What are the copyright implications of NFTs?

Non-Fungible Tokens (NFTs) have been around since 2014, but only more recently gained popularity in the fields of digital and digitally held assets. Despite the almost decade-long history of this technological development, many individuals still wonder what actually is a Non-Fungible Token? By its name, one can infer it must be the opposite of a Fungible Token, but for those who are not up to speed on tech terminology or familiar with non-traditional asset categories, the mystery remains.

Fungible Tokens are cryptocurrencies, like Bitcoin, that have equivalent fractional values to one another the same way four quarters make up $1 and ten $1 bills are equivalent to a $10 bill, therefore making the currency “fungible” or interchangeable. Non-Fungible Tokens, on the other hand, are not made to have equivalent fractional values and instead represent unique and individualized values, unlike currency. It is this uniqueness that has driven the public’s perception of digital scarcity in the realm of NFTs, something that most everyone can understand at its most basic level: supply and demand.

Both Fungible and Non-Fungible Tokens are built and reside on blockchain technology. The purported downside to this is that, particularly when dealing with larger files like a piece of artwork, the blockchain is unable to store the actual underlying digital asset. The result being, as described recently by one of the original NFT creators Anil Dash in an article for The Atlantic, “[t]his means that when someone buys an NFT, they’re not buying the actual digital artwork; they’re buying a link to it.” (“NFTs Weren’t Supposed to End Like This,” April 2, 2021)

Thus, the “Token” portion to an NFT is truly a digital item designed to track the asset by its “TokenID” and attribute ownership to the current owner, as the transaction histories dating from the “minting” (i.e., initial creation and recordation on blockchain) of the NFT to current ownership are technically public.

The ownership history of NFTs is the blockchain equivalent of real property records recorded with the local county’s recorder of deeds, or for those of us in intellectual property, the assignment records recorded with the U.S. Patent and Trademark Office or U.S. Copyright Office.

Creation and purchase of individual NFTs

The intention of this article is not to provide an all-encompassing assessment of NFTs and each type of intellectual property, but rather a focus on NFTs and associated implications for copyright holders and copyright law. However, in order to better understand these implications, it is also beneficial to understand both how an NFT actually comes into existence or becomes “minted” as well as how the ownership of an NFT is transferred.

The minting process really involves creation of code on a blockchain network (e.g., Ethereum, Bitcoin Cash, EOS, and the like) that includes a unique ID to the digital asset with additional fields for ownership details. This means that anyone with access to one of these platforms has the capability to mint a new NFT.

Once the NFT is created, the digital asset can be listed or otherwise offered for sale to buyers. Purchasers of NFTs must have digital wallets capable of receiving and storing such digital assets, the same way physical wallets are designed to hold traditional currencies, and can purchase NFTs on platforms such as OpenSea, Mintable, and Rarible, using cryptocurrencies (which are ultimately purchased via credit card payment).

Take, for example, what The Andy Warhol Foundation for the Visual Arts recently did in minting five digital works restored from Andy Warhol’s floppy disks, originally created on Andy Warhol’s Commodore Amiga computer in the 1980s.

The five NFTs were created specifically to be auctioned off, with no intention of creating additional NFTs (works can be duplicated the same way a traditional artwork would be created as “limited edition” of any number of prints). The sales for these five NFTs alone totaled over $3.3 million in May 2021. Ultimately the proceeds from the sales went on to provide annual funding for The Andy Warhol Museum as well as emergency funds for artists impacted by COVID-19.

With increasing demand for “minting” related to creative works (NFTs are also minted for works of music, game assets and various types of videography), this phenomenon inevitably raises questions in relation to not only the related copyright ownership, but also ownership enforcement issues.

How NFTs impact copyright owners

It is no secret that the sale of an NFT does not necessarily transfer the underlying copyright in the work which exists “off-chain” to the purchaser. Such is the case when selling a physical copy of nearly any type of creative work — the transfer of the underlying copyright is up to the creator or most recent copyright owner.

Ownership of a copyright provides exclusive rights to the owner under 17 USC § 106 — the right to reproduce the work, prepare derivative works, distribute copies, to display the work publicly, and to perform the work publicly. So how will the transfer of a newly “minted” sub-edition of a creative work ultimately impact a copyright holder? Will we see a new wave of counterfeit issues for copyright holders? Will this increase the burden on copyright owners to employ heightened monitoring standards on platforms that the majority of the public has never even accessed?

Although the popularity of NFTs has only fairly recently skyrocketed, the answers to these questions have begun to unfold.

Creation of an NFT can be categorized as a copy or even a derivative of the original work (“a work based upon one or more preexisting works” such as an “art reproduction … or any other form in which a work may be recast, transformed, or adapted.”).17 USC § 101. In other words, under U.S. copyright law the copyright holder (absent a license) is and should be the only one with the authority to transform the original work into an NFT.

However, as we have all come to know, shortly behind any unique work of finite number with high demand is a potential counterfeiter or scam artist waiting in the wings — remember the vast infiltration of Beanie Baby toys? This craze, among others, have their respective histories with counterfeit issues. Similarly, artists have recently been subject to individuals fraudulently offering the artists’ works as NFTs without the artist’s permission.

For example, on July 1, 2021, one of the arguably most well-known NFT creators, Larva Labs (that in 2017 created the CryptoPunk project consisting of 10,000 unique characters), submitted a Digital Millennium Copyright Act (DMCA) takedown request to NFT platform Foundation for the online display of CryptoPunk work offered by Ryder Ripps as a work of his own. The dispute appears ongoing but evidences yet another potential hurdle for even self-declared crypto-artists that have plagued creators since the dawn of time: copycats.

Access to viewing NFTs on the various NFT platforms is public. While this is useful for copyright owners (such as Corbin Rainbolt and Larva Labs, which was likely already actively involved on Foundation) in identifying potential unauthorized reproductions or derivative works, it does potentially add to a copyright owner’s ever-growing list of platforms to monitor for such unauthorized works. These issues highlight the importance of both employing and relying on important enforcement techniques ranging from simple solutions such as watermarks to the DMCA. The Copyright Management Information (CMI) provisions of the DMCA (e.g.,17 USC § 1202) will also likely come into play as more copyright owners are forced to police NFT platforms.

International implications

On the plus side, the minting of an NFT by the author of a creative work may have broader positive implications when it comes to the current international state of artists’ resale rights. The minting and sale of NFTs is largely unregulated, but also highly accessible to an international audience.

While there have been decades-long disputes over artists’ resale royalty rights in the U.S., also known as droit de suite, NFTs present potential workarounds for artists in this respect. Currently, the EU, UK, Australia and the Philippines officially recognize artists’ resale royalties, whereas the U.S., as a whole, has long fought the idea — even the California state equivalent was held to be preempted by the U.S. Copyright Act by the 9th U.S. Circuit Court of Appeals in 2018, effectively limiting the resale right to resales which occurred during 1977. (Chuck Close v. Sotheby’s, Inc.)

By contrast, NFT platforms do offer artists the possibility to claim resale royalties on subsequent sales of the artists’ work not otherwise traditionally offered in certain countries.

Although it remains to be seen what potential long-term impact NFTs will have on both domestic and international copyright laws, for now it appears the typical hurdles to copyright owners exist, albeit with some added benefit.

Original post: https://www.reuters.com/legal/transactional/what-are-copyright-implications-nfts-2021-10-29/

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