The role of Copyright in NFT
This is the first in a three-part blog series surveying the role of copyright law in NFT space.
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In this week’s post, we are going to discuss some of the
novel legal issues arisen in NFT space since
its popularity rose in 2021, with a main focus on copyright laws. First, we will give a brief overview of the blockchain technology and then go on to examine copyright infringement issues in different stages of NFT transactions from minting to selling and reselling,
resale rights, smart contracts, and finally a few things you should consider before trading
in these non-fungible collectibles.
Copyright, NFT and blockchain.
For the uninitiated, the world of NFTs and crypto may be a
completely foreign universe. In block chain (which is a decentralized digital ledger) money
is crypto and goods are NFTs. NFT is one of the few cryptographic assets on block
chain technology alongside cryptocurrencies, ICO (initial coin
offering),and smart contracts.
‘In blockchain, rights and assets
are represented by tokens. Assets from the real world or virtual world can all
be tokenized. This means that, practically, houses, cars, commodities, loyalty
points or company shares can all be tokenized’1.
NFT stands for non-fungible tokens. In Latin, Fungi means ‘interchangeable’.
Fungible tokens those that are interchangeable, replaceable with,
or equal to another asset of the same category2.
Things to beware before you start buying NFTs.
Let the buyer beware!
There are real dangers out there associated with trading
NFTs, mostly in the area of copyright law. We’ll take you through one-by-one.
No dedicated NFT copyright laws.
There is no dedicated NFT law in any country in the world
that protects you if you get ripped off buying NFTs. Due to anonymity and
pseudonymity of block chain and absence of conflict of law provisions, where a
lawsuit should be filed and what law is applicable remain unclear4. When you purchase NFTs, copyright ownership to these arts is not
necessarily granted to you unless the original author of the NFT who created
the art makes a transfer to you in writing.
There are uncertainties as to whether creators have the
necessary legal qualification for minting NFT arts, whether they own the
copyright to copy, reproduce or sell the artwork underlying the NFTs, and the
consequences of unknowingly purchasing a copyright-protected NFT. Minters’
wallet address and metadata do not provide enough evidence as to the real-life
owner of the artwork. The question whether someone possessed the legal
authority to create an NFT art is particularly hard to decide as blockchain
doesn’t give any clues as to the original work of authorship. Additionally, what type of NFT digital arts
qualify to be a ‘work’ within the meaning of copyright law is also not clear.
Jack Dorsey’s first tweet which was sold for for nearly $3 million to Sina
Esravi a Malaysia-based crypto entrepreneur raised questions as to whether mere
statements which do not seem to be an expression of someone’s intellectual
creation should be eligible for copyright protection under the existing general
legal framework. This leaves room for many copyright infringements to take
place in the NFT market. Buyers are lured to purchase unoriginal, unauthorized
creations of art minted based on third party’s works.
Let’s say you are a big basketball fan, and you decide to buy a Lebon James's NFT from NBA top shot for $200 000 thinking you could flip its value into 9 figures in future. But when you made the purchase, you’re risking your life with a potential copyright infringement claim. Though there is no such law prohibiting minting of NFTs without prior authorization of the copyright holder, copyright laws would still protect the copyright owner of the original content, making resales of NTFs vulnerable to copyright issues in the event they have not obtained permission from the original creator. If the minter does not have copyright to NFT, you'll be buying only a copyright infringed artwork.
To understand the basics of copyright law, read LawGrad’s
brief guide to copyright basics.
Some NFTs come with pre-loaded smart contracts.
Smart contracts grant minters an unconditional resale right
to receive royalties each time their NFTs are sold. Article 14 paragraph (1) of
the Berne Convention5 states that
authors are entitled to an “inalienable right to an interest in any sale of the
work subsequent to the first transfer by the author of the work6”
. Article 14 establishes a right known as the “droit de suite” or “resale right”. Generally,
the law is that a resale right does not attach to digital works such as NFTs,
but only to those in some physical form7.
Here’s where smart contracts come to minters’ help. Smart contracts are an
immutable set of coded instructions embedded into the NFT art which acts as a
contractual requirement to pay a portion of subsequent resale proceeds. They easily
cut in corners for artists to receive royalties for their digital aartworkswithout
having to comply with the conditions set by copyright law. When you sell a NFT
powered with a smart contract, a pre-scheduled percentage of the sales price
automatically passes to the original minter of that NFT. This prevents buyers
from receiving full earnings of the resale.
Nick Szabo who first coined the phrase smart contracts defines it as a
computerized transaction protocol that executes the terms of a contract8. These self--containing contracts that sets out the terms of NFT sales are not subject to copyright law and most of the time these royalties-like payments are
made automatically to the creator of the NFT art, not the real artist. Due to
the absence of regulations, the royalty feature can be used in smart contracts
for all copyrighted and non-copyrighted NFTs. The transaction takes place every time a
subsequent sale happens as programmed by computer codes without the
intervention of any party. Moreover it is questionable whether terms in a smart
contract which are not in any written form or signed by parties comply with the
requirements in contract law and therefore are enforceable in a court of law.
So before you decide to buy a NFT with a smar contract, always confirm that it
doesn’t come with a royalty feature.
Moreover, due to their pre-programmed nature smart contracts
are not that smart enough to include contractual terms as to copyright
infringements. Let’s say you bought a Nyan Cat GIF with copyrights to it
through a seperate written contract, and you decide to sell it but
keep your copyrights. You can’t make use of smart contracts to do that. When
you sell it without a written contract, purchasers may still be able to modify
and make significant changes to the original NFT as copyright warnings cannot
be meaningfully communicated and enforced through computer codes in smart
contracts.
Future of NFT lies on Copyright clarity.
While we undoubtedly recognize the fact that NFTs have a
huge potential as a powerful novel digital technology to accelerate the
entertainment and finance industries, there are some legal implications as to
copyright issues, frauds, and the seeming vacuum of legal protection
surrounding NFT trading. Recently we’ve seen a huge fall in the crypto markets
and a loss of investor confidence due to concerns over scams and pyramid
schemes. The existing copyright legal framework at the international and state
levels is not sufficient to address the novel, complicated legal issues
stemming from a booming deregulated market like NFTs. With NFT every creative
artwork is turned into a unique, authentic digital value, creating endless revenue
streams for creators while the creative genius of authors is protected from
digital piracy. A promising technological development like NFT with a trustable
and transparent system shouldn’t face a similar fate and drift into irrelevance
like its peer crypto currencies. Therefore if it is possible for lawmakers and
courts to reach a consensus and step into clarifying copyright issues in the
deregulated blockchain-enabled markets, investments made in these digital
assets by millions will be safe and more rewarding without incurring costs for
vaguely termed lawsuits. It is probably the most plausible way to preserve the
budding technology underlying NFT and crypto-assets.
In the next post we'll explore legal consequences of buying NFTs, NFT 'copies' v NFT 'copyrights'.
1 Pınar C¸aglayan Aksoy, Zehra O¨ zkan U¨ ner 'NFTs and copyright: challenges and opportunities' (2021) 16(10)< http://repository.bilkent.edu.tr/bitstream/handle/11693/78125/NFTs_and_copyright_challenges_and_opportunities.pdf?sequence=1&isAllowed=y> accessed 9 Jul 2022.↩
3 Carolyn S. Toto, Chaz Hales, 'Non-Fungible Tokens and Art that Lives on the Blockchain' Internet and Technology Law (Los Angeles, 22 Feb 2022) < https://www.internetandtechnologylaw.com/non-fungible-tokens-art-blockchain/> accessed 8 Jul 2022.↩
5 Berne Convention for the Protection of Literary and Artistic Works (adopted 9 Sep 1886, entered into force 5 Sep 1887) (Berne Convention) art 14↩
6 Standing Committee on Copyright and Related Rights, Proposal From Senegal And Congo To Include The Resale Right (Droit De Suite) In The Agenda Of Future Work By The Standing Committee On Copyright And Related Rights Of The World Intellectual Property Organization (The World Intellectual Property Organization 2015)↩
7 Rimmer Natalie, ‘NFTs – five legal things to consider' Farrer Co (04 Mar 2022)
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