Why NFT Valuation Represents an Insurable Asset
WHY NFT VALUATION REPRESENTS AN INSURABLE ASSET
By David Gauntlett*
The Rise of The “NFT” Market Has Led to Novel Challenges in Many Fields.
Insurers may well find themselves embroiled in policyholder quests to secure defense fee reimbursement arising out of lawsuits contesting rights to NFTs and infringing uses of asserting NFT rights.[1]
As a form of digital asset, an NFT is a more untraditional form of property that can be traced through a digital ledger called a blockchain.[2] Unlike a painting or other form of personal property, NFTs are tangible property with intangible valuations.[3] They cannot be broken, destroyed, or otherwise encounter a diminution in value in a conspicuous way.
Protection for NFT as a Form of “Intangible Property”
Insurance policies are ill-equipped to track a potential loss in an NFT due to an attack upon its legal viability as an intangible property asset. An NFT is distinct from the underlying asset over which it certifies ownership. The value of an NFT is derived from its role as an identifier, even though it may not have any value inherent in itself. NFTs are unlikely to generate any more than the minimal value under a standard “property policy” much like the intrinsic value of a bitcoin which is simply a metal coin with little intrinsic metallic value.
An NFT does not only indicate ownership over a digital asset. NFTs play a dual role in that they also distinguish art as authentic.[4] Physical art has long been authenticated by experts in their fields while digital art was significantly more difficult prior to the introduction of the NFT. The innovative approach insurers will have to take may include the authentication aspect of an NFT and may expand and spread to additional forms.
NFTs Track Value to an Original Source Identifier Using A System Such As Cryptocurrency
On August 17, 2021, Alibaba Group, the Chinese multinational technology giant, launched a NFT market place allowing license and sale of intellectual property.[5] One of Alibaba NFT marketplace services is called “Blockchain Digital Copyright and Asset Trade.” It permits content creators to copyright material as a blockchain and sell the rights as an NFT as well. A crypto-wallet is used to purchase NFTs typically using the currency of the Ethereum blockchain.[6] The cryptocurrency’s value can be expressed in a more stable monetary form, such as the U.S. dollar. However, the exchange rate between the two has consistent fluctuations that are often erratic and can lead to significant changes in value. When an NFT’s value in terms of the particular cryptocurrency is set and controlled for, a significant change in the cryptocurrency’s exchange rate may lead to unexpected changes in the valuation of the NFT.
NFT Platform Markets
Currently, NFTs are marketed and sold through major platforms (e.g Alibaba and OpenSea). In a recent scare, OpenSea, encountered a possible copyright infringement when a seller on their platform was caught selling NFTs against copyrights of their creator.[7] OpenSea caught the sellers earlier enough to avoid and lawsuits; however, in such a case where OpenSea didn’t, they could find coverage for the third party claims through an insurer’s duty to indemnify.[8]
Duty to Defend NFT Under CGL Policies for “Infringement of Copyright ‘in Your Advertisement’”
Each NFT is a unique code that represents a specific form of property subjecting it to copyright laws. Copyrights of NFTs are authorized from the intent of the NFT creator giving them control over the rights that are retained and transferred when sold.[9] This chain of copyrights causes confusion that could result in disputes triggering defense fee reimbursement.[10] Multiple exclusions adversely impact coverage for copyright infringement claims. [11] Where copyright infringe occurs “in your advertisements” a defense may arise[12] through the establishment of “causal connection.”[13]
A Michigan district court [14] concluded that in distributing of videotapes as products and as promotions for motivational speeches and rallies, the “videotapes produced by the insured were both products and advertisements.”[15] The rising popularity of NFTs can illustrate that an NFT is an “advertisement for itself”. In promoting products as NFTs, a product not only receives a global audience but also generates instantaneous visual/audible accessibility which both identifies the product and promotes it[16]. As such, copyright infringement of NFT embodies forms of advertisement thereby constituting potential for coverage under CGL policies.[17]
A NFT may be an “advertisement for itself.” [18] The physical display of a product that attracts buyers in and of its self, suffices to be an advertisement of a copyrighted work that creates liability.[19] NFT functions as an advertisement in this capacity because as a form of art, a NFT promotes itself upon interaction. Twitter founder, Jack Dorsey, recently auctioned his first tweet as an NFT selling for $2.9 million dollars. As a NFT, Dorsey’s tweet functioned like a virtual autograph that in and of itself promoted bidding allowing for a sale worth millions.
Conclusion
The shift and sudden rise of the NFT market has left insurers and potential policyholders looking for insurance opportunities that have yet to be determined. They must address the new challenges posed in insuring this new technology. The traditional intellectual property rights have some interface. Copyrights can apply to NFT as is true of digital art, generally, but such right of the authors can be lost in the transfer of NFTs. The requirement is for unique and customized policies such as insurance coverage for lost bitcoins or other forms of cryptocurrency like NFTs.
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*David A. Gauntlett is a principal of Gauntlett & Associates. For more information, visit Gauntlett & Associates at www.gauntlettlaw.com.
[1] Kenneth J. Falcon and Moish E. Peltz, NFTs for Content Creators, Licensees and Copyright Holders, Falcon, Rappaport, & Berkman PLLC (April 5, 2021)
[2] Connor Campbell, The NFT Marketplace: How to Buy, Sell, and Create NFTs, NerdWallet (July 26, 2021)
[3] Moish E. Peltz, IP and Non-Fungibility: The Intersection of Intellectual Property and NFTs, Falcon, Rappaport, & Berkman PLLC (March 15, 2021)
[4] Carolyn Wimbly Martin and Margaret Horstman, Copyright Infringement of Photographs and Reclaiming Publicity Rights Through NFTs, Luztker & Luztker, LLP (July 8, 2021)
[5] Jamie Redman, Alibaba’s NFT Marketplace Allows Content Creators to Copyright Work via Blockchain IP Service: Report, Bitcoin.com (Aug. 17, 2021)
[6] Mitchell Clark, NFTs, explained, The Verge (Aug. 18, 2021)
[7] nftattorney, OpenSea Just Saved Their Users Millions in Potential Copyright Damages, The NFT Attorney Blog (July 15, 2021)
[8] Acuity v. Bagadia, 310 Wis. 2d 197, 228 (2008) (The insured’s distribution of samples of copyrighted software without authorization in order to sell more software disk illustrated a “causal connection between advertising and injury” under copyright infringement in advertising triggering Acuity’s duty to indemnify.)
[9] Ron Dreben, Amelia Pennington, Morgan Lewis, Nonfungible Tokens and Copyright: Diligence Issues to Consider, JDSupra (Apr. 13, 2021)
[10] 17 USCS § 505
[11] Susan J. Lutzker, If You Think you Are Insured Against Copyright and Trademark Infringement Claims, Look Again, Lutzker & Lutzker, LLP (Aug. 26, 2021)
[12] Phoenix Control Sys. v. Insurance Co. of N. Am., 165 Ariz. 31, 34 (1990) (The insured’s distribution of copyrighted material without authorization, despite acquisition from alleged public domain, was copyright infringement intended to promote the insured’s business and sales thus “‘in your advertising’ [the ‘last antecedent rule’] applie[s] to modify ‘infringement of copyright’ establishing coverage.)
[13] E.S.Y., Inc. v. Scottsdale Ins. Co., 139 F Supp. 3d 1341, 1356-1357 (11th Cir. (Fla.) Oct. 14, 2015) (Misconduct committed in hanging copies of Exist’s tags violated Exist’s copyright and created a confusion among Exist customers that impacted Exist’s sales thus “satisfies the causal connection requirement” between copyright infringement and advertising injury needed to receive coverage.) [See also: Intact Ins. Co. v. Comptoir Des Indes, Inc., Case No. 2019 CH 1308, *5 (Ill. Ch. May 14, 2021) (Displaying copyrighted furniture is committing “advertising injury” because such conduct is “infringing upon another’s copying in your ‘advertisements.’”)
[14] Amway Distributors Benefits Ass’n v. Federal Ins. Co, 990 F. Supp. 936 (W.D. Mich. 1997)
[15] Id. at 946
[16] Nick Bilton, “Imagine if the Mona Lisa was Digital and Then Auctioned on the Internet”: The Only NFT Explainer You Really Need, From a True Believer, Vanity Fair (Sept. 16, 2021)
[17] King v. Cont’l W. Ins. Co, 123 S.W. 3d 259, 261, 263 (W.D. Mo. 2003) (In building a home identical to a copyrighted home and placing a sign outside of it to draw attention, King committed “copyright infringement in the course of advertising” because “the house itself constitutes the copyright infringement, and the house is part of the advertising; therefore, there is causal relationship between the …copyright infringement and the advertising activity.”)
[18] David Gauntlett, A Product Can Be “An Advertisement for Itself” So As to Trigger “Advertising Injury” Coverage, Licensing Journal 29(7) (2009).
[19] Bear Wolf, Inc. v. Hartford Ins. Co., 819 So. 2d 818, 820 (Fla. Dist. Ct. App. (4th Dist.) 2002) (“[D]isplaying a copyrighted work at a trade show which is restricted to members of a trade association and qualified buyers would constitute a display of ‘copyrighted work publically’ under the federal Copyright Act, 17 U.S.C. § 106(5).”).