Non-Fungible Tokens or (“NFTs”) have taken the tech world by storm in 2021, as the variety of assets that are tagged with this “blockchain” technology (ranging from sports trading cards, collector’s items, works of art and music) are selling for increasingly staggering amounts in the online marketplace. This past week, a particularly pricey NFT digital image was sold by Christie’s NYC auction house for a cool $69 million. This may be perplexing for some, considering this record-setting price tag is for a work of digital art that does not actually exist in the physical world, and does not come with exclusive rights to use the art.
So what exactly are NFTs? Why have their popularity and prices skyrocketed recently? How does this affect our estate plans and administration?
NFTs come from the same family of cryptocurrency technology (blockchain) that birthed the Bitcoin and other forms of crypto currency. The technology is unique, in that, the Non-Fungible Tokens essentially act as certificates of authenticity and ownership for any asset or item they are attached to; guaranteeing the legitimacy, originality and ownership of almost anything, including digital and tangible assets.
Notably, the Non-Fungible Tokens are irreplaceable or not-able-to-be-replicated (not fungible), meaning that when an NFT is attached to a work of digital art or other asset, the owner of that NFT has the assurance (registered in the blockchain) that they own a limited-edition, or one-of-a-kind asset, which can then be transferred or sold amongst owners as prices fluctuate based on the market or demand for the asset. In this way, the NFT blockchain provides a sort of ‘title registry’ which shows the chain of ownership of a NFT.
What is somewhat confusing, is that owning an NFT does not give the owner exclusive use or enjoyment of the asset it is attached to. For instance, an NFT-protected digital image can still be copied by others who can screenshot, download, print or otherwise reproduce the image. What gives NFTs their incredible potential value is that the NFT registration itself cannot be replicated, the token is guaranteed to be unique, it certifies “ownership” and it can be sold or transferred on the open market. When you buy an NFT, you buy both the item it is attached to, and the irreplicable token itself, the latter being where the real value lies. In recent months, the NFT market has absolutely exploded, with assets like sports trading cards, digital images and artworks selling for thousands if not millions of dollars.
How might the rise in popularity and value of NFTs effect estate planning and estate administration?
As with any physical asset, the owner of an NFT has a right or interest in the asset and the ability to transfer it to their heirs upon their death. This can be done by way of a testator’s will, trusts or other planning instruments. However, the transfer of these electronic assets may not be as seamless or simple as the transfer of physical assets, because electronic keys or passwords are required to access/locate and transfer the asset.
As is the case with cryptocurrencies like Bitcoin, an NFT can usually only be accessed on the blockchain with an owner’s personal key or password, without which the NFT could be lost forever. If the key or password to your blockchain assets (Bitcoin, NFT, etc) is lost or misplaced, the asset itself will be impossible to recover due to the blockchain’s security (even with a court order, the assets are inaccessible without a password). This has already created issues with Bitcoin, which has seen instances of owners who have lost millions of dollars worth of Bitcoin because they have misplaced or lost the password.
For owners of NFTs making their estate plans (and for their professional advisors) it is absolutely crucial that they create a system for tracking and locating the personal keys and passwords that are necessary to locate and access these digital assets, so that heirs and those administering estates, can secure the digital asset. It is imperative to ensure that future estate trustees will be able to access these keys during the estate administration, so these assets and the ability to access them are not lost upon the death of the original owner.
Further, if the owner of the digital asset wishes for it to be maintained following his or her death, then he or she should specify in his/her estate plan exactly how the NFT should be held or transferred upon death, to avoid the NFT forming part of the residue of the estate and potentially being liquidated or sold-off as a result.
In addition, the historic value of digital assets (NFTs, cryptocurrencies, etc.) should always be logged and tracked by those creating their estate plan, as the inevitable fluctuation in the value of these assets can have consequences for one’s estate taxes and ultimately for those standing to benefit from the estate. It’s important, therefore, that owners of NFTs and Bitcoin not only track the passwords/keys required to access these assets, but also create a system for tracking the value of the asset.
NFTs, as a technology and class of assets, are relatively new, and in many ways we are still learning how these digital assets, their values and the ways in which they are used will evolve over time. It will be interesting to see whether the buzz currently surrounding these blockchain technologies is just an internet fad, or whether the NFT marketplace is here to stay, and if so, what further impact this could have on estate planning and administration.
This paper is intended for the purposes of providing information only and is to be used only for the purposes of guidance. This paper is not intended to be relied upon as the giving of legal advice and does not purport to be exhaustive.