NFTs and Intellectual Property

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Non-fungible tokens (“NFTs\”) are a growing trend in the crypto space, but what are they? Let’s start with a quick lexicological analysis.

A “token\” is something that represents something else. For example, at a coat check-in, you receive a token for your coat – the coat will have a corresponding tag attached to it that matches up with the
token so that the bearer of the token is identified as the owner of the coat.

A “fungible token\” is a token that can be exchanged for any other token of the same type or kind. For example, a £1 coin is a token that represents the value of £1. A £1 coin can be exchanged for any other £1 coin without impacting the underlying value of what that coin represents (i.e. that the coin is worth £1).
A “non-fungible token\” or NFT is one that cannot be exchanged for another token of the same type or kind, because the underlying value of the item those tokens represent are different. A coat token is an example of a NFT – you cannot swap your coat token for someone else’s coat token, as that token will be associated with that person’s coat (which may leave you in a better or worse position depending on your respective coats!).
Turning to cryptocurrency, a Bitcoin (BTC) or an Ethereum coin (ETH), or indeed any other cryptocurrency, is a fungible token. You can swap one BTC for another BTC without impacting the underlying value of the token you hold (that is, both BTCs represent the underlying value of Bitcoin, which itself can fluctuate from day to day).

The technology underlying most cryptocurrencies is the blockchain. A blockchain is a widely distributed publicly accessible ledger of all transactions ever carried out in that cryptocurrency (a transaction being the exchange of one or more tokens between two or more entities). Each has its own blockchain that records all of its associated transactions. By maintaining a list of all transactions ever, and widely distributing the blockchain to lots of nodes, it is possible in a transaction of a cryptocurrency to audit the provenance of a cryptocurrency. The wide distribution means that it is very difficult to maliciously alter the records in the blockchain – at least 51% of the blockchain would have to be altered near-simultaneously to make a malicious alteration without it being noticed.

NFTs are a new type of crypto token that represent a non-fungible asset, most popularly works of digital art, which is what we discuss in this blog. Like crypto currencies, NFT transactions can be recorded on a blockchain. In fact, the same Blockchains used for crypto currencies can also record transactions associated with other tokens, such as NFTs. Ethereum is the pack leader in issuing and recording NFTs on its Blockchain, though others are also recording NFT transactions.

So what does ownership of an NFT represent?

The general position under UK copyright law is that the author of a qualifying work is the first owner. Ownership can be assigned, provided the assignment is in writing and is signed by or on behalf of the assignor.

In the context of an NFT related to a digital artwork, the transfer of ownership of an NFT will not in itself effect an assignment of the copyright in the digital art work, not unless there is an underlying written agreement that satisfies the above requirements. In the absence of such an agreement, the default position would be that the NFT holder has a licence to the underlying artwork.

Where the NFT purports to represent the only copy of the digital artwork (i.e. the “original\”) then it might be argued that there has been an equitable assignment of the copyright, if not a legal assignment.
The NFT itself is essentially a cryptographically verified proof that the NFT holder has a licence to the underlying artwork. The terms of the licence would either need to be recorded, potentially in the blockchain, or would need to be implied.

Copyfraud

Due to the file size and limits to what can be stored on a blockchain, the digital file of the artwork is not itself contained in the blockchain entry. Instead, a URL link is recorded which links to the licensed copy of the digital artwork online (e.g. on YouTube or some website).

This quirk has led to instances of “copyfraud\”, where fraudsters generate (or “mint\”) NFTs for assets that they do not own or have a right to, but where the fraudster holds itself out as the owner of the asset. These NFTs are then sold to unwitting bona fide purchasers who believe they have a right to the asset referenced in the NFT, but not knowing that the vendor of the NFT did not have good title.

Given that the act of minting an NFT does not actually involve copying of an underlying asset, but merely referencing it or linking to it, it is debatable whether this constitutes copyright infringement. However, this would likely constitute an infringement of the author’s moral rights in the referenced digital artwork, specifically, the right to be recognised as the author of a work.

Enforcing an artist’s moral rights may be difficult as it would require identifying the natural or legal person who minted the NFT – unless that person has specifically made this information available (e.g. in the sales material for the NFT) it is very difficult to determine this from just the NFT and/or blockchain without some substantial forensic IT assistance, which is expensive and may not yield any results.

Conclusion

As with all disruptive technologies, NFTs do not fit neatly with the current legal framework. Given that the popularity and value of crypto assets has grown rapidly over recent years, there will no doubt be greater regulation and legislation to govern the technology. NFTs will be no exception, and they could afford an opportunity to fundamentally re-examine the core doctrines of copyright law and in particular what is means to own, license and distribute works protected by copyright.

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