Numerous blockchain projects, such as decentralized autonomous organizations (DAOs) and non-fungible tokens (NFTs), aim to offer new or more practical ways to own and market creative works.
However, several of these initiatives have encountered copyright issues as a result of misunderstandings over how copyright law relates to NFTs. Here are just a few issues they have run into:
- Alejandro Jodorowsky’s beautifully drawn pitch book for a Dune adaptation that was never realized was purchased by Spice DAO. Some participants hoped that by purchasing the book, they would be able to realize Jodorowsky’s filmic vision. But as soon as the concept was rejected by the Dune copyright holders, this initiative was abandoned.
- Popular NFTs allow “right-clickers” to save JPEG copies of the artwork. These NFTs’ owners claim that this violates their copyrights. One of the two can only be correct.
- The ownership of the NFTs for Pulp Fiction is the subject of a legal dispute between Quentin Tarantino and Miramax.
- In a particularly terrible case, Andy Williams produced an NFT using TV video evidence that showed the murder of his daughter. According to reports, Parker was told that obtaining an NFT would give him sufficient copyright in the video to have it taken down from Facebook and YouTube. But copyright doesn’t operate that way; the ownership of the copyright remains with the television station that captured the clip, and minting an NFT doesn’t alter that.
- The director of blockchain at The Associated Press suggested that making NFTs of some of its images would make it simpler to get illegal users to take them down. But copyrights don’t come from the blockchain; they come from copyright law. Having an NFT of the work does not make the procedure of filing a copyright lawsuit or a DMCA takedown notice any simpler.
- Too many NFTs to count use stolen works of art.
Although substantial influence over a creative work can be obtained through ownership of an NFT, this control is not inherent. Unless the creator takes explicit action to ensure that it does — ideally by signing a standard, formal copyright license to the work associated with the NFT – copyright law does not grant an NFT owner any rights.
Our analysis of a few current NFT projects and their licenses demonstrates that very few of them go through all the necessary motions to have NFT copyrights work as people would expect. The legal implications should be considered during the NFT design process, not as an afterthought.
An introduction to blockchain
The idea of ownership is the foundation of many blockchain projects. But what does really owning an NFT mean? We must first understand the distinction between “on-chain” and “off-chain” assets in order to respond.
In the crypto world, it’s typical to hear statements like “Lily owns 10 Bitcoins.” An asset that exists as a standalone entry on a blockchain is called a “on-chain asset” and refers to bitcoin. When someone refers to Lily as “owning” a Bitcoin, they usually mean that she has direct or indirect control over the private key to a blockchain address. She has the option to send that Bitcoin to another address if she so chooses.
NFTs also contain an on-chain component, often a smart contract based on software that may be started by the keyholder. However, occasionally, that blockchain entry stands in for something that is off-chain, such as a tungsten cube. The real tungsten cube is not the same as the Tungsten Cube NFT blockchain entry. The Tungsten Cube NFT and the actual tungsten cube, however, are related, claims the project’s inventor TungstenDAO.
In this case, an unnoticed legal linkage connects the rights to an off-chain item (the physical cube) to an on-chain asset (the NFT). Although some legal scholars are dubious as to whether tethering will actually hold up in court, lawyers occasionally refer to this link as “tethering.”
This suggests that there are three types of assets engaged in this NFT.
- The NFT entry on the blockchain
- The physical cube in a warehouse
- The legal authority to regulate the physical cube
If all goes according to plan, the on-chain NFT and off-chain cube are connected by a legal right. Due to the fact that they also hold the corresponding legal right, the current owner of the NFT is able to operate the actual cube.
A primer on copyright
A tungsten cube is a unique physical object that exists only in one place. Any additional cube, regardless of how similar it may appear, is distinct. A creative creation, however, can be both concrete and multifaceted. It may exist in a single special item, such as an oil painting on canvas. Like when a publisher prints thousands of copies of a book, it might exist in several versions simultaneously. It may only ever exist once, like when someone tells another person a story.
Creative work is not, legally speaking, the same as any of its copies; someone may be the owner of a copyright but not a particular copy of their work, or vice versa. This is due to the fact that a copyright is a constrained set of exclusive rights unrelated to any particular physical thing. Most crucially, having the copyright to a creative work involves the right to produce more copies of the work and to prevent others from doing so, which is why it is referred to as a “copy” “right.” The ability to create derivative works, such as a movie adaptation, is also included.
Let’s imagine Ross publishes a book and sells Lily a copy. They each possess the following:
Now imagine Lily wants to adapt Ross’ book into a motion picture. She requires Ross’s consent, which she can obtain in one of two ways: either by paying Ross directly for the copyright or by persuading him to grant her a license.
A “transfer of ownership” occurs when Lily purchases the copyright, transferring all of Ross’s rights to her. She would have the choice to produce her own film as well as to approve other derivative works like graphic novels or action figures.
There are more limitations with a license. Ross would give Lily certain rights, but he’d keep the overall copyright, thus the outcomes might resemble this:
For other sorts of creative work, the same splits apply. If you purchase an oil painting from an artist, for example, you may not obtain ownership of the copyright. Although the original painted canvas is yours, the artist retains the copyright and is free to sell copies if they so choose. You would require a different agreement if you wanted to purchase the copyright as well.
However, the internet effectively reduced the cost of copying to zero. NFTs are a reaction to this in several ways: because there are only so many NFTs in a mint, they create digital scarcity and can be priced similarly to books and CDs of old. But they’re running into a fundamental feature of the internet: it’s trivially easy to make copies, and regular people are constantly pushing the boundaries of copyright law.
Getting back to NFTs
NFTs, as previously explained, can possibly be “tethered” to a legal right. However, there are actually two different rights at issue here: the right to own one copy of the creative work (much like one may own a tungsten cube), and the right to make copies and produce derivative works from the original creative work. These rights may be combined into a single NFT. They may be split up, though, into what an artist might refer to as a “Copy NFT” and a “Copyright NFT,” for example.
When it comes to digital copies rather than physical ones, matters become more problematic because the law has an unusual definition of “copy.” Computer hard drives and occasionally even computer memory are included as “material things… from which the work might be observed, reproduced, or otherwise conveyed.”For copyright reasons, every computer interaction with the work results in the creation of a unique “copy”; even simply accessing a webpage causes your computer to create a “copy” of the graphics on that page for you to view.
Transfers of copyrights and transfers of copies are distinct, according to US copyright law. Thus, for the majority of NFTs, a “Copy NFT” actually requires some sort of “Copyright NFT” feature that permits the owner to create additional copies; otherwise, they will commit an infringement as soon as they view the artwork on their computer.
Copyright is difficult to sell. It is easier to get a license.
It is trickier than it seems to verify if NFT owners actually have the copyrights they believe they do. Take a look at the next section of the Bored Ape Yacht Club Terms & Conditions:
i. You Possess the NFT. Every Bored Ape on the Ethereum blockchain is an NFT. You fully own the underlying Bored Ape, the Art, when you buy an NFT.
This appears to link ownership of the copyright to the ownership of the NFT, meaning that if a buyer sells the NFT, they also appear to sell the copyright.
The writing aspect is not a problem because, according to federal law, the terms on the website are considered “writing.” Additionally, the E-SIGN Act allows even digital signatures, such as a person’s name displayed in a script typeface, to be considered signatures. Creating an account on a website and clicking “I agree” to the rules has been deemed sufficient proof of “intent to sign” by courts. Therefore, by changing the terms to include a signature line, an NFT producer might fulfill that need.
The true issue surfaces when one NFT buyer attempts to transfer ownership of their copyright. Let’s say Lily purchases an NFT from a fictional business that uses similar words to BAYC. From that business, Lily purchases the copyright in its entirety. She can tweet about it, bring a lawsuit against right-clickers for copyright, etc. The NFT is then sold by her to Ross on OpenSea. The copyright should also be transferred, in theory.
Lily still owns the copyright even after selling the NFT if all she did was execute the smart contract because there is no formal legal document transferring the ownership of the intellectual property.
Ross can assert that Lily accepted the terms of service, which state that the owner of the NFT is in charge of the copyright when she signed the contract. She signed a smart contract using her digital signature. However, there may be no mention of copyright or a link to the terms in the smart contract. If it did, there is no guarantee that Lily read or was aware of those terms. She wouldn’t have legally bindingly signed a transaction with her digital signature. Additionally, legal agreements usually only bind the parties who have given their explicit consent.
It is a challenging and complex task to move from a smart contract to a legally binding contract. It becomes much more challenging when off-chain assets like copyrights and tungsten cubes are included in the mix. Users have a strong case that nothing in the legal contract applies to them because they only engaged with a smart contract, even though the copyright in an NFT-linked artwork is based on a legal contract.
It is a challenging and complex task to move from a smart contract to a legally binding contract. It becomes much more challenging when off-chain assets like copyrights and tungsten cubes are included in the mix.
A license does not need to be signed, making it simpler to license a copyright than to transfer it. Even while it is much safer to put the terms in writing for any economically significant transactions, they are not even required. In order to circumvent the signed-writing issue, NFT’s developers could retain ownership of the copyright before providing a license. No one owns the copyright if Lily purchases an NFT and sells it to Ross, who then sells it to Kyra, but each receives a license while they are in possession of the NFT:
At first appearance, it appears more complicated, because the developer must now deal directly with each NFT owner, rather than just the first. However, it also means that Kyra doesn’t have to stress about Lily and Ross correctly signing the transfers. She can be sure that the license was granted to her directly and automatically by the creator as stated in the terms of service.
This strategy has been used successfully before in free and open-source software licensing, such as the GNU General Public License and the Creative Commons Attribution License. This paradigm has also been used by several NFT licenses, such as the RTFKT license.
To ensure that NFT owners really obtain the requisite copyright rights to NFT-linked artwork, NFT developers must carefully consider how they structure their conditions. Additionally, copyright licensing is far simpler to implement than a direct transfer of ownership.
Derivative Rights
Why the Bored Apes reached cultural and economic escape velocity is a mystery. It will always be considered one of history’s great mysteries. However, it is sometimes said that one contributing aspect is that the Bored Apes conditions permit owners to produce derivative works, such as comics and merchandising. The BAYC terms permit unfettered commercial usage of NFT art, in contrast to many NFT projects. However, BAYC’s conditions actually highlight how challenging and fraught with pitfalls creating derivative works can be.
The BAYC terms permit unfettered commercial usage of NFT art, in contrast to many NFT projects. However, BAYC’s conditions actually highlight how challenging and fraught with pitfalls creating derivative works can be.
The license of BAYC conflicts with its earlier assertion that “when you acquire an NFT, you own the underlying Bored Ape, the Art, completely.” This is the first issue. If consumers truly “own” the artwork “completely,” Yuga Labs has no further obligations, making the commercial-use license unnecessary. This is yet another indication that the claim that Bored Ape NFT owners “own” the artwork, along with many other assertions regarding who actually owns the stuff that consumers “buy” online, cannot be taken at face value.
The second issue is that these conditions are incompatible with the resale of NFTs. Let’s return to Lily to understand why. NFT 12345 is owned by Lily, and according to its rules, she may give sublicenses for derivative works based on it. She grants a license to a filmmaker named Ferb, who also owns second copyright on the derivative work, to use it in a film. Then, upon the release of the film, Lily sells NFT 12345 to Ross. What happens to Ferb’s license?
One straightforward explanation is that whatever sublicenses Lily has granted will expire whenever she sells the NFT, ending her control of it. But Ferb would hate this because it might be copyright infringement to show their movie without permission! Additionally, Lily is suffering since artists wouldn’t want to pay for rights that were forfeited each time the NFT changed hands.
Another response might be that Ross is powerless to suspend Fern’s license, which remains in full force. Unfortunately, there are issues with that too. Say Ferb had competent attorneys who were able to secure them an exclusive license for the film rights, preventing Lily from allowing anyone else to produce a rival movie. Ross, however, receives a copyright license from the business when he purchases the NFT. He hasn’t ever entered into a deal with Ferb! Thus, he is not constrained by those conditions and is free to license as many rival films as he desires.
Therefore, it’s possible that the licenses should “travel” with the NFT. With real estate, this occurs frequently. For instance, a landowner can grant a telecom corporation an “easement” to lay a fiber-optic cable beneath their property, and when they sell that land, the new owner takes on the telecom’s contractual responsibility. In this instance, Ross inherits any restrictions or liabilities when he purchases the NFT from Lily, including the exclusive license to Ferb.
However, this method implies that Ross will receive less than all of the rights that the original NFT creator provided. To ensure that prior owners like Lily haven’t already handed up some of the copyright, he will need to look into the complete chain of the NFT he is purchasing. This goes against the cryptocurrency philosophy that as much as possible should be done in the open and on-chain.
A fourth scenario is that Ferb’s permission to produce new derivative works expires, but they are still permitted to use any already-created derivative works. This is how various license terminations are handled by copyright law. What should happen to any royalties that Fern has agreed to give Lily if Ferb’s license is maintained, though? Should Ross also be given access to them?
At this point, we’ve discussed four distinct scenarios for what might happen if Lily sells the NFT to Ross:
- Ferb’s license expires.
- Ferb’s license remains in effect, but Ross can license the same rights to someone else.
- Ferb’s license remains in effect, and Ross cannot license the same rights.
- Ferb’s license for new derivative works expires, although they can continue to use existing works.
Any of these conclusions could potentially be followed by a court. In fact, there isn’t a certain agreement on which of them is the greatest answer overall. However, anyone who works on a project based on an NFT that does not provide answers to these queries is placing a great deal of trust in the ability of the legal system to resolve any disputes that may arise if the agreement fails and the parties wind up suing one another.
Many NFT projects don’t explicitly state buyers’ rights.
Some well-known NFT projects, like the CryptoPunks, have been made available without clear copyright limitations. For everyone involved, this is legally hazardous.
Without clearly stated terms, a third party may approach the author of an NFT series and purchase the underlying copyright to the artwork, then take legal action against NFT buyers for using the photos as their profile pictures because there is no license specifically granting them that right. The inventors and buyers did not intend for this to happen, and we sincerely hope that the courts would not support such a copyright-based attack. However, the courts are not renowned for their in-depth knowledge of contemporary blockchain technologies and social standards.
Without clearly stated terms, a third party may approach the author of an NFT series and purchase the underlying copyright to the artwork, then take legal action against NFT buyers for using the photos as their profile pictures because there is no license specifically granting them that right.
Larva Labs, the company that created CryptoPunks, then went back and attempted to retrospectively add a copyright license after the game’s first debut. Some legal experts doubt that this will be effective. Even more recently, Yuga Labs declared its desire to give token owners commercial rights after purchasing the CryptoPunks’ rights. Although many CryptoPunks owners will welcome this adjustment, it is more difficult to amend license restrictions after the initial launch and minting than it is to provide them beforehand.
Some NFTs cause copyright issues by employing stolen artworks from artists or famous works with whom the NFT producers have no relationship and no license to utilize. Copying these works as part of the NFT promotion, for example, for OpenSea listings, can be considered an infringement of copyright. By stating that NFT owners will obtain rights alongside these stolen works, an NFT creator may be engaging in misleading advertising. Because copyright infringement is punishable by “strict liability,” NFT owners who produce copies of stolen art may be held accountable for infringement, even if the NFT developer mislead them into believing the material was legitimately licensed.
It is unfortunate that many well-intentioned projects, like Andy Williams’ example, also seem to believe that minting an NFT of a work somehow inherently brings with it some copyright interest in the work. While outright scam artists are unlikely to care about infringement, it is also true that they are unlikely to care about other types of infringement.
It might be technically impossible to post a photo without the copyright owner’s express permission in a Web3 future where everything is on the blockchain and nothing is permitted unless it is authorized by a blockchain transaction. But that world does not exist now, and it would be incredibly dystopian if speaking publicly required permission. The freedom and transparency that blockchain is meant to stand for would be entirely at odds with it.
Whatever your opinion on NFTs may be, it is detrimental to everyone involved to launch them with invalid copyright licenses. And although some Web3 and cryptocurrency projects want to circumvent or replace the current legal system totally, many innovative NFT ventures aim to operate within the framework that is currently in place. Responsible NFT developers wouldn’t release a product based on a smart-contract library that had known security flaws that weren’t fixed, and they shouldn’t include legal clauses that might have equally disastrous results either.
Despite this, many projects seem to give their legal considerations significantly less care than their technical and artistic considerations. Numerous NFTs are constructed using flawed code if code is the law.
Although the majority of issues will be resolved at the platform level, there will inevitably be some practical interaction between NFTs and copyright. The market already serves as a gatekeeper, preventing potential infringement by promoting the existence of a venue where producers can sell the tokens they have created. However, because of the nature of the market and the motivation for high returns, there may still be a significant number of copyright issues in the NFT arena. It will be interesting to see how dispute and ownership claims emerge at this early stage of potentially disruptive technology.
