGN actthat governs whether a clickwrap agreement on a websiteis enforceable, both againstthe seller and to the buyer.These are effectively these same kinds of issuesthat any kind of eCommerce websiteis going to have to deal with.But effectively every singleindividual buyer and sellerof an NFT have to dealwith the same thing,and many people just aren’t.Making sure that contractterms are enforceableis a known issue that all websites,whether it’s Web 2.0 or Web 3,have to deal with.And you might try and puta contract on OpenSea,if that is the marketplacethat you are trying to sell your NFT,but right now there’s no guaranteethat anyone’s going to read it.And if no one’s readingthe contract terms,you’ve got big issues interms of enforceability,let alone privity.And the bottom line isthat you have to make surethat consumer are affirmatively consentingto the contract terms.And if you can’t prove thatthat might be your problem,but it also might be theproblem of the NFT purchasers.If they wanna make sure that third partiesare providing off-chain unlocked goods,well, you’d better have acontract that makes surethat they actually provide those things.And then there’s all kindsof securities related legal issues.NFTs are being market mostlyas art or collectibles,but at the same time,there is so much hypeand so much speculation,people tout them at as incredibleinvestment opportunities,premised on the ideathat they will always increase in value.At the moment it’s incredibly unclear,but it’s possible that theSecurities Exchange Commission,the SEC, could classifycertain NFTs as security.If they are classified as securities,this triggers all kindsof regulatory issueswith potential liabilities.And while it currently unclear,courts will use what’scalled the Howey Testto determine whether thesethings are securities or not.That stems from a Supreme Court case.Under this test,a transaction is deemed aninvestment contract if a person,”Invest his money in a common enterprise”and is led to expect profitssolely 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 Offeringsran a foul of the Howey Testand were regulated as securities.Effectively, people offeredcoins on a blockchain,related to some enterprise,for a thing that had notyet been and created.And as a result,you rarely see InitialCoin Offerings anymore,at least not from companiesthat are trying to abide by the law.Now, the argument against NFTs securitiesis that NFTs are finished products,not investment vehiclesthat need to be managed.If NFTs appreciate in value,it’s through principles like scarcityand just market forces,not because of a third party’s effortto enhance the NFTs value.And the SEC’s 2019 framework says,”Price appreciation”resulting solely fromexternal market forces,”such as general inflationarytrends or the economy,”impacting the supply anddemand of an underlying asset,”generally is not consideredprofit under Howey Test.”So an increase in value alonedoesn’t make something a security.However, some of the proposed uses of NFTsare a much closer calland would probably beconsidered securitiesif push came to shove.Things like royalty payments to artists,especially if the arthasn’t been created yet,would be a much closer call.And even apart fromsecurities related regulation,there seems to be all kindsof just garden variety fraud.The NFT markets are rifewith rug pulls and Rickrolls,people who are intentionallyscamming other peopleout of hundreds of thousands,if not millions of dollars.Not in the sense that NFTsin general are a scam,but literally thesethings are actual scamswhere they’re making false promises,knowing that they’re falseand then not providingon the thing that they promise to provide.I mean, that is justgood old fashioned fraud.But don’t take my word for it,I turn to the foremost expertin crypto related scams,Coffeezilla, to give mea recent salient example.- One example of whenan NFT project promisedand then didn’t deliveron what it said it would,was De’Aaron Fox’s project,called SwipaTheFox.De’Aaron is an NBA playerfor the Sacramento Kingsand he recently pulled in$1.5 million in NFT sales,in part due to a roadmapwhere he had promisedsome pretty extraordinary things,which would give these NFTssome real world utility.For example,one of the perks was gonna bea Metaverse basketball court,five scholarships, charitygiveaways, free merch,even tickets to All Star games.These all gave investors the impressionthat these NFTs mighthave real world valueand be worth buying.However, right after the money came in,De’Aaron Fox issued a statementsaying he was too busy with his NBA careerto make all that happen andwas quitting the project.No refunds, of course.Apparently he wasn’t toobusy to start the NFT,just too busy to deliveron what he promised.- Then of course, there’s allkinds market manipulations.Many of the high dollaramount transactionsrelated to very high ticket NFTs,are not conducted byarms length transactions.They might be wash sales,where an individual sellsan NFT to themselves,using a sock puppet,or there might be coordinationbetween two different peoplewho agree to pay a highprice for somethingto prop up the price.Because the blockchain is quasi anonymous,pseudo anonymous if youwant to get technical,it’s very easy for people tocreate sock puppet accounts,that they control,so that they can show a price historyof their NFT being soldfor lots and lots of money,so that some unsuspectingdownstream purchaser thinks,well, if that person paid this much,then I’ll pay even moreand I’ll be able to sell itto somebody else down theline for even more than that.Now, this to me raises gardenvariety issues of fraud.It’s just out and out fraudand market manipulation.It could even be a violationof the Sherman Antitrust Act.This is the kind of anti-competitivebehavior that the DOJ andFTC likes to crack down on.And often when you getinto price manipulationamong several different people,well, then you’re gettinginto criminal liabilityunder the Sherman Act.Maybe there’s an infinitesupply of greater foolswhen the prices keep going up,but as soon as any particular NFT crashesand a buyer realizes thatthere was price manipulationbefore they purchased their NFT,they might come lookingfor some heads to roll,and there might be some realcivil and criminal liabilityassociated with peoplewho were propping up the prices unfairly.And then there’s lots ofjust pump and dump schemes.People who maybe aren’tpromoting an out and out scam,but are looking to a quick buck.And there’s right nowa proposed class actionagainst people who promoted Ethereum Max,people like Kim Kardashian,Floyd Mayweather, Paul Pierce,they promoted this token ontheir social media chains,and right now there’s a class actionbecause it was clearlya pump and dump scheme.And the Ethereum Max lawsuitdoesn’t rely on federal securities law,it relies on pretty normalstate based causes of action,like unjust enrichment,violations of California’sUnfair Competition Lawand the California ConsumerLegal Remedies Act.I don’t know that we willever know for certainhow many NFTs are sold in wash sales,how many people are tryingto drive up the priceof these things,but anyone who ismanipulating the market here,really faces some trulyterrifying civil liabilityand maybe jail time.And those are just the on-chain problems,that takes us to the off-chain problemsassociated with NFTs.The first of which isyou need to make surethat if you’re selling an NFT,you have the rights to the reference work.Recently, an NFT minter called Hitpiece,purported to issue an NFTrelated to every songon Spotify’s database.So they would effectivelytake the album artworkand mint NFT related to theartist and name of the song.It seems like that raises somevery truly terrifying issuesin terms of Hitpiece notowning any of the rightsassociated with any of the songs, artists,or album artwork associated with the NFTsthat they claim to be making.Now, interestingly,there is a novel issue of copyright here.Since the NFT doesn’t containthe musical work itself,there’s an open questionwhether these NFTs violatethe 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 NFTrelated to a band and their song,using all of those namesand their album work,certainly violate the trademarkrelated to this particular band and songand probably a myriad of otherattribution related legal issues as well.Then there was anothermusic related NFT project,called Streamer.fm,that claimed thatbecause you could streammusic on Spotify and YouTube,they were somehow allowedto mint these NFTsand re-stream the music,which is not how any of this works at all.Fundamentally here,clearing the rights and makingsure you have the rightsto mint the NFT in the first place,goes back to old fashionedboring concepts of contractand copyright law.NFT and blockchain technology,not only doesn’t supplant or replacethose bedrock principles of law,they often run head long right into it.And when it comes to this Corpusof Law and brand new NFTs,NFTs are gonna lose.But there’s all kinds ofminting NFTs without permission.And often you have no way of knowingwhether the original minter had the rightsand the clearances to mint theNFTs that they are minting.Proponents of NFTs claimthat NFTs can prove digital provenancerelated to works of art,but the truth is often you have no ideaif the original minterhas any of the rightsassociated with thework in the first place.And there’s absolutely no way to know,except through conducting an investigationcompletely off-chain.This is actually one of the issuesassociated with the QuintinTarantino and Miramax case.In that case, QuentinTarantino, the director,was trying to min some NFTsrelated to film Pulp Fiction.And it’s a complete mirasto try and figure this outbecause Tarantino retains some rightsto the screenplay ofthe movie Pulp Fiction,but Miramax retainsalmost all of the rightsassociated with the movie itself.And it’s going to take a lot of litigationto figure out who owns what rightsand who has the right to make NFTsrelated to either thescreenplay or the movie itself.And good luck if you think the NFT itselfis going to prove the answerto either of those questions.And of course,there’s all kinds of good oldfashioned regulatory risk.A lot of people have explainedthat an NFT or a blockchainmight make perfect sensein the context of say real estate title,where having a publicdecentralized blockchainof who buys and sells housescould actually be much betterthan the current system ofa centralized title system.But good luck trying toconvince a state or municipalityto adopt that.And if your blockchainruns into something that’salready highly regulated,like real estate title,you can’t wave a magic wandand force the governmentto adopt your technical solution,even if your technicalsolution has some benefitsover the universally adopted system.One of the biggest issues is,as a downstream purchaser,how do you make sure that you can enforceall of the terms againstthe previous per purchasersand the original NFT minter?But the problem also goesthe other way as well.If those terms do travel down that chain,let’s say that you are aband or a YouTube creator,and as part of your NFT,you issue some sort of unlockable contentlike a meet and greet with a band,and based on the terms of sale,anyone who ever purchasesthat particular NFThas the right to enforce a meetand greet against the band.Well, as the seller,are you prepared to offer a meet and greetwith every single personwho ever purchases that NFT down the line?Because depending onthe terms of the sale,you might be obligated to provide that.Otherwise you might gethit with things like,breach of contract or fraud,depending on the value of the thingthat you have promised to provide.I was talking to a verylarge YouTube creatorwho wanted to create an NFT.I’m not going to name him,but I am going to wish him congratulationswhen he passes a hundredbillion subscribersin just a little while,and he wanted to offer a video conferencewith whoever purchasedthis NFT 24 hours a day,365 days out of the year.And I suggested to him thatmaybe that wasn’t a good idea,unless he liked being wokenup in the middle of the nightand being forced toprovide a video conferencewith every single personwho purchased his NFT.And lo and behold, hedidn’t go through with it,and I think that was a smart thing.I’ve seen lots of people claimthat there is absolutely no downsideto creators creating their own NFTs.On the contrary, there’s allkinds of potential pitfallsif you not smart about these things.Then there’s things likeproduct liabilities,NFTs break all the time.Who’s responsible ifthe link between the NFTand the reference material breaks?Who’s responsible if the blockchain forksand your revenue stream is then cut off?These are bedrock ideasof 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 aninvestigation off the blockchainto know if the thingthat’s on the blockchainis actually working or not.There’s been a lot oftalk about minting NFTsrelated to real world goods,creating an NFT related to a houseto track who buys and sells the house,creating NFT related to a car,related to the car itself.But what happens when somethinghappens in the real worldthat isn’t reflected on the blockchain?What happens if the house burns down?What happens if the car gets stolen?Rectifying real world eventswith things on the blockchainis no easy task and isinherently off-chain.And there are otherunintended consequencesalong with this as well.For example, Alfa Romeo just saidthat they’re going to are offering NFTsrelated to their cars.And when you take your Alfa Romeo carinto being serviced with Alfa Romeo,there will be a history on the blockchainthat shows that your car was servicedat such and such a timein such and such a wayand that follows with the car.But one of the problemsis what happens if you take your carto a non-authorized dealer,that information won’t make itonto the Alfa Romeo blockchain.It’s one way that AlfaRomeo might force youto use their walled garden.It’d be like DRM for a car,you’d never be able to take your carto any other service place.Now, I am not a computer programmer,these might be technical problemsthat will be fixed over time.Already we’re seeingintermediaries like OpenSea,interpret the data on blockchainand solve some of the issueswhen it comes to falsely minted NFTs.But if that’s the caseand we need these intermediariesthat are off-chain,it raises the questionWhy would we want Web 3?In fact, we can do allof this stuff legallyusing traditional websites andtraditional legal mechanisms.Often the Web 3 part of itjust makes things worse.Which takes us to the thirdcategory of problems with NFTs,which I’ve called innovation so mundanethat no one should care.And the issue hereis that there are probablyplenty of marginal benefitsthat NFTs bring to the tablefor a wide variety of industries,they’re just not huge winsthat are going to create anenormous amount of wealthfor the people with vested interests.It’s pretty clear thatcollectible JPEGs are pretty dumband that this is a speculative bubblewith untold numbers of nonarm length transactions,wash sales and sock puppets.It’s pretty clear at this pointthat at least thisfirst generation of NFTsare creating a speculative bubblethat is probably going toburst pretty violently.Collectible JPEGsand other collectibledigital pieces of artwork,it’s probably not going to last.It’s pretty dumband I think people willprobably get bored with it.It’s also filled with all kindsof non arm length transactions,wash sales and sock puppetsthat are propping up the pricesand just waiting for anotherperson to come aroundand buy the thing that probablyisn’t worth the sales price.But that being said,there are probably lots of other usesthat are more promising,fractionalized revenue streams,access to unique membershipstyle opportunities,proving certain kinds ofProvidence and raising equity.But the thing is thoseuses of NFTs are genuine,but they’re really justmarginal improvementson current technology,if they are indeed improvements at all.And NFT acolytes are claimingNFTs are a grand slam,but it’s probably probably morelike a simple walk on single.These improvements intechnology are probably useful,but they’re also extremely mundane.The technology at use hereprobably will form someof the unseen backboneof certain transactions,but it just simply won’tbe get rich quick schemes.It seems likely that the huge marketfor NFTs as collectibles willprobably crash at some point.And when the bubble around JPEGs dies out,what will be left is probably a technologythat makes marginal improvements.It’s going to create a few millionaires,maybe even billionaireswho find novel and practicaluses for this technology,but it’s not going to createovernight millionairesfor everyone that wants to mintsome low value NFT going forward.And the reason that thatis a problem for NFTs,is that there are many, many peoplewho have staked their entire reputations,as well as their entire finances,on the proposition that NFTs have createda completely new industryand that it can create overnightmillionaires in anyone.And when people realizethat that’s not the case,well, the entire industrymay evaporate a overnight,faster than Beanie Babies.Now, of course,NFTs are heralded as thisrevolution in creator economics,as a way for artists to actuallypaid what they’re worth,but people don’t realizethat there’s real liabilityand that NFTs could beincredibly dangerousif not outright terrible for creators.I go into great detail basedon my experience as a lawyer,but also my experienceas a creator myself.Let’s just say,there’s a reason I haven’tminted any NFTs myself.Now, what if I told youthat you could watchanother LegalEagle video,but this time it’s on whyNFTs could be dangerousand bad for creators.Well, this full lengthcompanion video does existand it is exclusively on Nebula.Because sadly, if I put it on YouTube,it would probably get demonetizedand 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 ofexclusive ad free content,like my first full lengthdocumentary, Bad Law Words Good,a long form interview with Mark Rober,exclusive videos on legal rightsyou should definitely use,and anti-SLAPP laws in KyleRittenhouse, plus tons more.And all of this exclusivecontent is only on Nebula,which you can get for freewith Curiosity Stream.Of course, the reason why all these videosare only available on Nebula,is because they just wouldn’twork here on YouTube.They’d never be viewedbecause of the way that the site works.But on the other hand,Nebula is a differentplatform with no algorithmand without any ads,because Nebula is a place wherecan experiment with content,put things on there thatwe couldn’t put on YouTube.Nebula is a platform forgreat and unique contentmade by independent educational 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