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Legal Considerations on NFTs and Digital Ownership

Introduction

Non-Fungible Tokens (NFTs) have shaken up the art world during the last couple of months. Their popularity seems to have grown rapidly during the pandemic. The corona restrictions have forced many of us to lead a more “digital existence”, which perhaps explains why NFTs promise of delivering ownership of digital goods has received so much public interest.

The fundamental problem with ownership in the virtual work, is that digital products can be reproduced in exact copies and sold over and over again millions of times with little or no costs. NFTs helps to resolve this so-called “double-spend problem” by introducing scarcity, uniqueness and identifiability to digital goods.

Definition of NFTs

I define NFTs as unique blockchain-based tokens that are used to track ownership of assets. To fully understand what NFTs are, we can start by understanding what tokens are, and understand the concept of “fungibility”.

Tokens are digital unit of value on a blockchain that are tied to some form of asset. Tokens can represent anything, for example stocks, IP rights, coins, credibility points, or special access to a service or a feature.

Fungibility is synonymous with interchangeability. Bitcoins are a fungible token, as one bitcoin can be exchanged with another one, and it makes no difference to the trading parties. Another characteristic of fungible assets is that they can be divided into smaller unit, e.g., a bitcoin can be divided into satoshis.

Non-fungible tokens on the other hand are not interchangeable and cannot be divided into smaller units. Each NFT has unique value in itself. Non-fungible assets could be anything with sentimental value to the owner or a copyright attached to it.

NFTs contain a “hash” of the tokenized asset and typically contain a link to an internet address (URL) where the digital asset can be experienced. Common use cases for NFTs are collectibles, arts, and items in computer games.

Prominent purchases of NFTs include:

  • The third-most expensive artwork by a living artist was “Everydays: The First 5000 Days”, an NFT made by the digital artist Beeple. It was sold for USD $ 69.3 Million (paid in Ether) at Christie’s auction house in March 2021. The artwork was a collage of 5000 digital images made by Beeple everyday throughout 13 ½ years.[1]
  • Journalist Kevin Roose wrote a column in The NY Times about NFTs and had the excellent idea of turning the article itself into an NFT. The auction ended with a winning bid of 350 Ether, or about USD $560,000.[2]
  • Twitter CEO and Co-founder Jack Dorsey sold his first tweet as an NFT for USD $2,915,835.[3
  • NBA Top Shot Moments are digital collectibles of NBA highlights that collectors can buy, sell and trade much like traditional paper-based basketball cards. The most expensive Top Shot Moment sold to date is a Lebron James dunk for the LA Lakers, sold for USD $ 208.000.[4] Overall, Top Shot have generated sales of more than USD $ 400 Million to date.[5]
How to make an NFT

Making an NFT is simple and easy.  To illustrate, I have made an NFT out of Futuristic Lawyer’s logo. It can be viewed here and bought for the humble price of 0.01 ETH (currently around USD $25).

What I did was to:

  • Download a crypto wallet and transfer some Ether to it (I used Coinbase Wallet),
  • Connect it with my account on the NFT marketplace Rarible,
  • Upload the original Futuristic Lawyer logo and fill in a few relevant details along with a description,
  • Pay the so-called minting fee and the listing price (which was unproportionally expensive compared to the value of my NFT).

And voilà! The NFT is made and put on auction.

Legal Considerations

In my posts on Audius and Rocki and the Global Copyright Registry, I write about how IP rights can be marked by tokens on a blockchain.

The NFT marketplace mintable.app provides the option of transferring all copyrights when an NFT is purchased. However, in the absence of an explicit, written agreement between the seller and the buyer of an NFT, there is no transfer of copyrights. In other words, the buyer of an NFT is not allowed to publicly display the NFT or commercialize it in anyway, unless it has been agreed so.  For example, the purchase of world’s most expensive NFT, “Everydays: The First 5000 Days”, included some display rights. The crypto investors behind Metapurse, that bought the NFT, plans to build a virtual museum in the Metaverse to house and publicly display Beeple’s images.[6]

In general, digital work is not allowed to be resold. That is because the principal of exhaustion (first sale doctrine in the US) does not apply to digital works.

The principal of exhaustion (“first sale” doctrine in the US) implies that once a work protected by copyright has been lawfully placed in circulation with the copyright holder’s consent, the copyright holder can no longer object to that copy being resold by the person who has acquired it. Without the principle of exhaustion, it would be a copyright infringement to resell used furniture, Pokémon cards, clothing, a car etc.

In the Tom Kabinet Case (as summarized on my blog) the Court of Justice of the European Union found that the principle of exhaustion did not apply to digital work.  The same conclusion has been made by courts in the US.[7] As a general rule you not are thus not allowed to resell digital work without permission from the copyright holder. The logic behind the court’s resonation is aligned with the double-spend problem as referred to in the introduction.

Although digital work is not allowed to be resold, the NFT market is booming. From a legal standpoint there is no problem in that.  Crypto experts and lawyers in the space unanimously agree that the owner of an NFT is not entitled to any ownership claims in the underlying asset. Unless the buyer and the seller have contractually agreed otherwise.

Contrary to some mainstream beliefs, what you buy when you buy an NFT is the digital representation of an asset, not the asset itself. For example, Jack Dorsey’s infamous tweet is still publicly available on Twitter’s platform and the rightful owner of the Tweet is still Jack Dorsey. The buyer of the NFT owns nothing more than a hashed version of the metadata and computer code behind the tweet.[8] Similarly, “the owner” of a Top Shot Moment does not really own it – the NBA retains all commercial rights.[9]

In some cases, the seller of the NFT will not even have ownership rights in the tokenized asset to begin with. Copyright theft is a common occurrence in the NFT market space. No technical security measures exist, as far as I am concerned, to prevent theft and sale of NFTs without the artists permission. The idea behind NFTs is to serve as a proof of authentication, and to verify origin and ownership of an asset. If the seller has no authorization to profit from the work, the NFT may be valueless, even more so than “a fake Mona Lisa”.

Buyers of NFTs owe themselves to fulfill their due diligence. This means that they have to make a background check on the seller and the NFT they are buying. Perhaps even enter into a formal agreement with the seller to clarify the ownership rights.

Crypto Idealism

With these legal considerations in mind, one question begs itself:

Why would anyone spend thousands and millions of dollars on an NFT with no ownership rights to the tokenized asset?”

My simple answer is crypto idealism. The NFT whales are not just investing in the art, but in NFTs as an asset class, and even more broadly, in the idea and the potential of blockchain tech.

So, what is the potential of blockchain? On a more overarching level, the crypto space represents a strong countermovement to the centralized tech giants machine learning methods and disregard for privacy. Undeniably, the big tech companies hold an unfathomable power over modern-day humans.

The crypto space represents a democratization of the virtual space. The so-called blockchain revolution[10] is all about ensuring digital trust, privacy, transparency, and security. This can be achieved in a peer-to-peer network where the power is distributed, opposed to centralized among a few, powerful actors.  Ascribing real value and ownership rights to digital goods is a key promise of NFTs. I personally believe that this is the ideological foundation where the massive investments in NFTs come from.

From a legal perspective, an NFT provides the holder with a sort of “idealistic right” to the tokenized asset, much more than any actual property right. I don’t see anything wrong with that, as long as buyers of NFTs are clear on what they are purchasing. Only time will tell whether the market for NFTs will continue to grow and develop, or if something else entirely will take its place.

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[1] https://www.christies.com/features/Monumental-collage-by-Beeple-is-first-purely-digital-artwork-NFT-to-come-to-auction-11510-7.aspx (05-04-2021).

[2] https://www.nytimes.com/2021/03/26/technology/nft-sale.html (06-04-2021).

[3] https://www.theverge.com/2021/3/22/22344937/jack-dorsey-nft-sold-first-tweet-ethereum-cryptocurrency-twitter (06-04-2021).

[4] https://hoopshype.com/lists/most-expensive-nba-top-shot-moments/ (06-04-2021).

[5] https://nbatopshot.com/ (06-04-2021).

[6] https://www.historyofinformation.com/detail.php?id=5445 (27-04-2021).

[7] See for example “Capitol Recorol Records, LLC v. ReDIGI, Inc.: 934 F . ReDIGI, Inc.: 934 F. Supp. 2D 640 (S.D . Supp. 2D 640 (S.D.N.Y. 2013)”.

[8] https://www.technollama.co.uk/what-do-you-buy-when-you-buy-an-nft (25-04-2021).

[9] https://decrypt.co/60808/so-you-bought-an-nba-top-shot-nft-what-do-you-actually-own (25-04-2021).

[10] See Tapscott & Tapscott (2018), Blockchain Revolution: How the Technology Behind Bitcoin and Other Cryptocurrencies Is Changing the World.

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