The last couple of years have witnessed a revolution in the online world, thanks to Non-Fungible Tokens (NFTs). From art to music, collectibles of gaming to even tweets, NFTs have completely shifted our outlook towards ownership and value on the internet. But despite all that is exciting about these NFTs, they do raise some real legal and ethical issues that everyone—creators, buyers, sellers, and platforms—ought to know.
In this article, we shall explore the underlying legal principles and ethical questions concerning NFT marketplaces in a straightforward and informative way.
Learn more about: NFTs Explained: Everything You Need to Know About the Digital Asset Revolution
What are NFTs and NFT Marketplaces?
Before we move to the legal aspect, it is important to understand what NFTs and marketplaces are:
NFTs or Non-Fungible Tokens are virtual assets that maintain the ownership of individual items or units of content. They are kept on blockchain platforms like Ethereum. Unlike cryptocurrencies like Bitcoin that are unique and interchangeable one-for-one, every NFT is unique and can't be exchanged in the same manner.
NFT Marketplaces are websites where NFTs may be created, purchased, sold, or exchanged. OpenSea, Rarible, SuperRare, and Foundation are a few examples of marketplaces. Marketplaces offer creators NFT minting tools and a way to exchange them, and they take a percentage as a fee.
Marketplaces are the middleman between creators and collectors, but they do have obligations when it comes to being legal and ethical in use of the platform.
Are NFTs Legal?
NFTs are not illegal in most countries, yet their legality is questionable or unclear. Various nations have varying views of NFTs. Lawful in one nation may be forbidden or even prohibited in another nation.
Some of the most important aspects of the law are:
1. Copyright and Ownership
When a person buys an NFT, they technically own the token—the unique digital certificate on the blockchain. But that doesn't always make them the owners of intellectual property rights (IPR) to the digital content linked with the NFT.
Creators will usually retain copyright unless they explicitly transfer it.
Buyers are usually given limited rights, i.e., viewing or reselling the NFT.
This is confusing. For instance, a consumer may buy an NFT art piece and think that he can print it on T-shirts or put it on a product for commercial sale. If he doesn't have a copyright license, this could result in legal action.
Authors must indicate clearly what rights they are selling, and consumers need to read the agreement before purchase.
2. Intellectual Property Theft
The NFT community has seen an increase in instances of a person duplicating the work of another and selling it as his or her own NFT.
Artists saw their work tokenized without consent.
Collections have been copied and sold as originals.
This is a serious problem, and while illegal under conventional copyright law, is hard to police in a decentralized and international world.
Marketplaces are also adding reporting capabilities and artist authentication features. Others are employing AI to search for content replication or plagiarized pieces.
For the consumer, one must check the authenticity of the artist and confirm any watermark or signature that assures originality.
3. Money Laundering Risks
NFTs can be utilized to conceal the source of illegally derived funds. The crooks will employ NFTs in a fraud called "wash trading," where they trade the same asset between themselves numerous times to create the pretense of increased value.
This generates an illusion of real profit.
NFTs represent a less regulated and more anonymous method of transferring money internationally.
Regulators are worried. A few nations are making it mandatory for NFT platforms to have AML and KYC policies in place to authenticate users' identities and report suspicious activity.
4. Securities Law and Regulation
Occasionally, NFTs may be "securities" under financial law. It will depend on the purpose and nature of the NFT:
If an NFT is a stake in a business, to own dividends, or is attached to future earnings, it could be within the scope of securities regulations.
The Howey Test is used within the United States to ascertain if something qualifies as a security.
If a token is determined to be a security, the platform or the issuer might need to register with financial regulators and make large disclosures to investors.
This applies particularly to fractionalized NFTs or investment strategies for NFTs, which divide an expensive NFT into tradeable smaller units.
5. Taxes on NFTs
NFTs are taxable, and withholding taxes can create legal issues.
Income received from NFT sales is reportable by sellers.
Capital gains tax can be payable from buyers if they sell NFTs at a profit.
Even artists are required to pay taxes on primary sales.
Tax legislations vary country by country. For instance:
NFTs in the United States are taxed and treated as property.
In India, NFT earnings could be subject to the 30% crypto tax regime.
Every transaction needs to be recorded and a tax expert sought out.
Learn more about: NFTs Explained: Everything You Need to Know About the Digital Asset Revolution
Moral Problems in NFT Marketplaces
Other than problems in the law, NFTs also have some ethical problems. These are equally necessary in developing a just and trustworthy system.
1. Environmental Impact
NFTs on proof-of-work blockchains such as Ethereum (prior to when it upgraded) consumed huge amounts of power. It was condemned for its role in global warming.
A single NFT transaction might consume the same amount of energy as a home would in seven days.
The carbon prints of such bestseller NFT drops were gigantic.
Ethereum transitioned to a proof-of-stake network, and that decreases energy consumption by more than 99%. Tezos, Flow, and Solana are some other environmentally friendly chains.
Producers and consumers can choose to support platforms that utilize more environmentally friendly blockchain alternatives.
2. Scams and Counterfeit Listings
There are several scams that involve NFT users:
Impersonating websites that look just like legitimate marketplaces.
Wallet access being stolen through links.
Projects offering utilities or rewards that are lost after the sale is completed (also called "rug pulls").
The users can:
Double check URLs every time.
Utilize verified platforms and wallets.
Don't click on dubious links.
The marketplaces can assist by flagging and removing suspicious listings, educating consumers, and enforcing stricter project vetting.
3. Market Manipulation
Wash trading is not only potentially illegal but unethical in that it deceives buyers.
Misinformed users are drawn by prices pumped.
Influencers at times promote useless projects for narcissistic reasons.
Ethical marketplaces ought to prohibit wash trading, label known flippers, and reveal seller-buyer identities where feasible.
4. Cultural Appropriation and Digital Colonization
Some NFT creators have tokenized Indigenous art, religious symbols, and sacred objects without permission from the community. That is digital colonization.
That kind of activity can be disrespectful and painful. Ethical creation involves:
Obtaining permission prior to use of cultural material.
Sharing revenues with involved communities.
Regulation on awareness, education, and platforms can cap these issues.
5. Accessibility and Inclusivity
NFT space is geeks or the rich, essentially. This is an exclusivity issue.
High gas fees make it impossible for small creators to enter.
Applications tend to be English-only.
There is minimal or no artist support in remote or rural regions.
Ethical solutions are:
Providing multi-language platforms.
Making low-cost minting possible.
Launching education programs in underrepresented areas.
How Are NFT Platforms Responding?
Certain NFT marketplaces are actively moving in the direction of encouraging trust and security. Key steps include:
Artist verification and blue-tick tags.
Clear fees and royalty practices.
Dispute resolution mechanisms.
Carbon offsetting partnerships.
Scammer blacklists and more rigorous minting procedures.
As the industry grows, these steps must become tougher and more prevalent.
Conclusion: Legal and Ethical Awareness Is Key
NFTs are transforming digital ownership and creativity, but their legal and ethical challenges can't be avoided.
Knowing copyright, safeguarding creators, minimizing environmental impact, and preventing fraud are all building blocks to a responsible NFT environment.
As a creator, collector, or platform, being in the know and doing the right thing isn't only best practice—it's the basis for a healthy digital future.