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

One of the unique features of Non-fungible tokens (NFTs) is their ability to distribute royalties to their creators from resales in the future. When the artist Beeple, for example, sold his art through an NFT for $69.3 million this year, a royalty was baked into the transaction so that the artist will receive a 10% cut from future sales. So how do these royalty structures work, how are they being customized, and what, if any, are the legal limitations of such "smart contracts."

Pratin Vallabhaneni and Adam Chernichaw, partners at White & Case, explain how the royalty feature works, the potential legal issues surrounding resale royalty rights, and the regulatory considerations for NFTs.

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TRANSCRIPT

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 uh 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 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... [Abridged due to YouTube limits]

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