NFTs – every trendsetter and their cat wants to own one, sell one, or in the case of cats – be one. There are many different uses of NFTs ranging from uses in games such as CryptoKitties which made NFTs famous to Beeple’s $69 million digital artwork sold through Christie’s auction house. What is an NFT, and can you insure one?
NFT = Non fungible token
NFT stands for ‘non-fungible token’. NFTs are recorded on a blockchain and certifies that a digital asset is unique. NFTs can represent real world objects. Accordingly, some people are referring to NFTs as ‘digital collectables’, one of a kind items, with values ranging from the low prices to the priceless. NFTs have unlocked whole new revenue streams and potential for artists by allowing them to be created and traded on platforms like OpenSea.
Insurance issues relating to NFTs
Technically, it should be possible to insure some NFTs or liability associated with NFTs although at the time of writing no such policy is readily available. What are some of the issues which will require consideration?
Legal characterisation: While an NFT may be called a ‘token’, this is not determinative of its legal characterisation. NFTs may have many uses and can be used to represent literally any thing. Legal due diligence is therefore required to consider what the NFT is actually doing and what underlying asset it is tied to. The contracts at the time of transfer or creation may also be relevant.
Ownership of an NFT does not necessarily mean ownership of the digital asset. In many cases and absent contractual terms, ownership of an NFT may be simply that and nothing more – ownership of the data stored on the blockchain which shows you own the NFT and which may point to the location of the underlying asset.
Immutability: The underlying asset which the NFT is related to may not be immutable. This is a significant issue in some uses cases for NFTs, such as digital art. While the record of the NFT is forever stored in the blockchain, the digital artwork itself is often stored on a centralised server. If the server goes offline for whatever reason, the digital artwork may be lost, possibly forever. For example, an NFT linked to Jack Dorsey’s Tweet is only of value so long as Twitter is still live and the tweet is hosted. There have been some solutions floated such as permanent storage systems like Arweave but this is certainly not standard. Is immutability a ‘loss’ which insurance can or should cover?
Custody: Like cryptocurrencies, an NFT can be stolen or lost forever if private keys end up in the wrong hands or are simply lost. On the blockchain, transactions are irreversible. Accordingly, insurance for NFTs will need to carefully consider security practices of the custodian. This is not only an issue relevant to individuals owning NFTs but also online marketplaces which may have custody of millions of dollars worth of NFTs.
Liability: What exactly is the insurance product seeking to protect? There are a range of potential scenarios here, some which are specific to use case for the NFT in question and may have some resemblance to traditional insurance covers:
- public liability to third parties associated with advertising and sale of an NFT;
- infringement of intellectual property rights associated with creation, transfer or use of an NFT of the underlying asset;
- negligence associated with failure of an intermediary (eg. auction house) to secure an NFT and transfer it after a sale.
Some existing liability policies possibly provide ‘silent cover’ for risks relating to an NFT.
Execution Risk: If the smart-contract transferring the NFT is also intended to transfer some other right in the underlying asset, it might be necessary to undertake that transfer in a non-blockchain setting. For example, depending on the jurisdiction, property rights might need to be transferred in writing. What if that transfer does not occur offline?
Loss: Like cryptocurrencies, NFTs themselves are susceptible to loss and theft. This could be malicious or by accident, such as the owner losing private keys to a digital wallet. However, unlike cryptocurrencies, there is also the risk of loss of or damage to the underlying asset linked to the NFT as well which could also affect the value of the NFT. Additional complexity may arise if the NFT also represented ownership in physical property. How might loss be valued?
Way forward?
The NFT market is in its early days and the above are just some of the potential considerations around insuring NFTs. However, novel products may call for novel insurance solutions. If traditional markets do not meet needs, could p2p insurance have an important role to play?
Tim Chan is an insurance & insurtech lawyer at global law firm Norton Rose Fulbright and Founder of The InsurTech Lawyer blog. He regularly advises insurers and startups on emerging legal issues affecting the industry. Follow Tim on Twitter: @timinsydney
