Non-Fungible Tokens And Copyright Law: A ‘Nifty’ Dilemma

On March 11, 2021, Mike Winkelmann a.k.a Beeple, a 40-year-old graphic designer made news by selling a digital collage, “Everydays: The First 5000 days” for slightly over $69 million. While this was not a record-breaking sales number, what sent ripples through the art world was what the buyer actually received at the close of this transaction - a digital file of the collage and Non-Fungible Tokens (NFT’s). Closer home, Prasad Bhatt, a Bangalore based illustrator known for his quirky caricatures, sold an NFT for his viral Leonardo Di Caprio GIF (titled “LDC Evolution”) for $3,195.32.

In recent years, NFT’s are being linked to all types of creative works including music albums, tweets, photographs, and other digital media. Over the last 3 months, everyone from Grimes to to Kings of Leon to even the NBA has made use of this technology. It does not help that to know more about NFT’s, one must also have a basic understanding of complicated buzzwords such as blockchain and cryptocurrency. Today, let us try to understand NFT’s and their impact on a sphere inextricably interlinked with the entertainment world, copyright law.

An NFT is a unique digital asset (token) that is minted, recorded, and traded on blockchain technology and can be used to determine the authenticity and ownership of a particular asset or item (an artwork, a music album, a tweet, and possibly even tangible property).

Now, let us break this down and understand each concept individually.

• Unique Nature: An NFT is unique because each token is coded in such a way that it contains distinctive data relating to the NFT’s creation, transaction history, and associated timestamps. Although the same asset can be associated with several NFT’s and those NFT’s might functionally be the same, they are still “non-fungible” i.e., unique and cannot be interchanged. In this respect, an NFT differs from real money or even cryptocurrency, all of which is homogenous and fungible.

• Blockchain: This technology can be understood as an ever-growing permanent digital ledger which records transactions and sets of information relating to specific digital assets in a decentralised manner. Blockchain is seemingly immutable and secure because once data is entered, it cannot be altered or modified.

• Ownership and Authenticity: An NFT can signify the authenticity and ownership of an asset because it is coded to contain exhaustive, publicly verifiable metadata and data about transaction history. Think of an NFT as the digital version of title papers that are recorded on a government register. It is important to note that the NFT itself cannot prove the genuineness of a creative work. It is possible that an NFT may get associated with a counterfeit or that the first ownership entry in blockchain is incorrect. Thus, we might still need to resort to traditional methods of authentication and appraisal of artwork.

• Cryptocurrency: Decentralised digital currency that operates on blockchain technology and is designed to be secure. Currently, NFT’s are traded only in cryptocurrency (such as Ether), however, that may change soon.

Under Section 14 of the Copyright Act of 1957, the copyright owner of a creative work owns a bundle of rights, including the right to make reproductions and adaptations. Upon purchase of an NFT that relates to a creative work, the buyer receives a copy of the underlying work (in JPEG, PDF, or MP4 format) and the NFT i.e., tokens get added to the buyer’s digital wallet. Since the sale of an NFT involves making a copy of the creative work and communicating it to the buyer, any unauthorised reproduction, distribution, or adaptation may amount to copyright infringement.

Unfortunately, there are increasing reports of artists finding their artworks on NFT trading websites. NFT marketplaces such as OpenSea are battling these concerns by including “Notice and Takedown” and “Repeat Infringer” policies in its Terms of Use.

It is important to understand the distinction between owning an NFT versus owning rights to the creative work associated with the NFT. After a sale, the buyer unequivocally owns the tokens that are placed in their digital wallet. However, ownership of the artwork itself is trickier. Although the seller is free to assign their copyright ownership in the creative work while selling an NFT, under Section 19, the digital contract covering the sale of NFT’s must expressly provide for such an assignment in signed writing. This is similar to how by default, an artist retains copyright ownership over a painting even if ownership of the tangible painting itself is conveyed to the buyer. Similarly, most NFT sales merely convey a license to use the digital copy of the creative work and the author or copyright holder retains their copyright.

As with all transactions, the rights of the buyer of an asset or item are decided by the governing sales contract. Thus, the governing digital contract underlying an NFT determines what rights a buyer has with respect to the digital copy of the creative work that they receive. While both parties are free to shape their contract as they deem fit, most NFT sales grant the buyer a non-exclusive license to use the digital copy of the creative work in a non-commercial manner. When the latest Kings of Leon album was sold as an NFT, the Auction Terms stated that a buyer was granted a non-exclusive, non-transferable, royalty -free license to display album artwork and certain included merchandise in a personal and non-commercial manner. Alternatively, the NFT License Version 2.0 created by Dapper Labs for NFT sales relating to the wildly popular CryptoKitties, permits buyers to make commercial use provided that such use does not result in an earning above $100,000 in gross revenues each year. Most licenses do not grant the NFT buyer any rights to make modifications or derivative works.

As with any evolving industry and especially with one as technical as NFT’s, it is important for a buyer to analyse the digital contract and understand exactly what they are purchasing at the close of an NFT sale.

Yes! NFT’s have ushered in a significant change to the art world by somewhat democratising the actual experience related to a creative work. Thus, the $69 million sale of the Beeple collage does not restrict the general public from being able to view the artwork. We must remember that there is an artificial scarcity of only the NFT’s and not of the underlying creative work itself.

Although NFT’s are the newest craze, they is being widely compared to digital collectibles (Ex- Pokemon Cards or autographed items) which are valuable only if someone is willing to pay for them. Hence, the very creation of an NFT does not automatically give it value. NFT’s representing a Jeff Koons sculpture or a Banksy mural would presumably fetch a higher price than NFT’s associated with a lesser-known visual artist. But what it means for the future of copyright law is a question yet to be answered.

This article was originally published on the SpicyIP blog.

Awani Kelkar is a New York-based lawyer with an interest in IP, TMT, and Art Law.z

The views expressed here are those of the author, and do not necessarily represent the views of BloombergQuint or its editorial team.