But what is an NFT? And what makes them so valuable? Or are they actually even valuable at all?

In my research I found that the value of an NFT is often tied up with aspects copyright and thus this blog post was born! Below I breakdown what a NFT is, how they work and how their value is inherently related to copyright law.

“Non-Fungible Tokens” vs. “Fungible Tokens”

• Non-fungible essentially means that it is “unique”
• Fungible Tokens are cryptocurrencies, like bitcoin, which are NOT unique.
  • i.e. I can trade you a bitcoin for another bitcoin and we’re exchanging something with the exact same value.  But trading one NFT for another NFT would be like trading a Charizard pokemon card for a Squirtle pokemon card – the value is not the same

Can anything be an NFT?

• An NFT is a digital asset that represents real world objects like art and music, but it can also be digital art- because an NFT is like a digital certificate of authenticity embodied in the blockchain. 

How does it work?

• In order to make an NFT – one has to turn the asset into a digital token that can be moved, stored and recorded on the blockchain.
• The largest platform where artist/creator mint and sell NFTs is called OpenSea
• Sometimes the NFT being traded is also stored on the blockchain, but because the blockchain cannot support the size of many of the files – it is really just a link to a site that hosts the underlying digital content the NFT represents.
  • All transactions occur on the blockchain – thus making it easier to track the chain of title for the digital asset.

Copyright in a Nutshell

• Copyright is the bundle of rights afforded to the creator of an original work of authorship.
• An original work of authorship can include literary, dramatic, musical and artistic works.
• In a basic sense, once the work is created, the copyright in the work is also created and is owned by the creator of the work. While the copyright exists once the work is created, registering a copyright provides the creator with additional enforcement rights.
• In a more complex sense, if it is a work made for hire or as part of an underlying contract – then the copyright might be owned by someone other than the creator
  • Example: Musicians under a recording contract with a record company
• The bundle of rights associated with a copyright are as follows:
  • Right to reproduce
  • Right to prepare derivative works
  • Right to distribute copies
  • Right to display work publicly
  • Right to perform the work publicly

Copyright Issues for NFT Creators:

• Ownership
  • An NFT does not equal the art/piece of work itself
  • Rather an NFT is actually considered either a “copy” or “derivative” of a creative work
• Selling the NFT
  • When selling an NFT just like with any other piece of art, it does not mean you are selling the underlying copyright with it.
  • However, part of what makes an NFT valuable is when some or all of the underlying copyright is transferred and/or licensed.
    • Often the platform on which the transaction occurs dictates these terms and conditions.
      • Ex. NBA Top Shot platform licenses the personal right to display the art associated with the NFT and a commercial license to make merchandise displaying the art subject to a cap of $100,000 in gross revenue per year.
  • Many creators do not feel comfortable selling all or any of the rights to their work and there are also many who shouldn’t, so this is a delicate balance with the artists wants/market value.
• Infringement
  • A common thing being seen with the NFT craze is people taking art and creating NFTs without permission of the creator of the underlying art – which constitutes copyright infringement.
    • Ex: July 2021 – LarvaLabs (creators of CryptoPunk project) submitted a DMCA takedown to NFT Platform “Foundation” for online display of CryptoPunk work offered by another artist as his own. https://www.reuters.com/legal/transactional/what-are-copyright-implications-nfts-2021-10-29/
  • Because the platforms where people purchase NFTs can be publicly viewed – it is crucial to monitor them for people infringing on your original creative work. If the work is stored on a separate platform and not the blockchain itself – you can send DMCA takedown notices.
    • Note: If the work itself is stored in the blockchain, sending a cease and desist can be nearly impossible.
• Royalties
  • The US, unlike other international jurisdictions, does not recognize royalty rights for artists.
    • I.e. when an artist sells their work and the person they sold it to re-sells it, under copyright law in the US, the artist is not entitled to any royalties from the re-sale.
  • With the advent of NFT’s, artist can now include the right to royalties with the sale of the NFT.
    • Note that in the US, it will be difficult to maintain a cause of action against someone in the event royalties are not paid due to the existing copyright framework.

In summary, NFT’s are extremely risky not only in the sense that they are unregulated but that the value generally comes from selling a part of your underlying copyright which is not something you would necessarily want to do as an artist. If you are considering minting an NFT, you should come up with a comprehensive legal strategy to make sure you are protected. Contact us today to set up a consultation!