COMMENTARIES
Posted April 21, 2022
Some Thoughts on NFTs and Copyright Law
As a new crypto asset class, NFTs appear to exist almost unbound by current regulatory systems. Not so. It is important to remember that NFT's are subject to copyright law and other IP laws in the same way as traditional artwork.
Article At-A-Glance
- Despite their newfound popularity, it is important to remember that NFTs are subject to copyright law and other IP laws in the same way as traditional artwork. NFT ownership is more even complicated.
- The NFT industry has also been hit by a wave of litigation for copyright infringement. Companies including Nike, and Hermes have filed lawsuits against NFT projects.
- Regardless, the NFT industry continues to rise in popularity and value. The industry that had over $40 billion in sales volume during 2021, is seeing multiple new patents filed for NFTs and metaverse-related development.
NFT stands for “Non-Fungible Token”. NFTs are relatively new and exciting. Top selling NFTs generate massive price tags and they’re only becoming more popular. The most expensive NFT of 2021 sold for $69 million. Estimates put average monthly sales for NFTs at about $2 billion. Earlier this year, rapper Eminem spent 123.45 units of Ether cryptocurrency — worth over $450,000 at the time — on an image of an ape. What to make of it all?
Introduction
A NFT has a unique identification token tied to the person who bought it, acquired it or made it. Being digital it can be copied. However, the ownership of that token is marked in a ledger, usually the Ethereum blockchain, so the owner has a record that they own that token.
NFTs are digital files such as photographs, videos, or audio files that can be bought and sold with cryptocurrency. NFTs may be large files and, thus, a link to the actual photo, video, or audio file is what is stored on the blockchain rather than the actual piece of artwork.
Whenever an NFT changes hands, the underlying blockchain technology creates a public record of the transaction on its digital ledger. The record includes the details regarding the specific NFT involved in the transaction and the identities of the digital wallets (the software-based system used to hold the NFTs) utilized to transfer the NFT.
The idea is that, while anyone can read the article or view the tweet, this gives one person (or a small group of people) “ownership” in that work. In reality, that ownership is somewhat limited. Other than purchasing the token, buying an NFT doesn’t confer copyright ownership.
Ownership does not grant the right to print or distribute the work without the copyright holder’s permission, especially if the artist didn’t authorize the NFT in the first place.
In many ways, buying an NFT is similar to buying a limited-edition poster or an autographed copy of a book. It is special and (more) unique to you but that doesn’t mean that the original work is now yours. It confers to you no rights that others have, you just have a slightly more unique connection to it.
The Copyright Issue
The recent NFT “boom” is really only a few months old. So the courts have not even begun to address numerous legal issues that have begun to percolate. It will likely be years before the courts significantly address the issue of NFT infringement. By then, the fad may already be over and done with.
For now NFTs are the wild west. So pay attention to the glowing headlines but also notice the negative stories as well. The NFT gold rush has, predictably, attracted spammers, fraudsters, and infringers. Some thieves simply grab digital URLs and other digital content and release NFTs based upon them. This happens because anyone can create an NFT for anything. The only practical downside is the free market. An NFT not from the original artist will usually be worth less money. That and because doing so is almost certainly a copyright infringement.
Arguably, the NFT open-market approach heightens the risk of counterfeits, scams, and fraud. One accusation, for example, is that a scammer might copy an image of someone else’s art and sell it as an NFT on OpenSea. OpenSea is reportedly working on an automated way to spot fakes and has moderators who investigate suspicious offerings.
The incredible growth in NFTs combined with extremely valuable individual NFTs, weak security infrastructure, a largely unregulated market, and no recourse for victims to retrieve their stolen property has made NFT creators and owners natural targets for thieves. Even the savviest NFT owners can lose millions of dollars in a matter of seconds if they fall victim to a scam or a hack.
To date, the consensus is that the NFT marketplaces have done little to deter fraudulent activity on their platforms. They have instead created systems where thieves can act without fear of retribution or consequences. Indeed, crypto crime, of which stolen NFT transactions are included, accounted for a record-setting $14 billion worth of blockchain transactions in 2021.
Consider the case of William Shatner. Back in July 2020, the actor offered a series of trading card NFTs based upon his career. The sale netted him an estimated 125,000 dollars, roughly one dollar for each token he put out there. However, by March 2021 his tone has changed.[1]
Other examples aboud. For example artists are complaining that indie developer Jason Rohrer is offering NFTs based on their commissioned work. Other artists haved noticed that their work turning up on NFT websites without their permission, much of this being done by bots.[2]
This increased popularity of NFTs has led some to question the role that copyright law will play in the protection of this new type of artwork.
While NFTs are relatively new and may be an unfamiliar type of art, copyright law will still apply to NFTs the same as it does to any other traditional artwork. An artist who creates a new piece of artwork will automatically acquire a copyright of that new artwork.
There are certain rights that are acquired by a copyright owner automatically upon creation of a copyrighted work. A copyright owner has exclusive rights to reproduce the work, prepare derivative works, and distribute copies of the work.
Thus, a copyright owner has exclusive rights to make an NFT based on an original piece of artwork because “creation of an NFT can be categorized as a copy or even a derivative of the original work.”
Imagine that you own the copyright to a famous piece of art. As the copyright owner you have the exclusive right to reproduce the work, prepare derivative works, and distribute copies of the work. You might create an NFT based on the artwork. You could still sell that NFT without transferring the copyright to the underlying piece of art, just as you would be able to create and sell a reprint of the underlying piece of art. Because your rights are exclusive, you can also ensure that others do not infringe on your rights by bringing suit for copyright infringement if anyone creates art, such as an NFT, that is copying or infringing my copyrighted work.
But how does copyright law fit into NFTs that are based on a copyrighted work but are not created by the rightful copyright owner?
It is important to keep in mind that digital artwork is still artwork as it has always been, and copyright owners and their licensees are the only ones who should be creating NFTs based on copyrighted artwork.
A non-copyright owner may own a validly acquired re-print of a copyrighted work or may just want to create an NFT based on a piece of artwork that they admire.
Creating a piece of artwork based on a copyrighted work may only be non-infringing if it is subject to the fair use exception to copyright law or if the non-copyright owner has received a license from the copyright owner.
Thus, the NFT may be infringing on the original work unless it has been changed such that it has a “new expression, meaning, or message” that would subject it to the fair use doctrine.
Conclusion
Being a trailblazer in a new area of technology is exciting and people may want to create NFTs while the market is booming. Investors should take advantage of this market but should continue to consider IP laws as they always have. Through NFTs, blockchain technology has provided creators with a fresh new piracy concern.
Though there is also a new business opportunity in NFTs, it’s unclear how sustainable that model really is, especially at its current level of hype. The simple truth is this, when you have a system where anyone can make and sell tokens of anything, it’s going to be widely abused. That is exactly what we’re seeing.
Until there are checks in place to ensure that NFTs were created by the artist or rightsholder, it’s going to serve as a much bigger piracy threat than opportunity.
- As a new crypto asset class, NFTs appear to the public to exist almost unbound by current regulatory systems.
- Despite their newfound popularity, it is important to remember that NFTs are subject to copyright law and other IP laws in the same way as traditional artwork. NFT ownership is more even complicated.
- The NFT industry has also been hit by a wave of litigation for copyright infringement. Companies including Nike, and Hermes have filed lawsuits against NFT projects.
Regardless, the NFT industry continues to rise in popularity and value. The industry that had over $40 billion in sales volume during 2021, is seeing multiple new patents filed for NFTs and metaverse-related development.