How Do NFT Royalties Work? We Ask Two Blockchain Lawyers... - YouTube

Non-fungible tokens or NFTs can range  from digital art to famous tweets  

to video clips of sports highlights and they can  sell for thousands or even millions of dollars  

but today we'll talk about an unusual feature  of NFTs which is their ability to pay royalties  

royalties not just on the original sale but  on secondary sales resales that may happen  

in the distant future hello and welcome to talks  on law i'm Joel Cohen today we're talking about  

NFT royalties and we're joined remotely by  two blockchain attorneys Adam Chernichaw  

and Prat Vallabhaneni of the law firm white and  case welcome to talks on law thanks joel great  

thanks joel thanks for having us so when we get  to the royalty uh functionality of NFTs first off  

did i describe it right in the introduction how  does it actually work so the way the royalties  

work in the context of NFTs is that when an  artist or a person who's creating the NFT  

initially sets it up they could build into the  code by way of something called a smart contract  

a method of pushing a portion of the resale  proceeds back to the original creator  

and it's called a smart contract but it's not  really a contract so to speak the question is  

still out as to the bindingness of that contract  it is just code that is executable upon the  

occurrence of an event that causes something  else to happen in this case the uh transfer of  

proceeds or portion of the proceeds from the  resale of the NFT on a particular marketplace  

you mentioned that the the royalty is kind of  written into the blockchain you know Prat are they  

how customizable are they can i write into the  contract that i don't want the royalty to continue  

can i write that i want it to continue for for  20 years or just for the life of the artist etc  

your creativity and the the native technology of  the blockchain are really your only limitations  

as a practical matter though what we've seen  with with early iterations of platforms with  

our clients is that they've tried to create  the most palatable market friendly construct  

and this idea of a perpetual royalty has gotten  a lot of traction and inspired the interest in  

creating NFTs i suspect over time and what we're  actually seeing from clients is more finite terms  

limitations on the life of of the products  and whether that's one year 20 years perpetual  

all of these issues will be customizable they will  probably be platform dependent and as i think we  

see a maturation of the different assets that are  grafted on to the NFTs or tethered to the NFTs  

will probably have different terms that are more  appropriate for different types of NFT so whether  

that's natively digital art or a package of  concert tickets that you can use that are linked  

to the NFT the royalties kick in with each resale  if it's structured that way in the smart contract  

but is there a way for someone to then sell the  item the NFT outside of the original platform  

yeah that that all depends on what the terms  of the platform are if there is transferability  

off platform and we're seeing more of that and  there is technological capability to move from  

the platform's architecture to an off-platform  wallet and then one can then in turn transfer  

from wallet to wallet there absolutely from a  technological perspective is that possibility  

whether commercially the terms allow for that is  totally within the scope of the terms and i think  

users need to be really careful in understanding  what it is they're actually agreeing to  

maybe this is a good time to touch  on u.s law in u.s property law and  

and perhaps more importantly an ip law there  isn't necessarily a concept of perpetual royalty  

it's you know once an item is sold then the rights  to that item no longer reside with the creator  

so if there is a dispute how does U.S.  law help or what role would U.S. law play  

i would just say that NFTs as a property concept  can be decomposed into a few different pieces  

there's the underlying reference asset it may  be natively digital or it may not be it may be  

transferred from a physical medium into a digital  form like a photo that is digitally rendered but  

not originally created digitally there's the  actual property aspects of the NFT as a token or  

coin itself and then there is the user interface  and all of the other ancillary information  

documents contracts that may exist and reside  on a platform and it's important to keep in mind  

the separate and unique nature of each of these  different aspects but also how they come together  

as a bundled product the underlying reference  asset may have an independent legal existence of  

its own it has its own property rights and it has  its own maybe statutory framework for royalties  

but the token itself exists within a blockchain  architecture it is property it can be bought and  

sold but how it's tethered to the underlying  reference asset via the other commercial  

agreements maybe that come from the platform where  they're bilaterally negotiated between parties  

all stitched together these different pieces  and so it's important to remember that smart  

contracts as they often say are neither smart nor  contracts and we are still reliant upon real world  

agreements and contracts to put all these pieces  together if you're the consumer you need to read  

the terms of service to be clear on what you're  actually getting when you purchase or ostensibly  

purchase what you're with the NFT and when you're  the creator you need to read the terms of service  

to make sure you're comfortable with what  you're actually giving away to the platform  

so before we let you go we've seen that  fungible tokens like crypto bitcoin etc  

have been subject to increased regulatory scrutiny  how do non-fungible tokens fit into that landscape  

so there are a lot of different regulatory  perspectives that we could bring to the discussion  

it could be securities law it could be payments  law anti-money laundering concerns in addition  

to all of the commercial and enforceability items  we've talked about at least you know a positive  

note is that unlike truly fungible tokens  non-fungible tokens can truly be used from  

use case perspectives as collectibles and there is  a long tradition of collectibles not necessarily  

being considered securities but the devil's  always in the details it's really important  

to look at whether the overall construct of the  platform itself creating the tokens is a security  

and increasingly regulators are looking at whether  movement of tokens especially of high dollar value  

underlying artworks are subject  to anti-money laundering concerns  

one of the important points to keep in mind  is a lot of these regulations don't just apply  

to the tokens themselves but they apply to the  ecosystem players so if one is hosting a wallet  

as a service and taking custody of tokens or  transferring these tokens as items of value on  

behalf of clients or generally offering a consumer  product that is regulated by the CFPB or maybe the  

FTC there are a lot of ancillary state federal  regulations and laws that one should be concerned  

with so we really take an ecosystem approach here  we look at what one is doing how they're doing it  

and you know infer what the law can be  from that but it's definitely a rich  

landscape of potential loss that could  apply to these products and platforms  

Prat Vallabhaneni, Adam Chernichaw thank you for  your time today. Thank you Joel. Thanks Joel.