Everydays – The First 5000 Days, by Mike Winkelmann (Beeple) – nytimes.com, Fair use
Non-fungible tokens (NFTs) have generated a lot of hype in recent years, not only because of recent multi-million-dollar auctions – the NFT sale of the work “Everydays – The First 5000 Days” by the digital artist “Beeple”, which fetched $69 million – but also because of the copyright issues and questions they may raise.
However, before analysing the implications associated with the commercialisation of NFTs for authors of works, it is necessary to understand what an NFT is and to differentiate it from the work it represents.
What are NFTs?
A non-fungible token or NFT is a unique, unrepeatable and indivisible digital asset, which allows a digital certificate of authenticity to be associated with any virtual object using blockchain technology. This makes it possible to ensure, through a series of metadata:
- The identity of the author.
- Its initial value.
- The value of subsequent acquisitions.
- All the transactions that the NFT has undergone since its creation.
In other words, an NFT is metadata written on a blockchain that represents an object, whether physical or digital, or any feature of that object, and should therefore not be confused with the object itself.
However, we must differentiate between two scenarios that may occur with creating an NFT. On the one hand, the NFT may be the digital artwork itself, while, on the other hand, it may be a digital copy of a physical work that already exists.
In short, to summarise, the characteristics of NFTs include the following:
- They are unique and original: the most common case is that of works of art, of which copies may exist; however, the owner of the work can certify that it is unique and true to the original work.
- They are indivisible: unlike cryptocurrencies, NFTs cannot be subdivided; rather they have a full value as a token that represents 100% of the asset.
- They are unalterable and verifiable: all their metadata and transactions are stored in a blockchain through a Smart Contract, so they cannot be deleted or replicated, and their history can be verified, and who has bought or sold an NFT can be checked; although the identity of the parties to the transaction remains anonymous.
Implications for NFT transactions
Differences between Property Rights and Copyrights
Once we know what an NFT is, we must address the problematic relationship between the copyright held by the creator of the work and the ownership rights of the buyer of the work once the NFT is transferred.
To begin with, copyright is a set of intellectual property rights granted to the author who created an original work. These rights protect the personal interests of authors and give them the opportunity to obtain an economic benefit from the exploitation of the work.
In this sense, by selling the NFT, its ownership is transferred to the buyer, but the copyright (intellectual property) of the NFT is not transferred and remains with the creator or owner of the NFT.
Therefore, the NFT ownership right implies ownership of the NFT, i.e., ownership of the metadata representing the digital object, but not the transfer of the intellectual property rights over the work, which remains with the work’s creator.
This means that the seller of an NFT may not be the owner of the exploitation rights of the work it represents. At this stage, the main risks arise posed by the commercialisation of the NFTs concerning potential copyright infringement.
In fact, since any digitised digital or physical item can be tokenised, anyone can, in turn, tokenise a work and market it without the proper authorisation from the original author.
Therefore, it is of vital importance, from the point of view of the author of the work whose rights are being infringed, that before the sale of the work, the author registers their intellectual property in the Intellectual Property Register, as proof of their authorship, to take the legal action that they deem appropriate against anyone who unlawfully tokenises their work.
In any event, the extent of the rights that the buyer of the NFT acquires will largely depend on what the creator contractually stipulates, through the transfer of the exploitation rights of the work, together with the sale of the NFT.
An example of this is MakersPlace, one of the leading and best-known marketplaces – digital marketplaces where crypto-assets (among other things) are traded – for digital artworks. If we access their works, we can check the content of the rights granted to the work by the NFT, which in most cases are non-commercial rights, i.e., the buyer cannot commercially exploit the work; instead, it is for personal use only (collection).
Authors’ right to collect royalties
The main economic incentive that comes from the creation and subsequent commercialisation of the NFTs by the authors of the works, represented by the token, is the possibility of receiving financial reward:
- For the price agreed upon in the sale of the NFT ownership
- The resale right or royalty on any resale of the works.
If the buyer resells the NFT, the author will take a percentage of that sale, and so on for each subsequent resale and for each NFT that is traded on the same work.
However, there are substantial differences in the regulation of the author’s resale rights depending on whether the commercialisation of the NFT takes place inside or outside the European Union.
European Union
In the first case, Directive 2001/84/EC of the European Parliament and of the Council, of 27 September 2001, on the resale right for the benefit of the author of an “original work of art”, meaning works of graphic or plastic art (pictures, paintings, prints, sculpture, etc.), shall apply.
This definition excludes the concept of NFTs. Remember that they are simply a set of metadata, not graphic or plastic works. Therefore, the NFTs do not meet the requirement to fall within the scope of the Directive and, consequently, the author is not legally protected to claim royalties on potential resales of the NFTs.
United States
On the other hand, if we focus on the NFT market in the US, there is no such limitation on the collection of royalties, so authors are not legally prevented from collecting them. The royalty payments are also automatically executed through the Smart Contracts in which the purchase and sale of NFTs are usually formalised.
This way, each time a secondary sale is made, the Smart Contract ensures that the terms of the NFT are fulfilled, without the need for intermediaries or additional contracts, and without even the volition of those who carry out the transactions.
However, the problem here is that not all marketplaces where NFT transactions take place accept royalty payments. Therefore, it may be that the author of the work sells the NFT on a marketplace that effectively allows for the collection of royalties, but subsequent sales by the buyer of the NFT take place on a marketplace, other than the initial marketplace, that does not allow the collection of royalties.
Proposed solutions
Several solutions have been proposed to correct this failure in the token market. These include the creation of the ERC-721 standard. It is, as the name suggests, a standard that describes how to build non-fungible tokens on the Ethereum blockchain, defining an interface that every Smart Contract must implement in order to enable the management, ownership and trading of tokens.
However, the functions of the ERC-721 standard can only work if the action takes place within the Ethereum blockchain, becoming inoperative when acting outside of that platform.
Therefore, we are faced with a structural defect of the blockchain system itself with respect to the trading of tokens and, specifically, of NFTs. So, the most effective way to overcome this obstacle lies in the actual contract of sale and/or exploitation of the agreed commercial rights, which, remember, will in any case be a Smart Contract, where the parties must stipulate, among other things, the terms and obligations to operate only on platforms that allow the payment of royalties.
Exhaustion regime within the European Union
Finally, we must mention the so-called exhaustion regime in the European Union, the application of which, in relation to the NFT, is doubtful.
Directive 2001/29/EC of the European Parliament and of the Council, of 22 May 2001, on the harmonisation of certain aspects of copyright and related rights in the information society, establishes the regulatory framework in force among the Member States on this matter.
European law provides that, once a work is marketed within the European Union, its author cannot prohibit third parties from selling the original or copies that have already been distributed by the author.
In other words, within the geographical scope of the European Union, once the copyright owner has sold (distribution right) the ownership of the tangible medium containing the work, they can no longer control (exhaustion regime) subsequent sales of the ownership of the tangible medium of the work, i.e., the second-hand market.
It should be noted that, according to the case law of the Court of Justice of the European Union, the distribution right is exhausted only in the case of works on tangible media (DVDs, CDs, books, etc.), but not in the case of non-tangible works.
For example, in the case of commercialising a book in paper form, once the author has sold it to a third party, the author cannot prevent said the third party from reselling it on the second-hand market. However, in the case of the same book by the same author, but this time in digital format through an e-Book, the consent of the author would be necessary in order to authorise subsequent resales of the e-Book.
Accordingly, the same is true for resales of NFTs, since as they are not tangible works, but a non-tangible digital representation of the work, they are not subject to the exhaustion regime, so the consent of the copyright owner is required for the resale of NFTs. However, as with the example of the book and the e-Book, the following contradiction arises:
For resales of the physical work itself digitally represented through an NFT, the author’s consent is not required, whereas for resales of the NFT representing the physical work itself, the author’s consent is indeed required.
Risks of NFTs and their implication for money laundering
As has been explained, the NFT market presents great economic advantages for both the authors of the works and for the subsequent buyers of the digital asset. However, it is no less certain than the potential risks of commercialising NFTs.
Example
In order to launder illegally obtained money, individuals generate an anonymous NFT, offer it for sale on the blockchain, and then repurchase it for themselves using an anonymous digital wallet and illicit funds, thus bringing the illicit money into the legal market through the purchasing of the NFT.
Furthermore, the anonymity enjoyed by NFTs, thanks to blockchain technology, has fostered an environment conducive to money laundering. The fact that NFTs are traded mainly through cryptocurrencies heightens the risks, as the market is decentralised and unregulated, which adds to the complexity of tracking these transactions by the authorities in charge of preventing and prosecuting money laundering.
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