Many NFTs and DAOs aim to provide new or more convenient ways to own and sell creative works. Beeple’s EVERYDAYS: The First 5000 Days sold for $69 million at auction. Some observers believe that the astonishing rise of the Boring Ape Yacht Club is due to its lax approach to copyright. Some artists and developers are diving right in.
But at the same time, many of these projects have run into copyright issues due to confusion over 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. However, the plan was quickly scrapped when the Dune copyright holders vetoed 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 is correct.
- Quentin Tarantino and Miramax in lawsuit over Pulp Fiction NFT rights.
- Too many NFTs use stolen artwork to count.
In this blog post, we hope to clear up some confusion about NFT copyright and help those working in this field understand the challenges of incorporating NFTs into the framework of copyright law. 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 NFT owners 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 is common to say something like “Alice owns 10 bitcoins”. Most of the time, it’s pretty clear what that means. Alice controls the private key of a blockchain address to which 10 bitcoins were transferred in the unused transaction output. If Alice wishes, she can use that private key to transfer those bitcoins to another address. (Alice may control this key directly or through a wallet; we will ignore this complication below). In the words of the current Uniform Commercial Code draft articles for blockchain assets, Alice has “the power to exploit [herself] most of these bitcoins”. 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 easy 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 cube. The cube itself is an object that exists in the physical world. It weighs 2,000 pounds and measures 14.545 inches on a side and is located in the warehouse of Midwest Tungsten Services in Willowbrook, 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 real tungsten block, the two are the same. According to the “instructions” TungstenDAO provided to OpenSea when creating the NFT listing, when Alice gets the NFT, she also has the right to “see/photograph/touch the cube once per calendar year”. If Alice sends the NFT to a special address, preventing anyone from taking control of the NFT again (a process known as burning), she has the right to take physical possession of the cube “by 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 link a “tether”: rights to off-chain assets (physical cubes) are linked to on-chain assets (NFTs) through an invisible tether. (At least in theory. Some legal scholars are skeptical that “tethering” actually works).
So there are actually three different assets in NFTs. Yes, three.
First, there is an NFT itself on the blockchain. It looks like this:
You can view the creation of this NFT online on the Etherscan blockchain explorer.
Second, there are the physical cubes in the warehouse. It looks like this:
Third, there is a legal right to control the physical cube. It looks like this, because legal rights are intangible and have no physical existence:
Invisible legal rights ↑ (you can’t see is normal)
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 also have the associated legal rights.
Getting Started with Copyright
The following passage is sometimes considered to have been said by Einstein (humorous but incorrect):
You see, the cable is a very, very long cat. You pull its tail in New York and its head meows in Los Angeles. Do you understand this? Radios work exactly the same way: you send a signal here, they receive it there. The only difference is that there are no cats.
The copyright is exactly the same as the tungsten block, just without the block. A tungsten alloy cube is a specific physical object. It exists in one place. Any other tungsten block is a different block. But a creative work like a photo or a story is intangible. It can exist precisely in an object (called a “copy”), such as an oil painting on canvas. Or a work can exist in many copies at the same time, such as when a publisher prints thousands of books, or when a photo is displayed on millions of computer screens. Or a work can have no copies at all, such as one person telling a story to another. The problem is that a creative work is not the same as any copy that embodies it.
Therefore, the copyright of a creative work is not the same as the ownership of a physical object, such as a tungsten alloy cube. The owner of the cube can move it, carve it, or melt it; if anyone else does that, they’re violating the owner’s property rights. However, the owner of the copyright is not necessarily the owner of any specific copy. If Alice buys a copy of Bob’s novel, Alice owns the physical copy: paper with ink on it, but Bob owns the copyright to the text.
Instead, Bob’s copyright consists of a limited set of exclusive rights. Most importantly, Bob can stop anyone, including Alice, from making more copies of his novel. (That’s why it’s called a “copyright”.) If Alice wants to adapt Bob’s novel into a movie, which in copyright terms is a derivative work, 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 ownership, 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 license other uses, such as graphic novels and action figures. If Bob just gave Alice a license, he retains the power to decide how to use (or not use) the copyright.
NFTs, Copies and Copyright
Back to NFTs. It should be obvious by now that NFTs can be tied to a creation in one of two ways. First, it can be used to control copies of works: just as whoever owns the Tungsten Cube NFT is entitled to the Tungsten Cube, 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 more ambitious hopes go wrong. The project purchased a physical copy of the Jodorowsky Pitch book and tokenized its ownership. Owners of SPICE tokens can (collectively) decide to sell or lend them to others, or put them on public display offline. But they have never, and cannot, tokenize the copyright of the underlying creative work. The Dune novel is still copyrighted by Frank Herbert’s estate, who licensed the film rights to Legendary Entertainment, which produced the 2021 film version; the artwork in the pitch book is copyrighted by the original author and his estate Have.
Another failure mode of NFT copies is that copyright law has an unintuitive notion of what a copy is. We’ve been talking about physically distinct things, like printed books. But under U.S. copyright law, a “copy” includes any “material object … in which the work is fixed by any means now known or later developed and which can be perceived, reproduced, or otherwise transmitted, directly or by means of a machine or device. Works.” This definition includes hard drives and SSDs, and sometimes even RAM. Each computer that interacts with the work makes a separate “copy” for copyright purposes; even just browsing a web page will “copy” the images in it on your computer. Therefore, for all practical purposes, any NFT that includes digital artwork must include some copyright interest (assignment or license), otherwise the owner of the NFT becomes an infringer when trying to do anything with the artwork.
In particular, it is not enough to give NFT buyers a copy of the artwork. U.S. copyright law clearly states that assignment of copyright is different from assignment of copies.
Transfer of title to any physical object, including a copy or audiotape of a first-fixed work, does not in itself convey any rights in the copyrighted work embodied by that object; without agreement, transfer of title to copyright or any exclusive rights under copyright also Does not transfer property rights to any material objects.
If you buy a painting from an artist, you don’t take ownership of the copyright. Yes, you own the original work, but the artist retains the copyright and they can sell their prints if they want. If you want to buy the rights too, you need to get a separate agreement. The same is true for NFTs. Unless the NFT expressly gives the owner a copyright benefit, not just access to the work, the owner should not assume that they have any right to use the work or prevent others from using it.
Some popular NFT projects, including CryptoPunks, are released without explicit copyright terms. There are legal risks to all parties involved. An adversary could approach the creator of the NFT, buy out the copyright to the artwork, and then sue the NFT buyer for infringement if 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. Even 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 create copyright trouble by using artwork stolen from artists, or famous works that have no relationship or license with the NFT creator. Reproduction of these works as part of NFT marketing (e.g. for OpenSea listings) may violate copyright. Additionally, NFT creators can engage in false advertising by implying that 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 were misled by the NFT creator into believing that they were properly licensed.
While outright scammers are unlikely to care about infringement, unfortunately, many well-intentioned projects also seem to believe that an NFT that mints a work in a certain way automatically brings some copyright benefit to that work. A particularly tragic example is Andy Williams, who made an NFT of TV footage depicting the murder of his daughter. Parker was apparently told that creating an NFT would give him enough copyright to remove the clips from sites like Facebook and YouTube. But copyright is not like that. The TV station that filmed the footage 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 will 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 easier with the NFT that owns the work. To be sure, in the future of Web3, where absolutely everything is on the blockchain, it is technically impossible to publish a photo without the express permission of the copyright owner, unless approved by a 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 difficult
In fact, ensuring that NFT owners own what they consider copyright is also a more nuanced issue than it seems. Consider the following paragraph from the Boring Ape Yacht Club Terms and Conditions:
i. You own the NFT. Every Boring Ape is an NFT on the Ethereum blockchain. When you buy an NFT, you completely own the underlying boring ape, the artwork.
This appears to be tying the ownership of the copyright with 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 she sells the NFT to Bob, the copyright ownership transfers from Alice to Bob. Full ownership of the copyright allows Alice to use the artwork, for example, to display a hexagon in her Twitter profile. If she wants, she can also sue any right-clicker who downloads and displays the work for infringement.
Unfortunately, copyright doesn’t work that way. The problem is that U.S. copyright law sets a high threshold for transferring ownership of copyright—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. (emphasis added)
The written portion is not an issue; under federal law, the terms on the website count as “in writing.” The bigger problem is that BAYC’s terms are not “signed” by the copyright owner, Woodchuck labs. Without a signature, it is impossible to pass ownership of the copyright to Alice.
In theory, Woodchuck labs could fix the lack of signatures in the first step by modifying the terms to add a signature line. Under the E-SIGN Act, even a digital signature like a person’s name printed in script font can be a “process, attached to or logically linked to a contract or other record, performed or employed by a person, The intent is to sign the record” (emphasis added). In fact, the court held that when you create an account, clicking “I agree” to a site’s terms is sufficient to indicate “intention to sign.” (There are some timing issues, like CryptoPunks re-licensing, but that’s another timing issue).
Unfortunately, there is a bigger problem. This problem arises when Alice decides to resell WoodChucker to Bob. The original intent of the BAYC terms is that Bob now owns the copyright and Alice does not. But because of the signature requirement, this is not the case. Unsigned copyright transfer from Alice to Bob. Without a signed transfer, Alice still owns the copyright, not Bob.
This is the difference between smart contracts and legal contracts. Bob may be trying to argue that Alice has agreed to BAYC’s terms, which makes him the copyright owner. But Alice doesn’t! In her view, BAYC terms are just a bunch of words on a website. The copyright system was not created with digital tokens in mind and was not aware of their existence. In its view, Alice owns the copyright to Woodchucker and has done nothing to relinquish ownership. Legal contracts are usually only binding on those who expressly consent to it.
Admittedly, Alice has called the ERC-721 smart contract transferFrom() method to transfer the bored ape to Bob and apply her cryptographic signature to the smart contract that transfers the NFT to Bob. But the method is a smart contract term, not a legal contract term. The smart contract doesn’t say anything about copyright, nor does it link to the BAYC terms. Even if it had, there is no guarantee that Alice has read or even knew the terms. She would not attach her cryptographic signature to a legally binding transaction “attached to or logically linked to a [legal] contract…intended to sign”.
Going from smart contracts to legally binding terms is a tough and delicate one. Adding off-chain assets, such as tungsten blocks and copyrights, to the mix is even harder. Changing the ownership of these assets requires off-chain effects, but since smart contracts exist on the blockchain, it is entirely possible to interact with them without invoking any additional contract terms. If the copyright of the artwork associated with the NFT is based on a legal contract, users who only deal with smart contracts have a good reason that nothing in the legal contract applies to them, since they only interact with smart contracts interact.
An Alternative: Copyright Licensing
There is another way of structuring NFT copyrights that avoids the problem of writing signatures. Instead of transfer of ownership, NFT creators can use copyright licensing, which transfers full copyright ownership to each owner of the NFT. Creators hold ownership of the copyright and provide licenses directly to each successive NFT owner.
At first glance, this seems more complicated because now creators have to deal directly with each NFT owner, rather than just the first owner. But it has the big advantage that copyright licenses do not need to be signed like copyright assignments. (In fact, they don’t even need to be in writing, although for any serious financial transaction it’s much safer to write down the terms). Carol and Woodchuck labs do not need to rely on Alice and Bob to properly sign the transfer. Instead, Woodchuck labs could simply write down its terms to give each NFT owner a license directly and automatically when they acquire an NFT.
This approach has good precedent in free and open source software licensing. For example, the GNU General Public License states:
Whenever you pass on a covered work, the recipient automatically gets a license from the original licensor to run, modify, and distribute that work, subject to this license. You are not responsible for enforcing compliance by third parties with this license.
And the Creative Commons Attribution license says:
Each recipient of the Licensed Materials 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 digital work or other content made available to owners of digital collectibles through the platform as an “additional benefit” (as that term is defined in the Digital Collectibles Terms), will be identified on the platform or at the time of download as such content. As long as you own the applicable digital collectible, any such content will be licensed to you under any license terms set forth at the time of download, or, if no such terms are set forth, as that particular digital collectible under the applicable digital collectible terms The related content is licensed to you. …
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 the NFT owner actually receives the necessary copyright licenses for the NFT-related artwork, and that copyright licenses are far easier to achieve than a direct transfer of ownership.
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 Boring Ape has achieved rapid cultural and economic development. This will always be one of the mysteries of the age. But at least one factor, sometimes said to be the Boring Ape’s clause, 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 work of art in order to create derivative works based on the art.”
The first problem here is that this license grant is inconsistent with the statement in the two paragraphs above in the BAYC terms that “when you buy an NFT, you fully own the underlying boring ape, the artwork”. If Alice really “owns” the art, then Yuga labs has nothing to offer, and a commercial license is redundant. (This is another sign that claims that Boring Ape NFT owners “own” the artwork, like many other claims about what users actually own when they “buy” content online, are not to be taken at face value).
The second problem is that the term does not sit well with downstream transfers. Consider Alice and Woodchuck labs again. Suppose Alice owns WoodChucker numbered 12345. She allowed filmmaker Fern to create a series of videos based on number 12345 The Nutcracker. These videos are derivative works under copyright law, and Fern owns the copyright to these videos. Now, Alice decides to sell the Nutcracker No. 12345 to Bob. How should Fern’s license be handled?
A simple answer is that since Alice’s copyright license to use WoodChucker No. 12345 ends when her ownership of the NFT ends, so does any sublicenses she grants. This means that from the moment Alice sells them to Bob, the licensing of these videos ceases, and if Fern continues to play these videos, he becomes a copyright infringer. From Fern’s point of view, it was bad because she invested time and money in making these videos. It’s also bad from Alice’s point of view, because if Alice can sell the NFT to Bob at any time, Fern should be very reluctant to spend money to authorize Alice’s rights. So this solution actually makes the rights to derivative works unsaleable.
Another answer is that Fern’s license continues to be in full force and effect. Once Alice has given Fern a license, Bob has no ability to ask for remorse. This protects Fern, and thus Alice’s licensing business. But it also created its own troubles. 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 are good, Fern will insist that Alice make the video license exclusive so that Alice can no longer license others to make the video series. But this is a private contract between Alice and Fern. Bob did not sign it and is not bound by it! Bob got his copyright license directly from WoodChucker labs, without the exclusivity that Alice promised Fern.
So maybe the license should be tied to 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. An easement is said to be “binding on the owner’s heirs” or “run with the land”. That is, an easement is attached to and restricts (or “encumbrances”) the legal rights to the land itself. It’s not just Alice’s personal commitment to Telecorp. When Bob buys land from Alice, he puts on 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).
Likewise, we can imagine that when Bob buys the NFT from Alice, he steps into her. Not only does he inherit Alice’s rights in the Boring Ape 12345 copyright (such as the right to make a glossy art print), but he also inherits any restrictions or obligations that Alice has undertaken (such as an exclusive video license to Fern). Now Bob is not free to license Georg to make a second video series.
Maybe this is a good solution. Or maybe not. If Alice is now free to mortgage the artwork copyright in this way, it will limit Bob’s rights. When he buys the NFT, he buys less than Alice buys the full rights. Alice splits the copyright, effectively keeping a piece for herself. If Bob was on the NFT market, he would have to investigate the entire property chain of the NFT he purchased to make sure that no Alice had quietly ceded part of the copyright before him. The need for such an investigation goes against the ethos of cryptocurrency, which is to do as much public and on-chain as possible. So maybe an exclusive license signed by one owner shouldn’t work with NFTs.
So far, we’ve listed three different possibilities for what happens when Alice sells the NFT to Bob:
- Fern’s license terminated.
- Fern’s licensing continues, but Bob can license the same rights to Georg.
- Fern’s license continues, and Bob cannot license the same rights to Georg.
It is conceivable that the court would adopt any of these three outcomes. In fact, there is generally no clear consensus on which of these three outcomes is the best solution. (The three authors of this blog post don’t even agree!) Worse yet, these don’t even exhaust the 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 some license terminations. Or, if Fern’s license survives, what happens to any royalties Fern promises to pay Alice? Should Bob inherit these rights too? There are arguments for and against.
Our view is that these are issues that NFT licenses that allow derivative works need to deal with. Otherwise, NFT owners and their business partners may be unhappy with the outcome. Everyone who is building projects on the basis of NFTs that don’t answer these questions has great confidence in the courts that if the transaction goes bad and the parties end up suing each other, then the court will take care of things. (And blockchain advocates are generally not known for trusting the courts to get things done).
We are not saying that all projects have an optimal solution. (This is one of the many reasons why we don’t provide our own suggested license text). For “Boring Ape”, it may not be suitable for NFT projects based on musical works or literary works. Instead, we believe NFT creators need to think about these issues, discuss them with their communities, and then clearly communicate how copyright licensing will relate to NFTs.
Clearly, many NFT projects are designed to transfer copyright while transferring ownership of the NFT itself. This is a core design goal, on the same level as creating compelling 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 on which blockchain operates is as complex as the technical infrastructure and full of pitfalls for the unwary. While some cryptocurrencies and Web3 projects seek to evade 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 did not tie the copyright interest with the NFT as they intended. If code is the law, then these licenses are the code in question. Responsible NFT creators will not launch a project built on a smart contract library that has known unpatched vulnerabilities. They should be equally cautious about the legal codes they rely on, because otherwise, the results could be equally disastrous. Regardless of your opinion on NFTs, launching them with the copyright license broken does no one any good.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/is-the-copyright-of-nft-satisfactory/
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