by Pavin Kang and Chiara Portner
After reading our last article, you may have laughed, gasped, or even been curious about the future of NFTs.
Alternatively, you may have asked, well, how exactly will this (in startup terms) disrupt anything in my life? We've had “hotel” companies without real estate with Airbnb and “taxi” companies without cars with Uber, but what exactly will a gif of a bored primate do for me?
Well, NFT creators and startups have already began to answer that question by diving headfirst into video games. Unfortunately, this same group is often rushing into their next brilliant idea without a proper legal roadmap, only to find themselves and their users in a whole mess of trouble (or a lawsuit).
NFT
In the holiday season of 2021, we’ve seen a few different ways in which NFTs and blockchain technologies have infiltrated the video game market. First, there are several examples of NFTs being used as cosmetic "add-ons" within existing games, commonly referred to as "skins" or "drops." For example, Ubisoft launched its hotly debated Quartz NFT, which lets players own their in-game cosmetic items in the form of NFTs with a license to the underlying artwork.
Alternatively, some video game producers have fully adopted the block chain and used it as a platform for their games. These blockchain games let users earn coins as they play and use them for in-game purchase and in some instances, even convert it to the U.S. Dollar. For example, Sandbox has been making headlines about the sale of "land" in its video game. With names such as Snoop Dogg, Deadmau5, Justin Timberlake, Katy Perry, Adidas, the Smurfs, Atari, and the Walking Dead also joining the dog pile, we're seeing that investors and a wide range of industries beginning to take this subset of the blockchain very seriously. Nothing screams buy-in like spending $4.3 million dollars to purchase "virtual land."
The Fine Print (that you're probably not reading)
One of the most important parts of crypto is exerting ownership. When you accidentally make hundreds of thousands of dollars on a doodle of zombie that you forgot you purchased, you will eventually realize that you don’t actually own that artwork or you realize that the company holding said doodle is not allowing you to take full advantage of it.
Unfortunately, it is not atypical for an individual to not fully understand or even read the Terms of Use (TOU) for crypto websites.
For example, CryptoKitties, a blockchain game where players purchase and collect virtual cats, takes a hands-off approach to their user's NFT Kitties. In their TOU, CryptoKitties states that "[w]hen you purchase a CryptoKitty, you own the underlying NFT completely. This means that you have the right to trade your NFT, sell it, or give it away." However, while you may own the crypto asset under your CryptoKitty, CryptoKitty does put several restrictions over the "art" that is associated with your cryptoasset. Simply put, Crypto might let you do what you want with the underlying crypto code, but that adorable visual of the bengal crypto kitten that you made is actually restricted. To highlight a few restrictions, (1) you don’t own the kitten artwork, but CryptoKitties is merely licensing it to you, (2) you are limited to how much you can make off of your art, and (3) CryptoKitties is allowed to make additional restrictions in many different circumstances.
The Fine Print (that you should definitely be reading and including in your own TOU)
As a founder or experienced business person, you should consult with your legal counsel to prepare and carefully review your TOU to make sure that you are properly describing the boundaries of NFT ownership of or missing, often overlooked, but important standard provisions. In offering any NFT, you should include language about ownership and licenses, terms about purchasing and selling the NFTs, and required language and notices from governing agencies with scary acronyms such as the SEC, FTC, or IRS.
Notably, some NFT companies decide to keep their terms exceedingly sparse on standard clauses like Bored Ape Yacht Club. With the news release of BAYC’s NFT video game, it will be interesting to see if they change this approach for something more built out. Regardless, you should seriously consider including standard clauses that cover you and your company outside the crypto angle. For example, the TOU need to have restrictions for users as to the content that they place on your platform, or information on how to contact you or provide you legally required notices about user issues.
You’re excited about Blockchain but don’t know what to do?
With emerging companies working around the clock to push out a product, it is often difficult to pause and consider the legal ramifications and safeguards before launch day. In its simplest form, the TOU and other legal documents are often seen as a burdensome requirement for founders in these crucial finals days. However, you should take time to discuss and resolve these issues long before the launch of your next great blockchain invention, NFT series, or even cryptocurrency.
If you have any questions about these safeguards and your legal obligations in relation to NFTs and/or TOU, please do not hesitate to contact our cryptocurrency experts at Hopkins & Carley.