Non-fungible tokens (or “NFTs”) are expanding rapidly into the mainstream in new and creative ways, behooving us to learn more about them. An NFT is a digitized, authenticated “token” that is linked to a digital asset. NFTs may act as certificates of authenticity, receipts of purchase, or actual property. An NFT can be associated with a document, a media file, a URL, a digital photo, or any conceivable digital file-type.

Recent news of NFTs of art, music and similar content are reaching the public eye and ear as buyers pay high prices to acquire them. Because NFTs are a way to control, monitor, and monetize digital works, we see a synergy of purpose between the use of NFTs and the goal of intellectual property law to secure “to authors and inventors the exclusive right to their respective writings and discoveries.”[1]

While NFTs are currently hot due to high-profile NFT sales, the technology has been around since the Satoshi development team released their white paper in 2008 and blockchain technology permeated the market in increasingly imaginative ways. The blockchain is essentially a form of decentralized database, and a digitally transferrable asset on a blockchain is a “token.”

Blockchain creators have the option when creating their tokens to make them non-fungible, meaning that the token is usually the only one of its kind. Each NFT is individualized and verified on a blockchain, which publicly tracks and lists transactions in the interest of transparency. The complete record of title, payment, and other information about the digital asset is maintained on the blockchain.

The potential of NFTs is virtually unlimited. For luxury brands like Louis Vuitton, for example, each transaction can come with a digital certificate of authenticity, making it easier to spot counterfeits or unauthorized resellers. Purchasing shoes on Nike’s “Cryptokicks” blockchain provides the buyer a digital version of the shoe, allowing users to curate a verified digital collection of shoes alongside their physical collection.

Even Christie’s Auction House has found an application for NFTs, having recently sold an NFT artwork for over $69 million. The artwork, Everydays – The First 5000 Days by Mike Winkelmann, professionally known as Beeple, is viewable online, by anyone. It can be freely accessed and downloaded by any individual with an internet connection. Although the artist sold the NFT, he did not sell any of his copyright ownership interest. Beeple remains the sole rights holder in Everydays. For this occasion, Christie’s added a new paragraph to its terms of sale, disclaiming any warranty of title or non-infringement, and warning the buyer that it may contain viruses or other harmful components.

NBA’s Top Shot takes advantage of a similar model, where users buy packs similar to traditional basketball cards. Each pack contains video clips and highlights (called “Moments”) from different teams or players. Users can trade and sell Moments on Top Shot’s blockchain, and obtain limited rights to display publicly their Moments.

The blockchain provides verified evidence that the particular user purchased a specific original NFT. Authors may have the original copy of a digital work on their hard drive, but if they sell and distribute copies of the work as NFTs, they could theoretically determine how many licensed copies were in circulation, and who owned them. Authors could also demand evidence of authorized display of their work by requesting proof that the host owns the NFT.

The value of the NFT is not in the digital asset itself, but in the authorized nature of the asset. It is the difference between owning a licensed Ansel Adams print, and printing one of his photographs off the internet. While anyone could “own” the copy, only a select few may own the authorized NFT copy. Its value is in its exclusivity.

The rights granted to NFT purchasers are frequently encoded in “smart contracts” that govern ownership interests and provide rules for resale of NFTs. Smart contracts may provide that creators can continue to take a percentage of profit from every subsequent resale. The creator could also include self-executing code (the “smart” in the smart contract) in the NFT itself to ensure compliance with the terms of sale. Typically, self-executing provisions in NFT contracts are limited to transactional provisions involving the sale and resale.

There appears to be nothing inherent to NFTs that would alter or affect the rules regarding copyright ownership in a work. Purchase of an NFT does not automatically convey any copyright interest in the associated digital asset.[2] Unless the copyright owner explicitly transfers or assigns the work in writing along with ownership of the NFT itself, copyright remains with the author of the work, and it appears that in many NFT transactions there is no mention of copyright at all. To the extent that we view the NFT itself, separate from the associated asset, as merely a link to that asset, then the NFT itself is unlikely to be protected by copyright (although the software used to create the NFT may be).

The nature of NFTs is bound, however, to raise interesting questions under copyright law. For example, the Uniform Commercial Code Article 9 is likely to treat cryptocurrency as intangible property, and copyright law’s “first sale doctrine” is inapplicable to copyrighted digital media. In Capitol Records, LLC v. ReDigi Inc., which we covered here, the court explicitly limited the first sale doctrine (which allows the owner of an item to sell it without violating the underlying copyright) as applicable to “material items” that can be physically bought and sold, and not to digital music files such as MP3 files.[3] The holding is based on the view that when users download a digital file, they are creating a copy of that file on their personal hard drive, thereby reproducing the file, which nullifies the application of the first sale doctrine. In other words, the downloaded file is a reproduction, and not the original work.

Some have argued (as did the defendant) that the holding of Capitol Records reflected an antiquated reading of the copyright statute that did not properly consider technological advances. This seems especially true when one considers how NFTs fit into this framework. Non-fungibility makes transfers of NFTs of digital assets conceptually closer to transfers of tangible property than “traditional” digital media. No cases have been litigated on this point to date, but it seems like an issue that we will soon see raised.

The future of NFTs and whether the current interest in them will soar or wane over time is unclear. As we embed our lives more and more in the digital realm (Zoom, anyone?), NFTs and the technology behind them have significant potential to create and maintain records and enhance transparency regarding the ownership of digital assets.

[1] U.S. Const., Article I, Section 8, Clause 8.

[2] See 17 USC §204.

[3] 934 F. Supp. 2d 640 (S.D.N.Y. 2013), aff’d 910 F.3d 649 (2d Cir. 2018).

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