Explain in detail the confusion and challenges faced by NFT copyright

Many NFTs and DAOs aim to provide new or more convenient ways to own and sell creative works. Beeple’s NFT work “EVERYDAYS: The First 5000 Days” sold for $69 million at auction. Some observers believe that the astonishing rise of the Bored Ape Yacht Club is due to its personalized approach to copyright licensing. More artists and developers are jumping headfirst into the industry.

But at the same time, many projects struggle with the question of how copyright applies to NFTs

  • When SpiceDAO purchased director Alejandro Jodorowsky’s richly illustrated brochure for the never-filmed version of Dune, some participants hoped that buying the book would allow them to bring Jodorowsky’s vision to the screen. But the plan was quickly scuttled, as the owners of Dune’s copyright rejected the idea.
  • Right-clickers save JPEG copies of artwork from popular NFTs. The owners of these NFTs say this is a copyright infringement. Only one of the two statements is correct.
  • Quentin Tarantino and Miramax in lawsuit over Pulp Fiction NFT rights.
  • Too many NFTs using stolen artwork.

In this blog post, we hope to clear up some confusion about NFT copyright and help those working in the field understand the challenges of incorporating NFTs into the copyright law framework. Our bottom line is simple: ownership of an NFT can be used to give the owner substantial control over a creative work, but this control is not automatic. Copyright law does not give the owner of an NFT any rights unless the creator takes active steps to secure the rights of the NFT. Our survey of some existing NFT projects and their licenses revealed that few projects took all the necessary steps to make NFT copyrights behave as community members expect. Thinking about legal issues should be part of the NFT design process, not an afterthought.

On-chain and off-chain assets

When talking about blockchain assets, it’s common to say things like “Alice owns 10 bitcoins.” Most of the time, this expression is correct: Alice holds the private key to a blockchain address that has transferred 10 bitcoins in an unused transaction output. If Alice wishes, she can use this private key to transfer these bitcoins to another address. (Alice may also control the keys directly or through a wallet, a complication we will ignore below.) In the words of the current Uniform Commercial Code draft articles for blockchain assets, Alice has “the power to exploit these bits most of the benefits of the currency”. For more complex assets, such as NFTs controlled by smart contracts, this control may take the form of knowing the private key needed to initiate a transaction, transferring control to someone else.

This situation is relatively simple because Bitcoin and smart contract tokens are on-chain assets. They exist entirely as entries on the blockchain. Things are more complicated for off-chain assets, where an entry on the blockchain is used to represent something that exists elsewhere, such as a tungsten block. The cube itself is an object that exists in the physical world. It weighs 2,000 pounds, measures 14.545 inches on a side, and is located in the warehouse of Midwest Tungsten Services in Brook, Illinois. But the Tungsten Block NFT is an entry in a smart contract deployed on the Ethereum blockchain using the ERC-1155 standard. If Alice purchased the tungsten block NFT from TungstenDAO, the physical tungsten block would still be placed in Willowbrook, Illinois.

Although the tungsten block NFT is not the same as the physical tungsten block, the two are related. According to the “description” TungstenDAO provided to OpenSea when she created the NFT listing, when Alice acquires the NFT, she also has “one access per calendar year to view/photo/touch the cube”. If Alice sends the NFT to a special address to prevent anyone from taking control of the NFT again (a process called burning), she has the right to take physical possession of the cube via a cargo truck. If she sells the NFT to Bob, then Bob will have access to the cube once a year, or burn the NFT and receive the cube. Some lawyers call this connection “tethering”: rights to off-chain assets (physical cubes) are linked to on-chain assets (NFTs) through an invisible string of tethers. (At least in theory. Some legal scholars are skeptical that “Tethering” actually works).

So there are actually three different assets involved in NFTs:

First, there is an NFT itself on the blockchain. it looks like this

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You can view the creation of this NFT online on the Etherscan blockchain

Second, there are the physical cubes in the warehouse. it looks like this

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Third, there is the legal right to control the physical cube. it looks like this

Because legal rights are intangible and have no physical existence.

Legal rights are what ties the on-chain NFT to the off-chain cube if everything is working properly. The current owner of the NFT is able to control the physical cube because they have the relevant legal rights.

Getting Started with Copyright

The following passage is sometimes considered (humorous but incorrect) by Albert Einstein:

You know what, the cable telegraph is actually a very, very long cat. You pull his tail in New York and his head meows in Los Angeles. Radios work exactly the same way, you send signals here and they receive there. The only difference is that there are fewer cats.

The copyright is exactly the same as the tungsten cube, just without the cube. A tungsten cube is a specific physics object. It exists somewhere in the real world. Any other tungsten cube is a different cube. But creative works like photos or stories are intangible. It can exist in just one object (called a “copy”), like an oil painting on canvas. Or a work can exist in multiple copies at the same time, such as when a publisher prints thousands of books, or when a single photo is displayed on millions of computer screens. Or a work can have no copies at all, as one person tells a story to another. The point is, a creative work should not be the same as any copy that embodies it.

Therefore, the act of copyright in creative works is different from the ownership of physical objects such as tungsten cubes. The owner of the cube can move it, carve it, or melt it; if anyone else does, they’re violating the owner’s property rights. But the copyright owner is not necessarily the owner of any particular copy. If Alice buys a copy of Bob’s novel, Alice owns the paper with ink on the physical copy, and Bob owns the copyright to the text.

Bob’s copyright consists of a limited set of exclusive rights. Most importantly, Bob can prevent anyone, including Alice, from making more copies of his novel. (That’s why it’s called “copying” “rights.”) If Alice wants to adapt Bob’s novel into a movie, a derivative work in copyright terms, she needs Bob’s permission. She can get permission in one of two ways. She can buy the copyright directly from Bob, a transfer of title, or Bob can keep the copyright and give Alice a license to make the movie. The difference is that if Alice becomes the new owner through a transfer, she can now decide whether to authorize other uses, such as graphic novels and reworking of characters. And if Bob just gave Alice a license, he retains the right to decide how to use (or not use) the copyright.

NFT, copy, copyright

Back to NFTs. It should be obvious by now that NFTs can be tied to creations in one of two ways. First, it can be used to control a copy of a work: just as whoever owns the tungsten block NFT is entitled to the tungsten block, whoever owns the physical copy of the NFT is entitled to a specific copy of the work. Second, it can be used to control the copyright of a work: whoever owns the intangible copyright NFT has the right to decide who can make new copies. Both can be done at the same time, but it doesn’t have to be.

This is where SpiceDAO’s ambitious ambitions can go wrong. This item purchases and marks ownership of a physical copy of the Jodorowsky brochure. The owners of SPICE tokens can (collectively) decide to sell or lend them to others, or to put them on public display offline. But they have never, and cannot, tokenize the copyright of the underlying creative work. The copyright to the novel Dune remains with the estate of Frank Herbert, which licensed the film rights to Legendary Entertainment, which produced the 2021 film version, the rights to the artwork in the brochure Held by the original artist and his estate.

Another failure mode for NFT copies is that copyright law has a non-intuitive concept of what a copy is. We’ve been talking about contrasts, of clearly different physical things, like printed books. And under U.S. copyright law, a “copy” includes any material object … in which the work is fixed by any means now known or hereafter developed, and in which the work can be perceived, reproduced, or otherwise communicated, directly or with the aid of a machine or device. This definition includes hard drives and SSDs, and sometimes even RAM. For copyright purposes, each computer that interacts with the work makes a separate “copy”, and even just browsing a web page will make a “copy” of the image on your computer. Therefore, for all practical purposes, any NFT that contains Crypto artwork must contain some copyright interest (assignment or license), otherwise the owner of the NFT will be an infringer when they try to do anything with the artwork.

In particular, it is not enough to provide NFT buyers with a copy of the artwork. U.S. copyright law clearly states that a copyright assignment and a copy assignment are different:

Assignment of title to any material object, including a first-fix copy or audiotape of a work, does not in itself convey any rights in the copyrighted work embodied in that object; nor does assignment of copyright or any exclusive rights under copyright in the absence of an agreement Transfer property rights to any material object.

You also don’t get copyright ownership if you buy an oil painting from an artist. Yes, you own the original, but the artist retains the copyright and they can sell a print of it if they want. If you want to buy the rights too, you need to get a separate agreement. The same goes for NFTs. Owners should not assume they have the right to use the artwork or prevent others from using it unless the NFT explicitly gives the owner a copyright benefit rather than just access to the artwork.

Some popular NFT projects, including CryptoPunks, are released without explicit copyright terms. There are legal risks to all parties involved. An adversary who gets close to the creator of the NFT, buys out the copyright to the artwork, then sue the NFT buyer for infringement because they put the picture on their profile picture, on the OpenSea listing, etc. This is not the intent of creators and buyers, and we hope that courts will not cooperate in such copyright-based attacks, but it can happen without clarity about the copyright rights of NFT owners. (The court is not known for its nuanced understanding of cutting-edge blockchain technology and community norms).

After the original CryptoPunks launched, its creator, Larva Labs, later attempted to retroactively add a copyright license. Some legal scholars are skeptical that this will work. Recently Yuga Labs acquired the rights to CryptoPunks and announced its intention to grant commercial rights to token owners. While many CryptoPunks owners will welcome the change, changing license terms after the initial launch and minting is trickier than granting them up front.

Even more blatantly, some NFTs are creating copyright trouble by using artwork stolen from artists, or famous works that have no affiliation with and authorization from the NFT creator. Copying these works as part of NFT marketing (eg for OpenSea listings) may violate copyright. Additionally, NFT creators can engage in false advertising by implying that the NFT owners will acquire the rights to these stolen works. In fact, since copyright infringement is “strict liability”, NFT owners who copy stolen artwork may also be held liable for infringement, even if they are misled by the NFT creator into believing they have the proper license.

While outright scammers are unlikely to care about infringement, unfortunately, many well-intentioned projects also seem to believe that NFTs that mint a work in a certain way automatically bring copyright benefits to the work. A particularly tragic example is Andy Williams, who produced an NFT video clip describing the murder of his daughter. Parker was apparently told that creating the NFT would give him enough rights to the video to have it removed from sites like Facebook and YouTube. But copyright doesn’t work that way. The TV station that filmed the clip owns the copyright. Parker cannot change this by minting NFTs.

Another NFT-related myth is that minting NFTs helps enforce copyright protection against infringers. For example, the Associated Press’s blockchain director believes that making NFTs for some of its photos would make it easier for unauthorized users to delete them. But copyright comes from copyright law, not from blockchain. The process of filing a copyright lawsuit or DMCA takedown notice doesn’t get any easier by owning the NFT of the work. To be sure, in the future of Web3, where everything will happen on the blockchain, it is technically impossible to publish a photo without the express permission of the copyright owner, unless approved by the blockchain transaction. But first, that world is not the world of today, and second, a world where speech is impossible without prior permission would be deeply dystopian. It would go completely against the values ​​of freedom and openness that blockchain is supposed to represent.

Copyright transfer is a problem

In fact, ensuring that NFT owners own the copyright they think they own is also a more nuanced issue than it seems. Please refer to the following paragraphs from the relevant terms and conditions of Bored Ape Yacht Club / Bored Ape Yacht Club.

i. You own the NFT. Each Bored Ape is an NFT on the Ethereum blockchain. When you buy an NFT, you fully own the underlying Bored Ape, the artwork.

This looks like tying the ownership of the copyright to the ownership of the NFT. Suppose Woodchuck Labs uses these terms for its WoodChuckers NFT. When Alice buys the WoodChucker NFT, she gets the copyright. When she sold the NFT to Bob, he got the copyright. In terms of copyright, when Alice buys the NFT, the copyright ownership transfers to Alice, and then when Alice sells the NFT to Bob, another copyright ownership transfers to Bob. Full ownership of the copyright allows Alice to use the artwork, such as the hexagons shown on her Twitter profile. It also allows her to sue any “right clicker” who downloads and displays artwork for infringement, if she wants to.

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Unfortunately, copyright doesn’t work that way. U.S. copyright law sets high thresholds for transferring copyright ownership. Section 204(a) of the Copyright Act states:

Except as provided by law, assignment of title to copyright is void unless the instrument of assignment or assignment instruction or memorandum is in writing and signed by the owner of the assigned rights or a duly authorized agent of that owner.

There is no problem with the written part. Under federal law, terms on a website count as “in writing.” The bigger problem is that the copyright owner, Woodchuck Labs, didn’t “sign” to the BAYC terms. Without a signature, it is impossible to pass copyright ownership to Alice.

In theory, Woodchuck Labs could fix the missing signature in the first step by modifying the terms to add a signature line. Under the Electronic Signatures Act, even a Crypto signature like a person’s name printed in a script font can be “attached to or logically associated with a contract or other record and is intended to sign that agreement. records performed or adopted by persons”. In fact, the court held that clicking “I agree” to the site terms when you created your account was sufficient to indicate “intent to sign.”

Unfortunately, there is a bigger problem. This happens when Alice decides to resell WoodChucker to Bob. The intent of the BAYC clause is that Bob now owns the copyright and Alice does not. But that’s not what happened because of the signature requirement. There is no copyright signature transfer from Alice to Bob. If there is no signed transfer, Alice still owns the copyright, not Bob.

This is the difference between smart contracts and legal contracts. Bob might try to argue that Alice has agreed to the BAYC terms, which makes him the copyright owner. But Alice doesn’t! As far as she is concerned, the BAYC term is just a bunch of words on a website somewhere. The copyright system was not created with Crypto tokens in mind, nor does it understand them. For its part, Alice owns the copyright to Woodchucker and has done nothing to relinquish ownership. Legal contracts usually bind only those who expressly consent.

Admittedly, Alice has called the ERC-721 smart contract transferFrom() to transfer the Bored Ape to Bob, and has applied her cryptographic signature to the smart contract transferring the NFT to Bob. But the method is a smart contract term, not a legal contract term. The smart contract does not mention copyright or link to BAYC terms. Even so, there is no guarantee that Alice has read or even knows the terms. She will not attach her cryptographic signature to a “transaction related or logically related to a [legal] contract…with intent to sign” in the sense that it is legally binding.

Going from smart contracts to legally binding terms is a tricky and delicate one. Adding off-chain assets like tungsten blocks and copyrights to the mix makes things more difficult. Changing the ownership of these assets requires off-chain effects, but thanks to the presence of smart contracts on the blockchain, it is entirely possible to interact with them without invoking any additional contract terms. If the copyright of the NFT-related artwork is based on a legal contract, users who only deal with smart contracts have a good argument that nothing in the legal contract applies to them, since they only interact with the smart contract.

Alternative: Copyright License

There is another way to build NFT rights to avoid signature writing issues. Instead of transferring ownership to each owner of the NFT, NFT creators can use copyright licenses. The creator holds ownership of the copyright and provides licenses directly to each successive NFT owner.

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At first glance, this looks more complicated because now the creator has to deal directly with each NFT owner, not just the first owner. But it has the big advantage that a copyright license doesn’t need to be signed like a copyright transfer. (In fact, they don’t even need to be in writing, although for any financially serious transaction, it’s much safer to write down the terms.) Carol and Woodchuck Labs don’t need to rely on Alice and Bob to get the correct signature transfers. Instead, Woodchuck Labs can simply write its terms so that licenses are automatically granted to each NFT owner as soon as they acquire the NFT.

This approach has good precedent in free and open source software licensing. For example, the GNU General Public License says:

Whenever you pass on a Covered Work, the recipient automatically receives a license from the original licensor to run, modify, and transmit that work, subject to this license. You are not responsible for enforcing third party compliance with this license.

And the Creative Commons Attribution License says:

Each recipient of the Licensed Material automatically receives an offer from the Licensor to exercise the Licensed Rights in accordance with the terms and conditions of this Public License.

A clear example of this approach in the NFT space is the RTFKT license, which states:

1 …… any Crypto work or other content made available to owners of Crypto collectibles through the platform as an “additional benefit” (as that term is defined in the Crypto collectibles terms), will be made available on the platform or in marked as “Additional Benefits”. As long as you own the applicable Crypto collectible, any such content will be licensed to you under any license terms proposed at the time of download, or, if no such terms are proposed, as that particular Crypto collectible under the applicable Crypto collectible terms related content. …

The details are tricky, and that’s not meant to be a full legal analysis. Our view is that NFT creators need to think carefully about how to structure their terms to ensure that NFT owners actually receive the necessary copyright licenses for the NFT-related artwork, and that copyright licenses are far easier to play than outright transfer of ownership.

Derivative power

Another conundrum concerns derivative works—that is, “translations, musical arrangements, dramatizations, fictionalizations, film versions, sound recordings, artistic reproductions, abridgements, condensations, or any other form in which a work can be recast, transformed, or adapted”. No one can explain why the Bored Apes has grown culturally and economically. This will always be one of the mysteries of the age. But at least one factor, sometimes said to be the terms of the Bored Apes, allows owners to make broader derivative works based on it. While NFT licenses allow owners to use the art for their own “personal, non-commercial use” and projects that earn up to $100,000 per year, the BAYC terms allow for unlimited commercial use of the artwork. Specifically, “Yuga Labs LLC grants you an unlimited, worldwide license to use, reproduce and display the purchased artwork for the purpose of creating derivative works based on the artwork.”

The first problem here is that this license authorization is inconsistent with the statement in the above two paragraphs of the BAYC terms, that “when you buy an NFT, you fully own the underlying Bored Ape, which is the artwork”. If Alice truly “owns” the art, then Yuga Labs has nothing to offer, and a commercial license is redundant. (This is another sign that claims that the owner of the Bored Ape NFT “owns” the artwork, like many other claims about what users actually own when they “buy” content online, should not be taken at face value).

The second problem is that the term does not sit well with downstream transfers. Consider again the Alice and Woodchuck labs. Suppose Alice owns WoodChucker numbered 12345. She allowed filmmaker Fern to create a series of videos based on Woodchuck number 12345. These videos are derivative works under copyright law, and Fern owns the copyright to these videos. Now, Alice decides to sell Woodchuck #12345 to Bob. How should Fern’s license be handled?

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A simple answer is that since Alice’s copyright license to use Woodchuck #12345 ends when her ownership of the NFT ends, so does any sublicenses she grants. This means that the moment Alice sells it to Bob, those videos cease to be licensed, and if Fern keeps playing them, she’s a copyright infringer! From Fern’s point of view, this is bad because he has invested time and money in making the video. It’s also bad from Alice’s perspective, because if Alice could have exited by selling the NFT to Bob. Fern should be very reluctant to spend money to authorize Alice’s rights. Thus, this solution effectively makes the rights to derivative works unsaleable.

Another answer is that Fern’s license remains in effect. Once Alice gives Fern the license, Bob can’t go back. This protects Fern and thus Alice’s licensing business. But it can create headaches for itself. For example, Bob might license his own video to Georg, so there are now two competing WoodChucker 12345 series. Fern will be pissed, but what can they do? If their lawyers were good, Fern would insist that Alice make the video license exclusive so that Alice could no longer license anyone else to make the video series. But this is a private contract between Alice and Fern. Bob has no signature and is not bound by it! Bob has licensed the copyright directly from WoodChucker Labs, without the exclusivity that Alice promised to Fern.

So maybe the license should be packaged with the NFT itself. This often happens with real estate. If Alice owns a piece of land and grants Telecorp an “easement” to run fiber optic cables under a corner of the land, the easement will remain after Alice sells the land to Bob. It is said to be “binding on the owner’s heirs” or “run with the land”. That is, easements are attached to and limit (or “encumbrance”) the legal rights to the land itself. It’s not just Alice’s personal commitment to Telecorp. When Bob buys land from Alice, he “steps in her shoes”. Not only did he inherit her rights to the land (such as building a house or growing crops), but also her obligations (allowing Telecorp to continue operating the cable).

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Similarly, we can imagine that when Bob buys NFTs from Alice, he will be wearing her shoes. Not only does he inherit Alice’s rights in the Bored Ape 12345 copyright (such as the right to make a glossy art print), but he also inherits any restrictions or obligations that Alice undertakes (such as Fern’s exclusive video license). Now Bob can’t freely license Georg to make a second video series.

Maybe this is a good solution. Or maybe not. If Alice is now free to insure the artwork copyright in this way, it limits Bob’s rights. When he buys the NFT, he buys less than the full rights that Alice bought. Alice divides up the copyright, effectively keeping a portion for herself. If Bob were in the NFT market, he would have to investigate the entire chain of ownership of the NFTs he purchased to ensure that no Alice had quietly given up part of the copyright before him. This need for investigation runs counter to the ethos of crypto that should be done as public and on-chain as possible. Therefore, an exclusive license signed by one owner should probably not work with the NFT.

So far, we’ve listed three different possibilities that occur when Alice sells the NFT to Bob:

1. Termination of Fern’s license.

2. Fern’s license continues, but Bob can license the same rights to Georg.

3. Fern’s license continues and Bob cannot license the same rights to Georg.

It is conceivable that the court adopts any of these three outcomes. In fact, there is currently no clear consensus as to which is the best solution. (The three authors of this blog post don’t even agree!) Worse, these don’t even summarize all possibilities. A fourth possibility is that Fern’s license to create new derivative works terminates, but they can continue to use existing derivative works they have already created. This is how copyright law handles certain license terminations. Or, if Fern’s license survives, what happens to any royalties that Fern promises to pay Alice? Should Bob inherit these powers too? There are pros and cons.

Our view is that these are issues that need to be addressed by NFT licenses that allow derivative works. Otherwise, NFT owners and their business partners may be unhappy with the outcome. Everyone who is working on an NFT-based project but doesn’t answer these questions has a lot of confidence in the courts that if the transaction goes bad and the parties end up suing each other, the court will take care of it. (And blockchain advocates are generally not known for their belief that the courts will fix things.)

We are not saying that there is an optimal solution for all projects. (This is one of the many reasons why we don’t provide our own suggested license text). For NFT projects based on musical or literary works, what works for the Bored Apes may not work. Instead, we believe NFT creators need to consider these issues, discuss them with their communities, and then clearly communicate how copyright licensing will work with NFTs.

in conclusion

Clearly, many NFT projects aim to transfer copyright as well as ownership of the NFT itself. This is a core design goal, on the same level as creating attractive content and making transfers irrevocable. Still, many projects seem to have far less consideration for the legal aspects of their designs than the technical and artistic aspects.

We consider this a major mistake. The legal infrastructure to run a blockchain is as complex and full of pitfalls as the technical infrastructure. While some cryptocurrencies and Web3 projects aim to get rid of the existing legal system, or replace it entirely, many creative NFT projects are not. They are designed to work within the legal system that currently exists, allowing people to create new and interesting art now and commercialize it using real-world contract, property and copyright laws.

Some existing NFT licenses are not fit for purpose. They don’t make copyright interests spread with NFTs in the way they want. If the code is the law, then these licenses are the wrong code. Responsible NFT creators will not launch projects built on smart contract libraries with known unpatched vulnerabilities. They should pay the same attention to the laws and regulations they rely on, or the results could be equally disastrous.

No matter how you look at NFTs, launching them with a broken copyright license does no one any good.

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