Now that the initial bloom has begun to come off the NFT rose, thorns are starting to poke through. Among the prickliest: legal uncertainty around NFT ownership and intellectual property rights; and enforcement of smart-contract based royalties. Last week, crypto merchant bank Galaxy released a report for which it surveyed the top 100 NFT collections by implied market capitalization (floor price X collection size) to determine how and to what extent the listed terms and conditions of sale convey ownership rights in the digital object represented by the NFT.
It’s main findings?
- The vast majority of NFTs convey zero intellectual property ownership of their underlying content (artwork, media, etc.)
- Many issuers, including the largest Yuga Labs, appear to have misled NFT purchasers as to the intellectual property rights for the content they sell.
- Only one NFT collection in the top 25 by market capitalization even attempts to confer intellectual property rights to the purchasers of their NFTs (World of Women).
- The Creative Commons license, while seen as a solution to the restrictive licenses used by most projects, renders NFT ownership obsolete from a legal perspective as it moves the intellectual property fully into the public domain, making it impossible for NFT holders to defend their ownership rights in court.
- Without improvements in the on-chain representation and transfer of intellectual property rights from NFT issuers to NFT token holders, the expansive vision of Web3 will remain unrealized.
“Copyright is the only legally cognizable form of ownership in digital content that we have in the United States,” the report’s authors write. “Without copyright, a purchaser of digital content does not own that content, but instead “licenses” that content from the copyright holder, on terms dictated by the copyright holder. In this sense, the copyright holder (i.e., the licensor) is the digital content landlord; the purchaser (i.e., the licensee) of that content is the digital content tenant.”
The researchers analyzed several common types of NFT licenses and found problems with how each of them has been implemented. The broad commercial-use license offered by Yuga Labs, creators of the Board Ape Yacht Club collection, for instance, undergirds a sprawling BAYC economy. But as discussed in an earlier post here, the actual language of that purported grant of rights is ambiguous, leaving the legal status of any derivative works based on those NFTs unclear, as the actor Seth Green discovered when someone absconded with his Ape and scuttled his plans to cast his Ape character in an animated series.
Other NFT collections offer buyers “limited” commercial rights, which in many cases come with a cap on the amount of revenue the token holder is allowed to earn from any commercial use and proscribe certain “unacceptable uses.”
The problem is both technical and legal. An NFT is a separate and different thing, both technically and legally, from the digital object to which it refers, just as the DVD of a movie is a different thing from the copyrighted movie it embodies. One can be sold or transferred without the other.
Further, U.S. copyright law requires there be an agreement, in writing, between the copyright owner and the intended assignee to legally transfer the intellectual property. Obviously, the anonymous sale of an NFT via third-party marketplace does not suffice.
Another copyright-related question regarding NFTs receiving increased attention lately is the viability of using NFT smart contracts to provide artists and copyright owners with royalties from the subsequent sale of their work.
Many digital artists have seized on NFT technology because the blockchain smart contract that comprises the token can be coded to automatically remit a royalty or “transfer fee” back to the original creator when an NFT is resold, allowing the artist to participate in any appreciation in the value of her work.
The problem is that such coding is not part of the specification of the ERC-721 Ethereum standard used for the vast majority of NFTs. That effectively leaves it up to the marketplace where an NFT is listed whether to recognize and honor the remittance, and many do not.
Without adopting a new technical standard, NFTs may not prove broadly useful or effective at collecting and paying copyright royalties.
Beyond the big NFT studios and marketplaces, however, entrepreneurs and startups are working to device and develop strategies to overcome those challenges. For the RightsTech Summit on September 21-22, we’ve brought together an international panel of four leading developers who are working to turn NFTs into viable and useful instruments for managing rights and royalties for the benefit of artists and creators.
Bruno Guez is the founder and CEO of Revalator, an Israel-based startup working to build a global rights administration and royalty management using blockchain technology, with a goal of enabling efficient and fully transparent reporting, real-time payments and innovative revenue streams for rights owners, creators, artists, producers, and publishers around the world.
Christof Straub is the founder and CEO of Global Rockstar, an Austria-based startup that connects musicians with top writers and producers. It is currently developing a platform to enable fans to invest in a new single by their favorite artist and receive a portion of the proceeds from the commercial exploitation of that single.
Brian Scudder is the head of global communications for Blockpool.io, a U.K.-based blockchain-as-a-service provider working to support the creative industries by helping power blockchain-based applications such as NFTs. He is also the deputy director of the British Blockchain Association and director of the Web3 consultancy Vox Corp.
Steve Stewart is co-founder and CEO of Vest, Inc., a U.S.-based developer of a mobile app to enable music fans to share royalty rights for songs and recordings by their favorite artists using blockchain to track and collect those royalties from performing rights organizations. Prior to Vezt Steve was a long time artist manager by which he gained on-the-ground insight into global royalty collection systems.
Don’t miss this important conversation. Register today for the 2022 online RightsTech Summit. Good seats still available!