Embracing evolving technologies: Offering NFTs as legal advice
Will Foulkes explains Stephenson Law’s unique concept of offering legal advice as a non-fungible token
In November 2021, to show they could not only advise on the legal considerations associated with these complex and rapidly evolving technologies, but that they could also create their own Non-Fungible Tokens (NFT), Stephenson Law became the first law firm in the world to launch three one-of-a-kind NFTs.
This trio of NFTs comprised of a piece of digital art, linked to by an NFT that represented one hour of legal advice, making the most of the multifaceted capacities of blockchain technology.
Purchasing one of the NFTs afforded the buyer the right to redeem their NFT against one hour of legal advice on the subjects of financial services regulation, blockchain and NFTs, along with strategy, compliance, governance and the documentation necessary to harness such a new and evolving technology.
With many heralding – and in equal measure – questioning the purpose of the NFTs, the launch drew attention to some of the possibilities linked to blockchain and the hesitancy of some industries to embrace the technology.
A first for the UK legal industry, this trio of NFTs was a brave move forward for the industry, and echoes Stephenson Law’s expertise and passion for blockchain and its associated technologies. Having guided countless clients through the world of NFTs, the trio is not just a sign of their expertise – but acts as a move of solidarity with their clients in this space.
So, what are NFTs and why is everyone talking about them now?
General explanation of NFTs
An NFT is a unique, cryptographically secure token stored on a distributed ledger, or blockchain. Conceptually, you can think about an NFT as like a treasure map of an island, with a red cross pointing to a location. If you were to go to that location and dig, you would find some treasure, perhaps a piece of art. In reality the treasure map is the unique digital token that contains a link to a digital file storage location.
Typically, an image is stored in that location. The fact the link is coded into the token that is timestamped when it is stored immutably (forever) on a community verified database, is used as proof the owner of the token has some unique rights over what is stored in the database location. Exactly what those rights are, if any, (owning the treasure map doesn’t necessarily mean you own the treasure) has been the subject of much debate – and, of course, law suits – where there is contention.
Rights in NFTs
The implications of being able to prove you have a unique connection or rights to something digital are still being explored. While current use cases are basic and typically involve algorithmically generated art (see the Bored Apes Yacht Club, or Cryptopunks as examples), many more powerful use cases are emerging.
Being able to create something unique in the digital world and potentially prove ownership in a way that is accepted by all without the need for a central intermediary to approve or validate it is a big leap forward for how people will interact and how value will be exchanged, remotely.
We are currently in the second generation of the internet. The first was resplendent with dial up modems, occasional emails and single page websites. The current second generation has seen the dawn of social media, streaming video sites and online marketplaces. The issue that persists across platforms is that of siloed ownership and value generated by users and community participants remaining with the corporate platform owners (e.g., Instagram, Facebook et al).
An analogous comparison of Web 2.0 to the real world would be to imagine you are unable to own anything in the real world. If you wanted to travel, you would arrive without clothes at a hotel and you would need to buy clothes and toiletries from the hotel. If you improved the clothes while you were in there because you are good at needlework, that is fine, but when you leave the hotel, you are required to return the clothes and begin the darning process again for every hotel you visit. These hotels are representative of social media platforms, where content that is created or uploaded becomes theirs to exploit in exchange for some little red hearts.
With the next generation of the internet (or Web 3.0) that is community rather than corporation owned, you can make your own clothes and take them wherever you like from hotel to hotel. Then if you want to sell them, you can, and this time it is you that gets all of the proceeds, not the hotel.
This is where NFTs as a form of multi-platform representation of ownership will start to come into their own. Providing the opportunity for reputation and digital wares linked to an ‘avatar’ (3D figure representing you in a Web 3.0 world) to be accumulated and then moved from one platform to another. As well as the possibility of the creation of digital items that can be built in one metaverse and then sold in another.
They represent a significant shift in value creation and control, which is why large companies such as Facebook have rebranded as a metaverse and are keen not to miss out on the action.
What the legal profession should know
The issues linked to the current generation of NFTs and digital art are widely reported and include problems such as files disappearing, theft, confusion over licensing and ownership rights and more. Although the issues are too numerous to explore fully in this article, a straightforward example is licensing rights. The vast majority of NFT art sales you will see do not contain any terms and conditions about exactly what the buyer’s rights of exploitation are after purchase.
There is a brief, community-accepted licence that can be found at NFTlicense.org, that states the owner has the right to commercialise the image up to a value of $100,000 after which he needs to account to the creator. But this is very loose and open to interpretation.
Where we are involved in an NFT project, we create specific licensing terms that are linked to the NFT in the token smart contract (the treasure map). We also make sure they are drawn to the attention of the purchaser ahead of sale, and that they are aware of the risks associated with the early-stage nature of the technology.
Another key consideration is the multi-jurisdictional regulatory treatment of the NFT that will be determined by reviewing its attributes (for example, if it grants ownership or voting rights in a company, if it is representative of a debt or if it is just a digital collectible) and the way in which it is marketed to buyers.
Where a piece of digital art that looks like a collectible is sold to buyers as likely to appreciate in value, there could be issues with the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 in the UK. Where there is an element of gamification with real world rewards on offer, gambling regulations could apply. Because of the fluid nature of the space, we always advise anyone who is thinking about getting involved to take expert legal advice before launching a token or NFT project of their own.
Another key issue that is often discussed is the environmental impact of the technology. Because of the way some distributed ledgers are secured (those referred to as proof of work), a lot of energy is consumed when transactions are validated and added to the network.
Because of this, people who use proof of work blockchains for their NFT projects have been criticised for what is perceived to be a frivolous waste of energy during a climate crisis. To address this, we chose to ‘mint’ (create) our NFTs on a low energy chain called Polygon that works in a different way and uses little energy.
Will Foulkes is associate director and head of blockchain at Stephenson Law stephenson.law