intellectual property and NFTs
THE RISE OF NFTS AND BLOCKCHAIN TECHNOLOGY
In recent months, blockchain technology has grabbed the interest of the general public. The social, political and economic uncertainty caused by the Covid-19 pandemic has shown us that our economies are, in most cases, giants with feet of clay. It is against this backdrop that the world went in search of a new asset with which to diversify its investments, and it seems to have found it in NFTs in particular and blockchain technology in general (Giannopoulou, et al., 2021). We have witnessed the sale of NFTs for record figures, such as the USD 69.3 million Beeple's "Everydays, the first 5000 days" at Christie's auction house in March 2021. This shows that this is an incipient market with incredible potential, especially considering the current capitalization of the cryptocurrency market. Before delving into the copyright implications of this new technology, it is useful to analyze what exactly an NFT is and what its main characteristics are. Basically, a NFT is a new form of digital property; it is a digital collectible protected via blockchain (McBride & Alexander, 2021). A blockchain is nothing more than a shared, immutable ledger that facilitates the process of recording transactions and tracking assets in a business network (IBM, 2021). The transactions details are shared, verified by P2P network participants (Nakamoto, 2008) using the network’s consensus mechanism and are added to existing blocks and once added into the chain, the block cannot be modified. Provided that all transactions within a blockchain system are validated and recorded by consensus of the network nodes, the need for a trusted central entity is eliminated (Rennock, et al., 2018) 1.1. Cryptographic tokens A token represents an asset or a specific use (such as casino chips). There are many different types of tokens, one of them are the so-called cryptographic tokens. They can be defined as digital scarce units of value the properties and circulation of which are prescribed via computer code (Ferrari, 2020). There are different kinds of tokens[1]: payment tokens, utility tokens and asset tokens (Young Lee, 2019), whose main characteristics are (FINMA, 2018):
Non Fungibility
A fungible token can be replaced by an identical one and can therefore be exchange with any other item that corresponds to its value (Giannopoulou, et al., 2021). Traditional forms of currencies are fungible objects as they serve as mediums of exchange, because they are understood to be of equal value (Chohan, 2021). For example, one can substitute one euro with one euro because both are fungible: or even one euro with one dollar and twenty cents. On the contrary, non-fungible tokens are unique and distinguishable representations of assets, regardless of their physical or digital nature. In other words, a NFT is the equivalent, in the digital world, of a jersey signed by your favorite soccer team. This non-fungibility characteristic of NFTs endows them with four main features: they are unique, indivisible, transferable and with the ability to prove their scarcity[2]. In other words, it is possible to trace the creation timestamp of an NFT, the original creator, the current owner, the already performed transactions with it and their value among other data.
Creating (minting) NFTs
Understanding NFTs are built on a blockchain network (i.e., Ethereum or Binance Smart Chain). The network provides the technical requirements needed to allow NFT transactions to take place securely (Giannopoulou, et al., 2021). NFTs are minted (created) and uploaded to a NFT auction market[3] so that it can be purchased or sold using either digital currencies or fiat money. NFTs may also be traded without using the services of intermediaries and, by doing so, avoiding their commissions. Almost any process performed, included the minting and the exchanging of NFT, on a blockchain network implies the payment of some commissions. These commissions are called “gas fees” and it amount may heavily vary depending on which network you are using. For example, Ethereum network, although it’s arguably the most famous one, has really high fees, exactly the opposite to Binance Smart Chain (hereinafter, “BSC”).
NFT AND DIGITAL PROPERTY
NFTs are often seen as a new form of digital property, perhaps with a strong collecting character. However, a fundamental clarification is needed. There is a general belief in the public that ownership of an NFT implies ownership of the underlying physical asset, but nothing could be further from the truth. Actually, an NFT is closer to the idea of serving as proof of ownership of a particular digital version of an asset, rather than the asset itself. To put it another way, an NFT is nothing more than a sort of limited edition copy of a work (Lapatoura, 2021). Generally, the holder of the NFT does not hold any printing or copying rights[4] over the underlying work and cannot do so without the author's authorization. Notwithstanding the foregoing, the transfer of the NFT may also involve the transfer of the copyright of the underlying asset if expressly agreed by the parties.
Copyright Infringement
Through the process of creating an NFT, anyone can, de facto, create an NFT; without the need to hold rights to the underlying asset. In fact, this is a phenomenon that is already occurring, and many artists are reporting that their works are being copied in NFTs and offered for sale without their consent. Now, does this kind of action reflect any kind of copyright infringement? Does the fact that a person tokenizes a work that does not belong to the public domain imply the infringement of any copyright right of the owner? This is a problem that has hardly been analyzed and the answer varies according to the author considered. If we focus on the process of creating an NFT and what it really means, we can see that an NFT is neither the original work nor a copy of it. (Lapatoura, 2021), but a tokenized version of the work. The NFT does not contain the original work but a metadata file with a unique ID and, though not necessarily, a URL linked to it[5]. Therefore, the creation of an NFT from a work to which no rights are held would not necessarily imply copyright infringement. However, other authors, without entering into further detail, argue that the creation of an NFT without the permission of the copyright holder of the underlying work is an infringement of copyright that should be subject to prosecution[6] (Lewis, et al., 2021). This is without prejudice to the fact that the anonymity of blockchain networks makes the task extremely difficult, both in terms of verifying who the owner is and for the prosecution of the infringer).
Copyfraud And Moral Rights
It could also be the case that, instead of making an NFT on a private work, it would be made on a work belonging to the public domain. For example, one could consider the release of a musical NFT of one of Beethoven's Symphonies[7]. In this scenario, one might consider whether this would be a hypothetical copyfraud scenario. The phenomenon known as Copyfraud is generally understood as the making of false or at least dubious claims about a work that belongs to the public domain (Mazzone, 2006). However, in practice, copyfraud has no legal effect in practically any country[8], except perhaps Chile[9] and the caselaw is rather scanty on the subject (Guadamuz, 2021). Therefore, the creation of an NFT on a work belonging to the public domain does not imply copyfraud unless false claims of copyright ownership of the work were made; and, in any case, the legal effects would be practically meaningless in most jurisdictions. It would be a very different matter if the false claim of ownership were made in respect of a work not in the public domain. In the event that the NFT had some sort of dubious or false claim of copyright ownership embedded in its code, it could be argued that this is an infringement of the moral right of attribution (Guadamuz, 2021).
NFT AND THE REMOVAL OF THE MIDDLEMAN
The previous paragraphs have emphasized the idea that NFTs represent a new form of digital property that is captivating the interest of both investors and artists has been established. During the last few months there has an immense conversation about the multiple benefits of NFTs on the art market as if it were a kind of Holy Grail that would solve each and every one of the problems that the sector is currently experiencing. Thus, among other issues, it has been pointed out that NFTs allow artists and content creators to avoid the use of intermediaries and directly access a global market (Sergeenkov, 2021). This would save the artists the commissions to the different agents and would allow them to keep a higher percentage of the value they have created. As mentioned, artists themselves can use the Marketplace services to create and offer for sale their own NFTs. However, by definition, this approach would still involve the use of intermediaries and, if they were to be avoided altogether, would require a certain level of programming that many artists do not have nor are interested in acquiring. Another possible advantage stemming from the use of NFTs is that they allow the artist to continue receiving commissions for the successive sales of his object. Whenever the NFT changes ownership, a fraction of the price paid will revert to the original creator of the object. This would be the blockchain version of the so-called droit de suit regime. This regime originated in 1920 in France and has now been adopted by more than sixty countries and its implementation has been considered by the United States[10] (Martin, 2021). The analysis of this regime in relation to NFTs raises several important questions: Is the transfer of an NFT subject to the regime? If not, are there any cases in which it would be possible for its sale and purchase to be subject to the regime? What specific advantages does the use of NFTs and blockchain technology offer in this respect? Focusing on the European Union, the first and second recitals of Directive 2001/84/EC[11] state that the authors of an original work have the inalienable right to receive an economic interest in subsequent sales of the corresponding work[12]. This right is conceived with respect to physical works[13] and, therefore, does not seem to cover digital representations, as is the case with NFTs. (Giannopoulou, et al., 2021) at least not directly. It would be a different matter if the owner of the NFT were also the owner of the physical object associated with it and the transfer of the NFT also entailed a change in the ownership of the piece of art[14].
In this case, assuming that the rest of the requirements of the directive are met (i.e., that the physical object on which the NFT has been built falls within the scope of the Directive), droit de suit could apply and the right to receive the royalties stipulated in article 4 would be generated[15]. On the other hand, the NFT market that is being generated, and the intrinsic characteristics of the code in which the NFTs are programmed, makes it possible to extend de facto what would not be legally possible. We have noted that a traditional concern of artists was the maintenance of their economic interest in the successive sales of their work. The aforementioned European Union Directive represents one of the various attempts by legislators to resolve this issue, but it left unanswered two questions: What do we do in those cases that do not fall within the scope of droit de suite? And how do we adequately control the respect of this right? The NFT markets make it possible to extend this regime so that it is applicable in all cases, even when the requirements set out in the legislation are not met. Moreover, the control and application of this regime is automatic. Whenever an NFT transaction takes place, the original artist will take the corresponding commission, according to the terms set out in the smart contract. This setup would allow artists to secure a future source of income relatively automatically and without the need to exercise constant control over it.
NFT AND PIRACY
One of the oldest concerns of the art world is counterfeiting. Since the dawn of time there have been forgeries of works of greater or lesser quality and with the consequent creation of a market for counterfeits. The problem continues to this day, perhaps to an even greater extent given the increasing advances in technology. Forgeries sometimes reach such a level of sophistication that it is difficult to distinguish the authentic object from a mere reproduction. Another side of the same coin is piracy, to which the proliferation of the Internet has greatly contributed. In this sense, today anyone can purchase a movie online and immediately proceed to reproduce thousands or millions of copies of it and release them to the market. Each and every one of these copies would be identical and could hardly be identified as pirated copies. NFTs could, perhaps, put an end to this problem. Right now, if someone buys a film attached to an NFT, there is a digital marker identifying that video file. NFTs may actually mark the new era in online content; an era where we eventually see every digital copy tagged with a serial number to trace and prosecute counterfeiting (McBride & Alexander, 2021) In other words, the specific traceability of NFTs would represent advantages for both consumers and artists. For the former, being able to quickly and easily identify and trace that their NFTs are original allows them to ensure at all times that what they own or are going to buy is authentic and not a mere copy or counterfeit. For artists, it is a relatively simple way to avoid piracy and counterfeiting without having to go through the reputational damage of trying to tackle piracy, as it can be seen as a way of curtailing online freedom to increase their potential profits (McBride & Alexander, 2021). However, while the above is true, in the sense that the use of blockchain technology makes it possible to identify at all times which NFTs are authentic, in practice counterfeiting and piracy could continue to persist. It is relatively simple, as expressed in this paper, to create an NFT in such a way that anyone could do it. Thus, an artist's original NFT could be copied into another NFT that is visually identical[16] (although not so from a contract address point of view). This imposes the need for the hypothetical buyer to carry out due diligence in order to avoid buying an NFT that is not the original one. Either by making sure which is the contract address of the original NFT or by using a Marketplace that provides verification services. The above implies that NFTs would not really solve the counterfeiting problem but would give rise to a new version of it. Until now, when someone was going to buy a work of art and wanted to make sure that the work was authentic, they would hire the services of a specialist (or go to an auction house with a brilliant reputation such as Christie's); NFTs have turned the tables so that the hypothetical buyer of one can either (i) check the contract address of the original work himself and see if it matches that of the NFT he wishes to buy or (ii) use the services of a reputable Marketplace (which would come to represent the role formerly performed by Christie's). It should also be noted, although it has already been mentioned above, that piracy would not be prosecutable as such in the NFT world. Recall that an NFT is not an original work or even a copy of it, it is a metadata file that points to a copy of the file (which may not even be accessible to the public). This means that hypothetical copies of famous NFTs can become a tremendously lucrative market for counterfeiters with no way to prosecute them from a legal point of view, at least for the time being. A different matter would be the articulation of mechanisms on the part of the Marketplace to verify whether an NFT is authentic or not and, if not, to proceed to its withdrawal from the market.
CONCLUSION
No one doubts that NFTs are a rising market and are currently attracting the interest of many investors as an alternative way to diversify their portfolio; however, perhaps some of this public interest in NFTs is due to confusion or a misunderstanding. NFTs, as discussed above, do not generally grant any ownership rights over the underlying asset (or even a copy of it). They are, rather, a sort of proof of ownership of a particular digital version of an asset. Likewise, and derived from their characteristics, it does not seem clear that the creation of an NFT without the authorization of the owner of the asset on which it is based is an infringement of copyright. On the other hand, we cannot ignore the fact that NFTs can play an important role in the structure and development of the global art market. Particularly in terms of (i) generating greater wealth for content creators, (ii) eliminating intermediaries (one of the fundamental purposes of blockchain technology) and (iii) ensuring greater traceability and thus combating piracy. Indeed, the creation of NFTs, and their corresponding marketplaces, could bring about a revolution in the art market. Artists could dispense with agents and their respective commissions (at least partially, as mentioned above) and de facto extend the droit de suit regime to cases in which it would not apply. In addition, and related to the above, the use of blockchain technology would allow to trace both the number of existing NFTs and each and every one of the operations that have been carried out with them; thus avoiding (or at least greatly reducing) the piracy of works. Time will tell if the NFT market prospers or if it is just a new technology that, although novel, will eventually be forgotten. The advantages it offers are significant, but so are the challenges it faces, some of which have been mentioned throughout this paper. For the time being, we can only await the development of the technology and the adaptation of the legislator to the changes it entails.
REFERENCES
CHOHAN, U. W., 2021. Non-Fungible Tokens: Blockchain, Scarcity and Value. Critical Blockchain Research Initiative (CBRI) Working Papers, pp. 1-14.
FERRARI, V., 2020. The regulation of crypto-assets in the EU - investment and payment tokens under the radar. Maastricht Journal of European and Comparative Law, 27(3), pp. 325-342.
FINMA, E., 2018. FINMA publishes ICO guidelines. Berna: Eidgenössische Finanzmarktaufsicht FINMA.
GIANNOPOULOU, A., Quintais, J. P., Mezei, P. & Bodo, B., 2021. The Rise of Non - Fungible Tokens (NFTs) and the Role of Copyright Law (Part I), s.l.: Wolters Kluwers.
GUADAMUZ, A., 2021. Can Sir Berners-Lee sell a NFT of the WWW code?
Available at: https://www.technollama.co.uk/can-sir-tim-berners-lee-sell-an-nft-ofthe-www-code
GUADAMUZ, A., 2021. Copyfraud and copyright infringements in NFTs. Available at: https://www.technollama.co.uk/copyrfraud-and-copyrightinfringement-in-nfts
GUADAMUZ, A., 2021. Creative Commons, commercial use and NFTs. Available at: https://www.technollama.co.uk/creative-commons-commercial-useand-nfts
IBM, 2021. What is blockchain.
Available at: https://www.ibm.com/topics/what-is-blockchain
LAPATOURA, I., 2021. Copyright & NFTs of Digital Artworks. Available at: https://ipkitten.blogspot.com/2021/03/guest-post-copyright-nfts-ofdigital.html
LEWIS, L., OWEN, J., FRASER, H. & DIGHE, R., 2021. Non-fungible tokens (NFTs) and copyright law.
Available at: https://www.twobirds.com/en/news/articles/2021/australia/nonfungible-tokens-nfts-and-copyright-law .
MARTIN, C. W., 2021. NTFs: a 2021 Internet Craze or a Fundamental Shift in how we
think of Digital Property and Copyright Law?.
Available at: https://www.lutzker.com/nfts-a-2021-internet-craze-or-afundamental-shift-in-how-we-think-of-digital-property-and-copyright-law/ .
MAZZONE, J., 2006. Copyfraud. Brooklyn Law School, Legal Studies Paper, 81(40), pp. 1026-1101.
MCBRIDE, R. W. & ALEXANDER, S. K., 2021. Non-Fungible Tokens Force a Copyright
Reckoning.
Available at: https://www.ipwatchdog.com/2021/04/22/non-fungible-tokens-forcea-copyright-reckoning/id=132435/
MEZEI, P., QUINTAIS, J. P., GIANNOPOULOU, A. & BOLO, B., 2021. The Rise of Non-Fungible Tokens (NFTs) and the Role of Copyright Law, s.l.: Wolters Kluwer.
NAKAMOTO, S., 2008. Bitcoin: A peer-to-peer electronic cash payment. Decentralized Business Review, p. 21260.
NBA, 2021 Terms of Use. Availale at: https://nbatopspot.com/terms
RENNOCK, M., COHN, A. & BUTCHER, J. R., 2018. Blockchain technology and regulatory investigations. The Journal, Volume 1, pp. 35-45.
SERGEENKOV, A., 2021. How to Mint an NFT.
Available at: https://coinmarketcap.com/alexandria/article/how-to-mint-an-nft
SHINODA, M., 2021. NFT Terms.
Available at: https://www.mikeshinoda.com/NFTTerms
U.S. SECURITIES AND EXCHANGE COMMISION, 2021. Framework for “Investment Contract”
Analysis of Digital Assets.
Available at: https://www.sec.gov/corpfin/framework-investment-contract-analysisdigital-assets
YOUNG LEE, J., 2019. A decentralized token economy: How blockchain and cryptocurrency can revolutionize business. Business Horizons, 62(6), pp. 773-784.
[1] The distinction between the different types of tokens is not trivial, since falling into one category or another may imply that they are subject to securities market regulations. For example, in the case of the USA, the SEC has indicated that certain tokens, which it calls "security tokens", are genuine securities and accordingly are subject to US securities market regulations. In order to assess whether a token qualifies as a "security" or not, the SEC applies the so-called Howey test. As it was developed by the US Supreme Court in the SEC v. Howey case, the test enables building a link between a financial transaction and an investment contract as security type. The so-called "Howey test" applies to any contract, scheme, or transaction, regardless of whether it has any of the characteristics of typical securities. The focus of the Howey analysis is not only on the form and terms of the instrument itself (in this case, the digital asset) but also on the circumstances surrounding the digital asset and the manner in which it is offered, sold, or resold (which includes secondary market sales). Therefore, issuers and other persons and entities engaged in the marketing, offer, sale, resale, or distribution of any digital asset will need to analyze the relevant transactions to determine if the federal securities laws apply (U.S. Securities and Exchange Commission, 2021). According to the Howey Test, a transaction is only an investment contract if (U.S. Securities and Exchange Commission, 2021): • It is the money investment. • There is an expected profit associated with the investment. Payment tokens: commonly known as cryptocurrencies. They have no further functions or links to other projects. • Utility tokens: are intended to provide digital access to an application or service. • Asset tokens: represent assets such as participations in real physical underlying, companies, or earnings streams, or an entitlement to dividends or interest payments. This is the case of NFTs.
[2] While this is true in general terms, it has been pointed out in some circles that NFTs would not really have this quality of scarcity. This is to the extent that there is nothing to prevent, say, an artist from reissuing new NFTs of the same song.
[3] At the moment of writing this paper, OpenSea is the largest NFT marketplace. Creators can even create / mint their own NFTs directly using Open Sea’s item minting tool. Other important marketplaces are Rarible, Superrare, Foundation and Bakery Swap.
[4] This does not mean that the owner of the NFT has no rights over the work. For example, Mike Shinoda (Linkin Park) has stated the following with respect to his NFTs: Only limited personal non-commercial use and resale rights in the NFT are granted and you have no right to license, commercially exploit, reproduce, distribute, prepare derivative works, publicly perform, or publicly display the NFT or the music or the artwork therein. All copyright and other rights are reserved and not granted (Shinoda, 2021). In the same sense, NBA’s Terms of Service regarding NFTs states that For the sake of clarity, you understand and agree: (a) that your purchase of a Moment, whether via the App or otherwise, does not give you any rights or licenses in or to the App Materials (including, without limitation, our copyright in and to the associated Art) other than those expressly contained in these Terms; (b) that you do not have the right, except as otherwise set forth in these Terms, to reproduce, distribute, or otherwise commercialize any elements of the App Materials (including, without limitation, any Art) without our prior written consent in each case, which consent we may withhold in our sole and absolute discretion (NBA, 2021).
[5] Some authors support this opinion, also considering that it may only be possible to speak of copyright infringement in the case that unauthorized copies of the work have been used and publicly communicated in the construction of the NFT. (Guadamuz, 2021). In fact, one could even consider the scenario in which a person creates an NFT without uploading the file to the network (keeping it locally on his computer) and without providing a link to the work. In this scenario it could be considered that there is no copyright infringement since the NFT (the only file available to the public) is still a hash of a copy of the work. (Guadamuz, 2021).
[6] In fact, as these lines are being written, a federal judge in the United States has ordered to halt the auction of a Jay-Z's musical NFT in the face of a lawsuit filed by Jay-Z alleging that the NFT had been created without his permission. (Guadamuz, 2021)
[7] In fact, there are currently projects to create NFT marketplaces for classical music on the BSC network. The decision is not arbitrary, but the creators are relying on the fact that these songs belong to the public domain.
[8] In this sense, authors such as Mazzone have requested lawmakers to modify copyright regulations in order to prosecute these practices (Mazzone, 2006).
[9] Article 80 of the Chilean Intellectual Property Act states that: Commits an offense against intellectual property and shall be punished with a fine of 25 to 500 monthly tax units: (a) anyone who knowingly reproduces, distributes, distributes, makes available or communicates to the public a work belonging to the public domain or to the common cultural heritage under a name other than that of the true author. (b) any person who claims or claims economic rights in works in the public domain or in the common cultural heritage. c) Whoever is obliged to pay remuneration for the performance or communication to the public of protected works, omits to draw up the corresponding performance forms.
[10] So far, the only American state to introduce this regime has been California. Accordingly, the California Resale Royalty Act of 1976 provides for a minimum royalty of 5% for the artist for successive sales of the original work.
[11] In the field of copyright, the resale right is an unassignable and inalienable right, enjoyed by the author of an original work of graphic or plastic art, to an economic interest in successive sales of the work concerned. The resale right is a right of a productive character which enables the author/artist to receive consideration for successive transfers of the work. The subject-matter of the resale right is the physical work, namely the medium in which the protected work is incorporated.
[12] According to the third recital: The resale right is intended to ensure that authors of graphic and plastic works of art share in the economic success of their original works of art. It helps to redress the balance between the economic situation of authors of graphic and plastic works of art and that of other creators who benefit from successive exploitations of their works.
[13] According to article 2.1 of the Directive: For the purposes of this Directive, ‘original work of art’ means works of graphic or plastic art such as pictures, collages, paintings, drawings, engravings, prints, lithographs, sculptures, tapestries, ceramics, glassware and photographs, provided they are made by the artist himself or are copies considered to be original works of art.
[14] Recently, NFTs have been bought and sold in which, subsequently, the original object they represented has been destroyed. For example, in the case of a Bansky artwork, after an NFT of the work was created, the artwork was destroyed. In such cases, it could be argued that the NFT no longer represents a work of art but is the work of art itself and that, therefore, the purchase and sale of the NFT itself is the purchase and sale of the work. However, as mentioned above, such transfers would not fall within the scope of protection of the directive.
[15] These cases of interaction of the legal and digital world could generate problems. In the case of the use of marketplaces, for example, the situation could arise where the transfer of the NFT involves the transfer of the underlying physical asset and the regime of the aforementioned directive is applicable, but the commission received by the artist is lower than that legally provided for. In this sense, OpenSea recommends a fee of 2.5% whereas the directive stipules a range that goes from 4% to 0.25% depending on the amount of the transaction.
[16] In fact, additional problems arise with the proliferation of different blockchain networks and their different particularities. Thus, an NFT could go out on the BSC network in its original version and be immediately copied on the Ethereum network. The prospective buyer (or the Marketplace) should be able to also be able to identify these potential frauds and fight against them.