Basic legal guidelines for entering the field of NFT digital art

NFT, or Non-fungible token (non-fungible token), is in full swing in the global art and culture field.

The public mostly focuses on NFT’s technical advantages and exciting transaction volume, but they don’t know much about the legal risks behind this trend.

Have you heard of the following events?

  • The cartoonist José Delbo of DC “Wonder Woman” was warned by DC’s lawyer’s letter for publishing NFT digital works in the image of Wonder Woman without authorization.
  • American top rapper Jay-Z sued a shareholder of RAF Records under his name, prohibiting the shareholder from intending to transfer the copyright share of Jay-Z’s music album “reasonable doubt” through NFT technology.
  • As the director of the classic Hollywood film “Pulp Fiction”, Quentin Tarantino was sued by the production company Miramax for planning to distribute NFT digital works related to the film.

Basic legal guidelines for entering the field of NFT digital art

Although the above examples occurred in the United States, the global enthusiasm of NFT has caused a certain amount of chaos in various countries and regions, and many issues urgently need to be further clarified by the judicial and regulatory authorities.

However, behind the layers of fog, there is still some legal consensus that has been reached, and the legal disputes contained in the above cases are still universal under the legal systems of different countries.

The content of this article takes overseas practical cases as a reference, combined with the current development of the NFT international market, and popularizes the key points of legal risk prevention related to the casting, sale and circulation of NFT digital art to sellers and buyers.

For the convenience of readers’ understanding, the seller referred to in this article refers to a corporate entity or individual artist who casts NFT on its own or commissions a third-party platform to cast NFT and distribute NFT digital artwork to the open market. The buyer refers to the investor who purchases the NFT digital artwork on the NFT trading platform.

What is NFT?

technical level

The name of NFT is prone to ambiguity for non-technical professionals. The most popular understanding is that NFT is a unique and non-tamperable data code stored on the blockchain.

Based on its characteristics, NFT can be associated with digital assets that are easy to copy, such as music, images, games, etc., and its role is equivalent to a “digital certificate.”

Through the use of NFT, the dilemma that the authenticity of digital assets is indistinguishable and easy to tamper with is solved. At the same time, every transaction is recorded, and all transaction processes are made transparent and open. And through the smart contract (smart contract), it can ensure that the seller of NFT digital works obtains continuous copyright income.

NFT is produced by casting (mint) on the blockchain. Most of them use the Ethereum ERC-721 technical standard, which generally includes at least a unique identifier, metadata, and smart contracts.

Basic legal guidelines for entering the field of NFT digital art

Legal attributes

Is NFT a commodity, a virtual asset, or a security?

This is directly related to the supervision of NFTs in various countries and the legal safeguards for buyers. Article 127 of the “Civil Code” stipulates: ” Where the law has provisions on the protection of data and network virtual property, follow these provisions.” However, there is no relevant legal characterization of NFT in mainland China.

In the United States, the mainstream view is that the Howey Test still needs to be used to determine whether NFT is a security. Is classified as “securities” , the NFT issuer and NFT trading platform should strictly follow the requirements of the United States Securities and Exchange Commission (SEC) and comply with detailed registration and disclosure procedures.

In addition, to obtain continuous copyright revenue through smart contracts, this transaction arrangement will also be strictly restricted.

Even if NFTs are not securities, if NFTs can be reasonably expected to have secondary market transactions and liquidity, they may also be identified as “commodities” as defined by the “Commodity Exchange Act” (The Commodity Exchange Act). The US Commodity Futures Trading Commission (CFTC) believes that Bitcoin and almost all other major digital currencies that are not securities are commodities subject to the CFTC’s anti-fraud and anti-manipulation jurisdiction.

As sellers and buyers of NFT digital artworks, they should pay close attention to the new regulatory regulations and enforcement actions of different countries to avoid compliance risks or frustration of investment objectives .

NFT and digital art are two independent assets

NFT and the linked digital artwork are two different assets. The difference from NFT is that the linked digital artwork is generally not stored on the blockchain, because the storage cost of the blockchain is quite high.

When a buyer purchases an NFT digital artwork, what they actually get is a link in the NFT, which points to the storage location of the digital artwork, such as a URL to a third-party webpage.

Understand that NFT and its corresponding digital artwork are independent of each other, and its purpose is that both parties to the transaction should accurately understand the subject of the transaction.

Regardless of the legal nature of the NFT, the underlying asset of the transaction is still a digital artwork.

As the seller, two compliance preparations should be made in advance:

1) Obtain the complete right or authorization to sell the digital art of NFT;

2) Clarify what rights the buyer obtains after purchasing (that is, the legal terms in the smart contract or product description).

Do you have the right to sell NFT digital artwork?

Unlike NFT, which is produced through mint, the rights of the digital artwork linked to it are more complicated.

At present, the types of NFT digital art market transactions include music, animation images, celebrity portraits, dynamic cards (NBA Topshot), tweets, etc.

It is important to remember that the current effective copyright law, portrait rights, and contract law related laws and regulations still apply to NFT digital art transactions.

Suppose a brokerage company intends to independently sell an NFT digital artwork created with celebrity portraits. Since the close application of NFT and cultural and creative industries has only just emerged in the past two years, traditional brokerage contracts may not cover encryption technologies such as NFT. Therefore, it is necessary to update the contract version in time, obtain the celebrity’s portrait rights authorization, and use it to sell NFT digital art, and count the commercial income obtained from the NFT digital art transaction as brokerage income.

For artists, even if they sell self-created works, they need to self-check whether they have the right to sell, such as whether they are commissioned by a third party or hired for creation, and review the written agreement of related projects in a timely manner.

Take the DC cartoonist José Delbo as an example. He has been creating the comics for “Wonder Woman” since 1976. In March of this year, Jose collaborated with another artist to sell NFT image works featuring Wonder Woman, with a total income of US$1.85 million. After the NFT transaction was discovered by DC, the legal department immediately issued a warning letter to all employees, prohibiting DC cartoonists from selling any digital images related to the DC universe or other NFTs without permission. work.

For companies like DC or Marvel, when cartoonists participate in the project, the company will sign an agreement with them on the employment of works (Work for Hire) to agree that all intellectual property rights such as animation and character images belong to the company.

Basic legal guidelines for entering the field of NFT digital art

For buyers, reviewing the seller’s “sale qualification” is a must, because NFT digital artwork cannot be fidelity.

If we compare the sale of NFT digital artwork to the production link, and the secondary transaction between the holders to the circulation link, NFT technology can only ensure that the transaction items in the circulation link are not tampered with and the transaction records can be traced, but There is no guarantee that there will be no legal issues in the production process.

If the seller does not have the legal right to distribute this digital artwork, then the buyer will bear the investment risk on his own.

The well-known NFT trading platform Rarible received a letter from Marvel’s legal department this year, requesting Rarible to delete a Spider-Man work sold on the platform for $5,500. After receiving this notice, Rarible immediately took measures to prohibit the buyer who has paid $5,500 from reselling the work he currently owns on the blockchain. The buyer can no longer view the digital image of Spider-Man he bought in his encrypted wallet through the Rarible website.

How to write “Sales Agreement”?

As far as the transaction of this digital artwork is concerned, the legal effect is either the transfer of ownership or the license of copyright.

Ownership: that is, the exclusive right to possess, use and dispose of a certain property.

Copyright license: As an intellectual property, it is a collection of a series of rights, generally including the rights to copy, distribute, adapt, and translate.

If the ownership is obtained , according to the “first sale principle” in the US copyright law (also known as the “exhaustion principle” in mainland China), the copyright owner has no right to control the copy of the work placed on the market with the permission of the copyright owner. For further resale, distribution and other activities of the work, the legal acquirer can decide for himself whether to resell the copy of the work.

If a copyright license is obtained , the above-mentioned principles do not apply. What kind of license rights the buyer ultimately obtains depends entirely on the seller’s contractual presupposition.

In a nutshell, only by acquiring the ownership of the digital artwork copy can the buyer have the right to resell it.

Unlike traditional commodity transactions, buyers and sellers can negotiate contract terms together. Due to the particularity of the NFT, this contract is generally drafted in advance by the seller and listed as a part of the smart contract, or directly indicated to potential buyers in the product description.

For buyers, if they misunderstand the sales contract due to negligence or knowledge blind spots, they may deviate from the investment purpose (for example, mistakenly believe that they have the right to resell).

The author checked multiple “sales contracts” published on the NFT market and found that the length of the contract varies. For example, a piece of music sold by Mike Shinoda, a member of Linkin Park, on the Zora platform through public auction, contains only one sales clause: “Only limited personal non-commercial use and resale rights in the NFT are granted and you have no right to license, commercially exploit, reproduce, distribute, prepare derivative works, publicly perform, or publicly display the NFT or the music or the artwork therein. All copyright and other rights are reserved and not granted.”

Basic legal guidelines for entering the field of NFT digital art

The sales contract drafted by Christie’s auction house for NFT digital art is more than 30 pages long, and its nature is more like a bidder’s risk notification. It has no practical reference value for the seller, and it is difficult for the buyer to be accurate. Understand its legal connotation.

Contract text that can be used as reference

For example, the Clonex series sold by RTFKT studio on the Rarible platform. The sales contract of this series is displayed in the product description. Buyers can check all the terms of the contract by clicking on the link.

In addition, the sales contract of the NFT “Pepsi Mic Drop” creation series issued by Pepsi-Cola can be queried in the smart contract. Below, we will take part of the contract terms of PepsiCo as an example.

Basic legal guidelines for entering the field of NFT digital art

Receipt of the Content or this NFT does not give or grant recipient any right, license, or ownership in or to the Content other than the rights expressly set forth herein.

Except for the rights specified here, the receipt of this digital work or this NFT will not grant or grant the recipient any rights, licenses or ownership of the digital work.

Owner reserves all rights (including with respect to the copyright, trademark, name, likeness, art, design, drawings and/or other intellectual property) in and to the Content not expressly granted to recipient herein. 

The owner reserves all rights (including copyright, trademark, name, portrait, art, design, drawings, and/or other intellectual property rights) in this digital work that is not expressly granted to the recipient here.

…recipient of this NFT is granted a limited, revocable, non-exclusive, non-transferable, non-sublicensable license to access, use, view, copy and display the Content and this NFT solely (i) for the duration of such recipient’s ownership of this NFT, (ii) for recipient’s own personal, non-commercial use and…

…The recipient of this NFT is granted a limited, revocable, non-exclusive, non-transferable, and non-sublicensable license to access, use, view, copy and display this digital work and this NFT, only ( i) During the period when the recipient owns this NFT, (ii) for the recipient’s own personal, non-commercial use…

Based on the above clauses, the author suggests that the seller when drafting the sales contract:

1. The wording should distinguish between NFT and digital artwork, so as not to confuse the two into an asset or a right;

2. Clearly state whether the buyer obtained the ownership of a copy of the digital work or a copyright license for the digital artwork;

3. If it is a copyright license, the types of rights and rights restrictions under the copyright license (such as copying for personal and non-commercial purposes) should be accurately listed.

In addition, a complete sales contract should also include general terms such as liability for breach of contract, application of law, and dispute resolution (the above-mentioned PepsiCo contract clearly states that the laws of the state of New York apply).

At present, most of the NFT digital artworks with high market circulation value are sold on overseas NFT trading platforms. Therefore, the sales contracts of the sellers are basically in English and are subject to overseas laws, which require higher legal knowledge of the buyers.

The author recommends that for high-value NFT digital art transactions, sales contracts should not be underestimated, actively seek professional help, and reasonably evaluate the transaction structure and investment risks.

Concluding remarks

The prevalence of NFT digital art transactions will generate high gas fees and transaction fees. I believe that the trading platform may become the biggest gainer of benefits.

As sellers and buyers, they should take a rational view of this trend, actively pay attention to the regulatory environment of various countries, and fully protect their rights and interests in accordance with the current effective laws and regulations, so as to avoid being negligent and “stumble” as a leek.

Disclaimer: All the content of this article is for reference and communication only, and does not represent specific legal opinions.

Posted by:CoinYuppie,Reprinted with attribution to:
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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