Q8. What Do I Need to Consider When Building an NFT Marketplace?

NFTs present an opportunity to excite fans and collectors. When an artist or creator sells an NFT, he or she retains the right to the underlying content. They are an opportunity to enforce property rights on digital versions and are typically sponsored by the actual owners of the copyright.

In an NFT marketplace, a platform that connects content creators with sellers, sellers mint NFT tokens and buyers can browse listed assets or participate in an auction. The marketplaces exist on blockchains. Once an NFT is minted on one of the blockchains, it is not easily transferred or sold on another. It is important to research carefully and choose the blockchain wisely.

Here are other critical steps to take:

    1. Protect yourself by forming a corporate entity before launching a marketplace. In addition to providing substantial liability protection, a corporate entity offers credibility when seeking financing.
    2. Draft or obtain a code of conduct to govern interactions on the platform.
    3. Create smart contracts with transferable ownership. Build-in the economics of trading—how much will a primary sale cost? How much for secondary sales, royalties, transaction costs and other aftermarket features?
    4. Generate or acquire platform Terms of Service to govern the relationships between you as the NFT marketplace operator and customers and between the buyers and sellers of the NFTs featured on the platform. Your terms of service may protect you from various legal issues and limit your overall liability.
    5. Verify each participant’s intellectual property rights at every stage of each NFT transaction. Allocate intellectual property rights among the creators/artists, purchasers/collectors, and other parties. The ownership of the original work is copyright ownership, which vests in the creator of the original work. If an NFT is minted and sold, the purchaser will receive a set of intellectual property rights from the creator as part of owning the NFT. The seller of the NFT determines the rights that accompany an NFT.
    6. Comply with all securities laws. Be sure to design features that demonstrate the distinction between your NFT and what governments seek to regulate. For example, the proceeds of the primary and secondary sales should not be used to build other NFTs, the platform, or the marketplace. Since currency is fungible, this requires careful planning.
    7. Use caution in setting up payments. If payments are processed on behalf of counterparties, the party touching the money may be a “money transmitter” with its activities governed by applicable Treasury, state, and local registration regulations. To avoid the complex process of registration in innumerable jurisdictions, many marketplaces partner with already-registered entities, acting as content creators rather than payment processors. But watch for commissions, gas fees and other transaction costs associated with validating transactions and processing payments. How is each payment characterized? Is it a fee for content creation or money transmission? This is a key question for compliance.
    8. Protect consumers. Adequately inform customers about what they are purchasing and the risks involved so that you avoid FTC allegations of deceptive or unfair advertising. Make certain that you have installed robust controls to guard against cybercriminals. You may also need to implement KYC (Know Your Customer), anti-money laundering, and other regulatory requirements.
    9. Data privacy. Be transparent about data collection and use! The fines for privacy violations can be significant.
    10. Pay where payment is due. With each piece of content and each media in which it is reproduced or tokenized, a different license fee may be payable to a different entity in the stream of commerce. Analyzing each contract involved in the monetization of content is a key task, and care should be taken to follow the trail through each transaction in the metaverse.

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