What do Beeple, Jack Dorsey, Cryptokitties, Grimes, and William Shatner have in common? They’ve all made money, and in some cases headlines, by selling NFTs. The internet has been buzzing about NFTs for some time now – but even if you’ve heard of them, you may still find yourself asking “What is an NFT?” and “Why are they so popular?”
So, what is an NFT?
An NFT is a non-fungible digital token that uses the same blockchain technology as many cryptocurrencies. Using the blockchain ledger, NFTs can be identified and tracked. Typically, cryptocurrency tokens such as bitcoin on the blockchain ledger are fungible assets, they can be readily interchanged for something else – for example, one bitcoin can be exchanged for another. Legal tender, such as bank notes, are a fungible asset as a $100 note can be exchanged for two $50 notes or five $20 notes. NFTs however are unique and cannot be exchanged, much like a one of a kind painting. Marc Chagall’s “Paris through the Window” is non fungible because it is one of a kind. The painting can be copied and photographed but there will only ever be one original “Paris through the Window”. NFTs use blockchain technology to give themselves a digital uniqueness, the originality and scarcity of which makes them a collectible item.
In theory, when you buy an NFT you acquire a token which contains the digital artwork or music file, along with the signature of the artist and a history of all transactions associated with that digital artwork or music file. As we will see, there are some limits to the technology that make the purchase of an NFT less clear.
But what are you really buying?
There are two aspects to the purchase of an NFT to consider, one how is the digital asset associated with the NFT stored and two, whether you acquire any rights, including the intellectual property in the underlying digital work.
Dealing with the technological aspects first, purchasing an NFT gives you a token which contains meta data and a link to a website where the digital work in stored, not the digital work itself. Despite NFTs being blockchain technology, NFTs associated with digital files like artworks or music are generally not stored ‘on-chain’ due to the prohibitive cost and time of replicating files across all users in the blockchain. Therefore, buyers are provided with a link to the web address where the digital work can be found. Using the painting analogy, NFT’s have been described as providing the directions to the gallery in which the artwork is on display, rather than providing the artwork itself. The main issue with this method of storage is that webpages can become defunct if someone fails to pay the hosting fees, there are other issues with the network, a hard drive fails or the owner of the domain redirects the link to something other than the digital asset. Given the technological limitations the whole system relies heavily on trust.
Further, when you buy an NFT you don’t acquire ownership of the underlying work or the rights associated with it. You are paying to own the unique token and not the content that the token is associated with. From a copyright perspective that means the artist who created the work will continue to be the copyright owner, and have certain exclusive rights to control the use of the work. In order for the copyright in the underlying asset to be assigned it would require a signed agreement between the parties to the effect that the copyright owner is assigning their intellectual property rights to the buyer of the NFT. In the absence of such assignment, all of the underlying intellectual property rights will continue to be owned by the artist or copyright owner.
Should NFTs come with contracts? Smart or otherwise?
It would seem somewhat foolish, at least to this lawyer, to outlay significant amounts of money on NFTs without an agreement with the seller that sets out:
- What the buyer can, and can’t do, with the underlying digital asset, including in relation to the intellectual property rights and commercialising the work;
- If the licence is for a fixed term, what happens upon the expiration of that term particularly where the licence permits for derivative works to be created or products created incorporating the work;
- Who is responsible for the maintenance, security and protection of any webpage or URL where the digital art is stored, including, but not limited to, the hardware and payment of any fees associated with the webpage;
- Liability and indemnity provisions to allocate risk between the buyer and the seller; and
- Representations and warranties as to the ownership of the underlying work, noting that the risk of fraud is rife with NFTs.
Licenses are a critical part of everyday business for many organisations, artists and creatives. There have been a few attempts at NFT licenses including one by Dapper Labs, the creators of CryptoKitties, however these licenses largely deal with intellectual property issues by trying to balance the rights between the copyright owner and the licensee, rather than the risks associated with the potentially ephemeral nature of the storage. It can be challenging to document all the necessary rights, responsibilities and obligations in any copyright license agreement – even where the subject matter is generally understood, let alone when you have a digital work stored ‘off-chain’.
Whilst NFTs may have some issues that need to be addressed, they should be considered as more than merely a passing fad. NFTs give us an insight into the direction that the digital economy may be headed and provide new business models for artists to exploit their intellectual property. Whilst the technology isn’t quite there yet, NFTs provide the possibility that in the future intellectual property owners could use the blockchain ledger technology, smart contracting and carefully drafted agreements to have greater control over how their creative works are used and to benefit financially from such use.