With society and technology evolving in tandem, incomes are no surprise that “Non-Fungible Tokens”, “NFTs” have gained traction. In a viewpoint, estimates suggest that the industry has garnered over $500 Million in recent years.[i]The wide range of NFT’s from “Nyan Cat” – a GIF featuring a cartoon cat to the iconic clip “Charlie Bit my Finger”, corroborates how anything can be digitized and subsequently monetized. This shift begets how the bundle of rights associated with a physical piece of intellectual creation is transferred into the digital space. In this article, the authors examine the possible intellectual property challenges that arise with the advent of NFT’s, with a specific focus on copyright law to argue that while NFT’s foster a pro-creator environment, because they operate in a digital space and much of the law is still nascent and unregulated, enforcement of copyright protection can be complicated.
WHAT ARE NFTs?
The definition of an NFT can be broken down into two components. Firstly, it is a “token”, meaning it’s a physical or digital asset capable of exchange, which represents a good, service, or any other form of value. Since NFTs operate in the digital domain, the token does not possess intrinsic value. The deal is contingent on the asset (musical record, digital art, etc.) it represents. Secondly, it is non-fungible, meaning that it is unique. For example, physical currency is a fungible medium of exchange whereby one dollar can be exchanged for one dollar’s worth of utility. Conversely, each NFT has an exclusive subjective value that cannot be interchanged. For example, Jack Dorsey’s autographed tweet is not equivalent to model Emily Ratajkowski’s digital portrait, even though both are NFTs.
HOW DO NFTs FUNCTION?
An essential aspect of NFTs that has facilitated its success is representing a paradigm shift to a decentralized, peer-to-peer regulated system where no single entity operates as a regulator. The supporting structure of an NFT is blockchain technology. Any change made on a specific blockchain is reflected across the chain and can be traced, eradicating the chances of corruption. Essentially, NFTs are digitized, authentic tokens hosted on decentralized, transparent, and immutable platforms.[ii]
THE INTERFACE OF NFTs AND COPYRIGHT LAW
WHERE DOES OWNERSHIP LIE?
The asset in question doesn’t need to be limited to copyrightable work. However, for this Article, only copyright concerns are addressed. The interface of NFTs and copyright law is located in what the asset entails. To be copyrightable, the literary, artistic, musical work or sound recording must be capable of being stored in a tangible medium, for example, the famous digital artist, Mike Winkleman, also known as Beeple, sold a digital collage “Everyday: The First 5000 days” for millions of dollars.[iii] Per the law, copyright vests the moment a work is created, it need not be registered. Further, the right is structured as a negative covenant preventing others from exploiting the creator’s work without prior permission.
When Beeple sold his college as an NFT, there is no transfer of ownership that occurs. It is “merely a cryptographically signed receipt that you own a unique version of a work”.[iv] The rights that accrue from ownership are thus still vested with the original creator, assuming that the creator himself has hosted the NFT. However, much like the physical world, in the contract of sale, specific terms that provide for the transfer of ownership and subsequent ability to exploit, adapt or employ the work in a method of choice must be provided for. When Beeple sold his NFT, the contract of sale explicitly precluded a transfer of ownership of IP. The purchase of an NFT grants the acquirer at best a quasi-ownership interest in a set of information or metadata linked to copyright-protected content.[v]
WHAT ARE THE POSSIBILITIES OF INFRINGEMENT?
Since NFTs operate in a digital space and are accessible to the public for download and viewing, the possibility of infringement is high. Unauthorized copying of digital work and subsequent commercial exploitation is one such problem. In blockchain jargon, when the NFT is “minted”, that is, uploaded onto the blockchain for further sale, there is a possibility that the NFT for purchase contains a copy of work obtained without permission.[vi] Once the NFT exists on the blockchain, it cannot be altered. Further, because of the pseudonymous nature of many blockchains and the inherent encryption, it is arguably more difficult to identify an infringer. Additionally, in the instance of derivative works, where there is a translation, adaption, or any other modification based on the prior protected work, in the absence of explicit consent, the creator or seller of the derivative work might not be able to sell the NFT due to susceptibility of infringement.[vii]
(MIS)USE OF LACK OF REGULATION
NFT’s are a recent phenomenon. Therefore, much of the legal discourse surrounding it vis-à-vis the intellectual property concerns that arise are ambiguous and to be discovered. The nature of an NFT resembles that of a receipt of ownership of a product you may own. As discussed, it does not result in the transfer of ownership, which leads to cases wherein the right holder may not have authorized the creation of the said token in the first place. The existence of sources for illegitimate NFTs creates a new segment of piracy.
This ambiguity comes with freedom and misuse of the same freedom. One such recent example sheds light on what may happen in such scenarios. DC Comics owns the legacy characters of Batman, Superman, and Wonder Woman, which are very popular. Freelance artists work for the company to create sketches of their characters for a particular iteration or storyline. Jose Delgo, one such freelance artist, made $1.85 million by selling his Wonder Woman sketches as NFTs. Subsequently, Delgo received a warning letter from DC Comics forbidding their artists from using their IP for personal gain. Similarly, Marvel Comics cracked down on their artist to sell NFTs of his comic-book work, including the cover of a particular issue. The NFT was consequently removed from the buyer’s wallet.[viii]
Decentralization and freedom can become a haven for scammers, giving caveat emptor more weight in such transactions. Platforms like OpenSea and Raible, where people can sell and purchase NFTs, do not require verification from one before they upload something onto the blockchain. This has seen an influx of fake profiles and scammers claiming to be lauded artists to scam their fans, and many have succeeded.[ix]There are no existing safeguards, regulations, or verification mechanisms in place. Big entertainment houses like Marvel and DC are now cognizant of the possible risks. Licensing agreements whereby the revenue sharing and ownership are demarcated mitigates such risk.
Much like conventional intellectual property, digital creations are also premised on a trade-off between public access and benefitting the creator to incentivize innovation. Arguably, the balance is currently skewed in favour of incentivizing creation. For example, Spotify, the world’s largest streaming service, pays between 0.003 to 0.005 cents per stream. NFTs, by eradicating the intermediaries permit creators to monetise work on their terms. However, there is no singular regulation governing NFTs. Further, copyright enforcements vis-à-vis NFTs are hurdled with problems such as unlawful minting, confusion regarding the fundamental rights that emanate from the transfer of IP, if it all any.[x]It is unlikely that the NFT tide is going to subside, and hence a structured approach to creating legal regulations concerning NFTs, including redressal mechanisms in addition to the aspects discussed above, is needed to balance the scales between the creator and the purchasers to ease reliance on caveat emptor.
[i]Pavel Bains, The Rise of NFTs Must Accompanied By Further Decentralisation, COINTELEGRAPH (June 14th, 2021, 9:30 PM)https://cointelegraph.com/news/the-rise-of-nfts-must-be-accompanied-by-further-decentralization
[ii] Morgan Lewis, Non-fungible Tokens and Copyrights: Diligence Issues to Consider JDSUPRA(June 14th, 2021, 9:30 PM) https://www.jdsupra.com/legalnews/nonfungible-tokens-and-copyright-3961333/
[iii] CHRISTIES,https://onlineonly.christies.com/s/beeple-first-5000-days/beeple-b-1981-1/112924 (June 14th 2021, 9:30PM)
[iv] Lynne Lewis, Non-fungible and copyright law, BIRD AND BIRD, (June 14th, 2021, 9:30PM) https://www.twobirds.com/en/news/articles/2021/australia/non-fungible-tokens-nfts-and-copyright-law
[v] Peter Mezei, The Rise of Non-fungible Tokens and the Role of Copyright Law, KLUWER COPYRIGHT BLOG, (June 14th 2021, 9:30PM) http://copyrightblog.kluweriplaw.com/2021/04/22/the-rise-of-non-fungible-tokens-nfts-and-the-role-of-copyright-law-part-ii/
[vi] Andres Guadamuz, Copyfraud and copyright infringement n NFTs, TECHNOLLAMA, (June 14th 2021, 9:30PM) https://www.technollama.co.uk/copyrfraud-and-copyright-infringement-in-nfts
[vii] Paul Chodirker, Reading the Fine Print- Are Non-Fungible Tokens a New Kind of Intellectual Property?, MEDIUM, (June 14th 2021, 9:30 PM) https://pchod.medium.com/reading-the-fine-print-are-non-fungible-tokens-nfts-a-new-kind-of-intellectual-property-368c26126da2
[ix] Bijan Stephen, NFT Mania Is Here, And So Are The Scammers, THE VERGE, (June 14th 2021, 9:30 PM) https://www.theverge.com/2021/3/20/22334527/nft-scams-artists-opensea-rarible-marble-cards-fraud-art