November 24, 2021

NFTs: Legal Checklist for Building an NFT Marketplace

Non-fungible tokens, or NFTs, are the latest craze to sweep the crypto world.  This Foley blog provides a legal checklist for parties who may be interested in creating a platform for monetizing artworks or other items through nonfungible tokens. Here’s an excerpt with some of the specific items that entrepreneurs need to keep in mind:

Formation: You’ll need to form a corporate entity before launching a marketplace. This will offer your business the most substantial liability protection, greater ability and credibility when seeking financing from external sources.

Conduct Code: Most NFTs, given the predominance of user-generated content and transactions in NFT marketplaces, include an extra layer of legal restrictions in the form of codes of conduct to govern interactions on the platform.

Smart Contracts: The unique digital creation must be independently identifiable, with ownership transferable within the smart contract. Creators should design-in the economics of trading: How much for a primary sale, how much for secondary sales, royalties, transaction costs and other features of the aftermarket to enable trading, with funds flowing to the appropriate parties by design.

Platform Terms of Service: NFT marketplaces must have essential documents such as Terms of Service, which govern the relationship between the NFT marketplace operator and customers, and between the buyers and sellers of the NFTs featured on the platform. A well-thought-out terms of service agreement can help protect your organization from various legal issues and generally have provisions limiting the company’s overall liability.

There are lots more where these came from, but I’ve got to admit, I’m still scratching my head about NFTs. After all, what’s the long-term investment value of “ownership” of a piece of digital art that a prankster can grab simply by right clicking?

John Jenkins