By Sophie Thornton

 

With the rise of NFTs, art collectors around the world purchase their own one-of-a-kind piece of artwork without ever having to leave the comfort of their home. Pictured above is an image of artwork created by Beeple which was purchased as an NFT for over $69 million. Anyone can google search this art, download it, view it, and personally use Beeple’s artwork in a seemingly equal way to the purchaser but at no cost. So, what makes this art worth buying?

An NFT is a non-fungible token.[1] A fungible asset is one that is interchangeable without losing any value.[2] For example, a dollar bill can be interchanged with any other dollar bill and the value remains the same. [3] A non-fungible asset has unique qualities that make it impossible to interchange.[4]

NFTs are based on blockchain that is made of software code in the form of “smart contracts.”[5] “Smart contracts are open-sourced blockchain protocols that control the transfer of digital currency under certain terms and conditions.”[6] Once the smart contract is finalized, it is “minted” onto the token on the corresponding blockchain.[7] This is permanent and cannot be modified later.[8] Additionally, the records cannot be forged because the information is stored on thousands of computers internationally.[9]

Many people are concerned that NFTs are the next big bubble, just waiting to burst and hurt people who have spent upwards of millions of dollars on this type of investment.[10] This concern seems to stem from the lack of tangible ownership. A former Christie’s auctioneer stated that the idea of buying something “which isn’t there is just strange.”[11] However, some of the property rights gained upon purchase of an NFT are quite similar to those gained upon purchase of a painting or any other tangible item.

Upon purchase of an NFT, the buyer gains only personal use rights associated with the copyright.[12] The creator retains copyright in the underlying work and the buyer does not gain any rights to the intellectual property associated with the image itself and would have to acquire a specific license to gain those rights.[13] In short, the buyer gains “a non-exclusive license to the underlying intellectual property rights of an asset and only for non-commercial purposes.”[14] This is no different than if someone were to purchase an original Picasso painting. By purchasing the painting, the buyer did not gain the rights to make and sell prints of it. Similarly, the purchaser of an NFT does not possess the rights to reproduce the code associated with the token.[15] These regulations theoretically keep NFTs as exclusive as tangible artwork because they ensure that only one purchaser can have the original.

There are some notable differences, however, between a tangible purchase and an NFT and the regulations that can be placed upon an NFTs use by the purchaser. Smart contracts in the blockchain of the NFT determine the rights that accompany purchase.[16] These smart contracts may limit what type of content your NFT can be displayed adjacent to or may stop you from altering any of the content in the NFT itself.[17] There may also be smart contracts embedded in the block chain of the NFT which contain clauses allowing for the original artist of the NFT to be paid royalties upon each resale of the token.[18] Conversely, the purchaser of an original Picasso retains all proceeds upon sale or may never sell it and instead paint over it (absent outside contract considerations). Smart contracts, which are standard in the world of NFTs, can severely limit ownership rights of the buyer in a non-traditional way.

Copyright infringement issues are some of the biggest legal concerns present with NFTs. There have already been issues of counterfeiting and “individuals fraudulently offering the artists’ works as NFTs without the artist’s permission.”[19] This means that NFT copyright owners have to spend more time and resources policing an ever-growing list of platforms for potentially infringing copies or derivate works. [20] Additionally, many people who are buying NFTs are not familiar with copyright law and more easily risk infringement liability.[21]

NFTs are a burgeoning form of technology. Many people view them as investments and collectors’ items in much the same way that tangible art is viewed. But the law has yet to tackle NFTs and bolster the supposed rights of purchasers or creators. Buyers and creators can assume that traditional copyright law will rule future disputes over NFTs, but they cannot be sure.[22]

Whether NFTs are worth buying depends on one’s perspective. Anyone can have a print of a Picasso painting but only one person can have the original. Someone who values having the original or thinks it has independent value may feel the same about NFTs or they may believe that physicality holds more worth than block chain. Conversely, a vast majority of the world may not care about the original at all and may be contented to have a print or a digital download. The risks and rewards of purchasing NFTs have yet to be seen and will probably inform the public on if they believe NFTs to be worth the investment.

 

[1] E.g., What are NFTs and why are some worth millions?, BBC News (Sept. 23, 2021), https://www.bbc.com/news/technology-56371912 [https://perma.cc/5QQS-5UHH].

[2]  Id.

[3] See Julian Pipolo, NFTs And The Law: What Do I Actually Own?, Law Technology Today (June 21, 2021), https://www.lawtechnologytoday.org/2021/06/nfts-and-the-law-what-do-i-actually-own/ [https://perma.cc/SQ9B-VJTP].

[4] E.g., BBC News, supra note 1.

[5] Pipolo, supra note 3.

[6] Id.

[7] Id.

[8] Id.

[9] See BBC News, supra note 1.

[10] See id.

[11] Id.

[12] See Pratin Vallabhaneni, The Rise of NFTs – Opportunities and Legal Issues, White & Case (Apr. 20, 2021), https://www.whitecase.com/publications/alert/rise-nfts-opportunities-and-legal-issues [https://perma.cc/2NZQ-TGYM].

[13] See Jon Moorhouse, Who owns the intellectual property rights of NFTs?, Lexology (July 12, 2021), https://www.lexology.com/library/detail.aspx?g=c301b33a-9974-4901-a0d8-6936a5b10423 [https://perma.cc/QVA3-UCRY].

[14]  Pipolo, supra note 3.

[15] Moorhouse, supra note 13.

[16] NFTs: Key U.S. Legal Considerations for an Emerging Asset Class, Jones Day (Apr. 2021), https://www.jonesday.com/en/insights/2021/04/nfts-key-us-legal-considerations-for-an-emerging-asset-class [https://perma.cc/34YZ-XYFZ].

[17] See Moorhouse, supra note 13.

[18] Vallabhaneni, supra note 12.

[19] Gregory J. Chinlund & Kelley S. Gordon, What are the copyright implications of NFTs?, Reuters (Oct. 29, 2021), https://www.reuters.com/legal/transactional/what-are-copyright-implications-nfts-2021-10-29/ [https://perma.cc/K93U-XWRG].

[20] Id.

[21] See Vallabhaneni, supra note 12.

[22] See Chinlund et al., supra note 19.

Image source: https://www.theverge.com/2021/3/11/22325054/beeple-christies-nft-sale-cost-everydays-69-million

css.php