What is a non-fungible token (NFT)?

Bellas & Wachowski, Chicago Business Lawyers

NFTs as a Business Asset

Simply put, NFT’s (or “tokens”) are digital assets. Various examples include movies, drawings, music, and digital artwork.

By their very definition, NFT’s are non-fungible, meaning that they cannot be traded for something else.  For example, Da Vinci’s original Mona Lisa is non-fungible; only one original version exists, and there will only ever be one.  Contrarily, U.S. dollars are fungible—trade one dollar for another dollar and you end up with the same thing.

To establish a token’s uniqueness NFT’s are “minted” which means they are entered into a digital ledger of transactions known as blockchain.  Once an NFT is minted, it becomes impossible to modify or delete it.  Importantly, individual consumers’ rights to minted tokens are forever memorialized via smart contracts. A smart contract is a computer code built into the blockchain to facilitate, verify, or negotiate a contract agreement.  This is the crux of NFT’s: once a sale occurs, the ownership rights become undisputable.  Each NFT may feature a smart contract to define the rights of parties involved, including the right to use, distribute, or reproduce the underlying digital asset.

Undeniably, NFT’s are becoming a part of mainstream business — perhaps even more rapidly than the rate at which people choose to pause and attempt to understand them.  Artists may expand the breadth of their following by minting their work as an NFT and posting it online.  Businesses such as Nike are beginning to use NFT’s to link consumers with their product.  Nike recently patented its idea for Crypto Kicks, a platform where consumers could purchase a genuine pair of shoes.  Once a person buys the shoes, a digital representation of the pair is generated via NFT, thus linking the shoes to the consumer.  Furthermore, the new animated show, Stoner Cats, also utilizes NFT’s in a functional way.  The show stars Mila Kunis, Chris Rock, and Jane Fonda.  It uses NFT’s as a ticket system where users could buy tokens to unlock and watch episodes in addition to receiving other perks. 

Why do NFT’s Matter?

The recent proliferation of NFT’s presents business with fresh opportunities for growth not seen since the genesis of the internet age. Such opportunities are not limited to the technologically elite—mom-and-pop business owners can expand family-owned businesses through NFT’s, too.  Brick and mortar art galleries no longer need to rely on their physical location to build a community around their art.  Now, they may establish a digital marketplace to showcase their art.  Moreover, local hardware stores specializing in sales of paint and construction supplies could issue NFT’s to their loyal customers.  This would give local shops a way of providing a discount rewards program to compete the big corporate hardware stores.  The bottom line is that business owners may offer NFT’s in various ways to establish a community among consumers. 

For those just beginning to learn about NFT’s, the novelty of the whole concept could be intimidating. Nevertheless, fear of the unknown is never a good excuse to turn one’s back on innovation. One thing is for certain: business owners require competent legal advice to navigate the challenges of establishing an NFT marketplace. 

The Three Keys to Creating NFT’s

  1. Start a Business

If you already own a business, you have completed the first step necessary toward creating an NFT marketplace. The experienced attorneys at Bellas & Wachowski are highly skilled at forming corporate entities offering the strongest form of liability protection that allow business owners to shield assets from business obligations. 

2. Create Terms of Service (TOS)

Bellas & Wachowski excels at protecting your company from liability. One way to do this is by forming “terms of service.” TOS serve as a legal contract between a business and its customers.  A strong TOS requires provisions disclaiming warranties toward users, limiting the business’s overall liability, and establishing an indemnification framework to cover any potential contingencies.  While NFT’s have only recently become popular, the team at Bellas & Wachowski is skilled at putting the necessary protections in place no matter the situation.

3. Prioritize Integrity to Grow Your Brand

A successful business requires strong values. Building a community is not possible without trust. At Bellas & Wachowski, we understand that trust is earned through doing things the right way. This requires strong protections for consumers with respect to their privacy rights. Legally your business is required to disclose data collection practices—transparency is the name of the game, but it’s not just all about fulfilling legal requirements. Well-written privacy policies signal that your business operates at a certain level of maturity, sophistication, and a commitment to putting customers first. 

Growth through NFTs

While NFT’s have only recently become popular, forward-thinking business owners understand that NFT’s unlock growth via marketing and innovation. Through many years advising small businesses, Bellas & Wachowski’s seasoned team understands how to manage legal liability in dynamic situations. More importantly, we understand that a business’s reputation is everything. For those who want to set up an NFT marketplace and build a community, we are here to help.  As with anything new, the possibilities are only limited by one’s imagination.