The tangled truth about NFTs and copyright

If code is the law, countless NFTs are built on flawed code

The tangled truth about NFTs and copyright

A long-held myth is that copyright law is the only functional law on the internet — after all, the entire internet is made up of copies, so copyright law has become the mechanism of choice for everything from fighting harassment to stopping everything leaking. Confusion about how copyright law works is everywhere – and it’s only getting more complicated in a Web3 world. What does it mean to “own” something on the blockchain that is still just a piece of code that can be copied infinitely? Courts and legislators have yet to address this issue, and many NFT projects have run into immediate, confusing issues because they conflate owning NFTs with owning copyrights .

To help, we’ve adapted copyright and blockchain guides from three legal scholars from Cornell University and the Cryptocurrency and Contracts Initiative (IC3) — James Grimmelmann, Yan Ji, and Tyler Kell. It explains how courts might actually treat NFTs — and why everyone who buys and sells them needs to take copyright law more seriously. —Adi Robertson and Nilay Patel

Many blockchain projects — such as non-fungible tokens (NFTs) and decentralized autonomous organizations (DAOs) — aim to provide new or more convenient ways to own and sell creative works.

But at the same time, many of these projects have run into copyright issues due to confusion over how copyright law applies to NFTs. Here are some of the problems they encountered:

  • Spice DAO has purchased the illustrated brochure made by director Alejandro Jodorowsky 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 scrapped because Dune’s copyright owners disagreed with 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 them must be right.
  • Quentin Tarantino and Miramax in lawsuit over rights to Pulp Fiction NFT.
  • In one particularly tragic example, Andy Williams 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 made the video owns the copyright, and minting NFTs doesn’t change that.
  • The Associated Press’ blockchain chief argued that creating an NFT for some of its photos would make it easier for unauthorized users to delete them. But copyright comes from copyright law, not blockchain. Owning an NFT for a work doesn’t make the process of filing a copyright lawsuit or DMCA takedown notice any easier.
  • There are too many NFTs using stolen artwork to count.

Ownership of an NFT can be used to give the owner substantial control over the creative work, but this control is not automatic. Copyright law does not give NFT owners any rights unless the creator actively asserts the rights – preferably by enforcing standard, formal copyright licenses for works linked to the NFT.

Our survey of some existing NFT projects and their licenses shows that few projects take all the necessary steps to make NFT copyrights behave as one would expect. Thinking about legal issues should be part of the NFT design process, not an afterthought.

Getting Started with Blockchain

Many blockchain projects are premised on ownership . But what exactly does it mean to own an NFT? To answer this question, we need to recognize the difference between “on-chain” and “off-chain” assets.

Words like “Xiao Bai owns 10 bitcoins” are often heard in cryptocurrency. Bitcoin is an on-chain asset: something that exists as a self-contained entry on the blockchain. When someone says that Xiaobai “owns” bitcoin, it usually means that she controls the private key to a blockchain address, either directly or through a cryptocurrency wallet. She can choose to transfer that bitcoin to another address if she wishes. [1]

NFTs also have an on-chain component, usually a software-based smart contract that can be activated by anyone in control of the keys. But sometimes, that blockchain entry represents something that exists off-chain — like a tungsten cube. [2] The Tungsten Cube NFT blockchain entry is different from the physical tungsten cube. But according to project creator TungstenDAO, the Tungsten Cube NFT and the actual tungsten Cube are connected. [3]

Here, the rights to the off-chain asset (physical cube) are linked to the on-chain asset (NFT) through an invisible legal connection. Lawyers sometimes refer to this connection as “tethering” — although some legal scholars are skeptical that binding actually holds in court.

This means that this NFT actually involves three different types of assets.

  • NFT entry on the blockchain
  • Physical Cube in the warehouse
  • Legal right to control the physical cube

If all goes well, the legal right to link the on-chain NFT to the off-chain cube. The current owner of the NFT can control the physical cube because they also have the associated legal rights. [4]

Getting Started with Copyright

A tungsten Cube is a specific physical entity that exists only in one place. But creative work can be intangible and can take many forms. It can exist in a unique object, like an oil painting on canvas. It can exist in multiple copies at the same time, such as when a publisher prints thousands of books. It can exist without any copies, just as one person tells a story to another.

Legally, a creative work is not the same as any of its copies – someone can own the copyright , but not a specific copy of their work, and vice versa. This is because copyright is a limited set of exclusive rights not associated with any particular physical object. On top of that, owning a copyright in a creative work includes the right to make more copies of the work and prevent others from doing so (that’s why it’s called the “right to copy”.) It also includes the right to make derivative works. Like a movie adaptation.

Suppose Bob writes a book and sells it to Alice. Here’s what they each have:

Bob owns:

Exclusive rights to make more novel copies Physical copies of text from Bob’s novels

Alice has:

The right to approve derivative works such as movies

Now suppose Alice wants to make a movie out of Bob’s novel. She needs Bob’s permission, which she can do in one of two ways: buy the copyright directly from Bob, or have him give her a license .

The purchase of the copyright is called a “transfer of title,” and it transfers all the rights owned by Bob to Alice. She can choose to make her films or license other spin-offs such as graphic novels or action figures.

At this moment

Bob owns:

nothing

Alice has:

Exclusive rights to make more copies of the novel

The right to approve derivative works such as movies

Licenses are more restricted. Bob would grant Alice specific rights, but he would retain the overall copyright, so the result might look like this:

Bob owns:

Exclusive rights to print the novel The right to make a movie based on Bob’s novel

Alice has:

Rights to License Action Figures, Graphic Novels, and Other Derivatives

The same divide exists for other types of creative work. For example, if you buy an oil painting from an artist, you don’t necessarily get copyright ownership. Yes, you own the original canvas with the paint on it, 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.

Before the internet, it was all a lot easier because making copies required things like printing presses and vinyl record punching plants. Copies are expensive to make, so they’re scarce : there are only so many copies available, so it’s easy to put a price tag on each one. Since all of this is expensive, only a few people really need to think about copyright law.

But the Internet has effectively brought the cost of copying to zero. NFTs are in part a reaction to this phenomenon: since there are only so many NFTs in a mint, they create digital scarcity, and they can be priced the way books and CDs used to be. However, they are running into the basic fact of the Internet that it is very easy to make copies and that the boundaries of copyright law are being pushed by ordinary people every day.

Now back to NFTs

As mentioned above, NFTs can theoretically be “tethered” to a legal right. But there are two separate rights here: the right to own  a copy of the creative work (like owning a tungsten cube), and the right to reproduce and create derivatives of the original creative work. These rights can be bundled into an NFT. But they can also be divided into – as the artist puts it, “copy NFTs” and “copyright NFTs”.

To see the difference in practice, let’s go back to the Spice DAO example at the beginning of this article. This item purchases and marks ownership of a physical copy of the Jodorowsky brochure. Therefore, the owners of SPICE tokens can collectively decide to sell or lend  the copy , or put it on public display offline. (It’s akin to “copying an NFT.”) But the rights to the Dune novel are still held by Frank Herbert, who licensed the rights to the film version to Legendary in 2021. And the copyright to the artwork in the brochure is held by the original artist and his estate. In other words, this is an NFT without “copyright”. Spice DAO cannot make additional copies of brochures, or make derivative works from them, such as movies. They only have this book.

Things get more complicated when you’re talking about digital copies rather than physical copies, because the law’s definition of “copy” isn’t intuitive. It includes any “material object that can perceive, reproduce, or otherwise convey a work,” including computer hard drives and sometimes computer memory. [5] Each computer that interacts with the work makes a separate “copy” for copyright purposes; even if just browsing a web page, your computer makes a “copy” of the images on that page for display.

U.S. copyright law clearly states that copyright assignment and copy assignment are different. [6] This means that for most NFTs, a “copy NFT” actually requires some kind of “copyright NFT” element, allowing the owner to make more copies – otherwise the moment they access their art would be an infringer.

Selling copyrights is hard. Licenses are easier.

In fact, ensuring that NFT owners own the copyrights they think they own is a more nuanced issue than it seems. Consider the following paragraph from the Boring Ape Yacht Club Terms and Conditions:

You own NFTs. Every Boring Ape is an NFT on the Ethereum blockchain. When you buy an NFT, you own the complete Bored Ape, including the artistic one.

This looks like tying the ownership of the copyright to the ownership of the NFT – for example, if the buyer sells the NFT, they also sell the copyright. Unfortunately, U.S. copyright law sets a high threshold for transferring copyright ownership, requiring that transfers must be “in writing and signed by the owner.” [7]

There’s nothing wrong with the written portion; under federal law, the terms on the website can be considered “in writing.” Under the E-SIGN Act, even a digital signature like a person’s name printed in a script font can be a signature[8] The court ruled that clicking “I agree” to the site’s terms when you created an account was sufficient to indicate “intention to sign” “. Therefore, NFT manufacturers can meet this requirement by modifying the terms to add a signature line.

The real problem arises when an NFT buyer tries to transfer their copyright ownership. Suppose Alice buys an NFT from a company that uses the same terms as BAYC. Alice acquires full ownership of the copyright from this company. (She can show it on her Twitter profile, sue right clickers for infringement, etc.) Then she sells the NFT to Bob on OpenSea. This should theoretically transfer copyright as well.

The tangled truth about NFTs and copyright

However, if all Alice does is execute the smart contract, there is no legal contract to transfer the intellectual property – so even after selling the NFT, she still owns the copyright.

The tangled truth about NFTs and copyright

Bob can claim that Alice agreed to the terms of service, which states that the person who owns the NFT controls the copyright. She has applied her cryptographic signature to the smart contract. But smart contracts do not necessarily state copyright or link to terms. Even so, there is no guarantee that Alice has read or knew these terms. She will not attach her cryptographic signature to the transaction in a legally binding sense. Legal contracts usually bind only those who expressly consent.

Going from smart contracts to legally binding contracts is a tricky and delicate issue. Adding off-chain assets like tungsten Cube and copyrights to the mix makes things more difficult. If the copyright of the artwork associated with the NFT is based on a legal contract, then the user has a legitimate argument that nothing in the legal contract applies since they are only interacting with the smart contract.

Licensing copyrights is easier than transferring copyrights because there is no need to sign a license. (They don’t even need to be in writing, although for any financially serious transaction, it’s much safer to write down the terms.) So NFT creators can get around the signature problem by retaining copyright ownership, but granting a license. So if Alice buys the NFT and sells it to Bob, and Bob sells it to Carol, neither of them owns the copyright, but everyone gets a license while owning the NFT:

The tangled truth about NFTs and copyright

At first glance, it looks more complicated because now the creator has to deal directly with each NFT owner, not just the first owner. But it means Carroll doesn’t have to worry about whether Alice and Bob signed the transfer correctly. She can be confident that she has obtained permission directly and automatically from the creator, detailing it in their terms of service.

This approach has good precedents in free and open source software licenses such as the GNU General Public License [9] and the Creative Commons Attribution License. [10] Some NFT licenses also adopt this model, such as RTFKT license. [11]

The point is, NFT creators need to think hard about how they structure their terms to ensure that NFT owners actually get the necessary copyright licenses for the NFT-related artwork. Copyright licensing is much easier than outright transfer of ownership.

Derivative rights

No one has been able to explain why the bored ape achieves a cultural and economic escape velocity. This will always be one of the mysteries of the age. But at least one factor came into play: The Boring Ape’s terms allow owners to make things like comics and merchandise. In other words, derivative works are fine. [12] Unlike many NFT projects, BAYC’s terms allow for unrestricted commercial use of NFT art. [13] But the BAYC’s terms actually show how difficult it is to get derivative works right, and how many potential pitfalls there are.

The first problem is that BAYC’s license is inconsistent with its earlier claim that “[When you buy an NFT, you have full rights to Bored Ape”. If the buyer does “completely” “own” the artwork, 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, cannot be taken on the surface.)

The second problem is that these terms are not compatible with resale of NFTs. To see why, let’s go back to Alice’s example. Alice owns NFT 12345, the terms of which allow her to sublicense derivative works based on it. She gave the filmmaker (we’ll call it Fern) a license to use it in the film – a derivative work that Fern also owns an independent copyright to. Then, when the movie came out, Alice sold NFT 12345 to Bob. What should I do with Fern’s license?

The tangled truth about NFTs and copyright

A simple answer is that when Alice sells the NFT, any sublicenses she grants will end when her ownership ends. But from Fern’s point of view, it’s horrific, and showing the film without a license could be a copyright violation! It’s also bad for Alice because the artist doesn’t want to pay for the right to disappear every time the NFT changes hands.

Another answer is that Fern’s license remains in effect and Bob has no right to revoke it. Unfortunately, this is also problematic. Let’s say Fern has good lawyers and they get an exclusive license to the film rights for them, so Alice can’t let someone else make a competing film. But when Bob bought the NFT, he got the copyright license directly from the company. He never signed a contract with Fern! So he’s not bound by those terms, and he can license as many competing films as he wants.

So maybe the license should “flip through” with the NFT itself. This happens all the time in real estate. For example, someone who owns a piece of land can grant a telco an “easement” to run fiber optic cable under it, and when they sell the land, the new buyer inherits a legal obligation to the telco. In this case, when Bob buys the NFT from Alice, he inherits any existing restrictions or obligations – such as Fern’s exclusive license.

The tangled truth about NFTs and copyright

But this solution means that Bob gets less than the full rights granted by the original NFT creator. He will have to investigate the entire transaction chain of the NFTs he buys to make sure that former owners like Alice haven’t given up part of the copyright. This goes against the crypto-spirit that everything should be done as public and on-chain as possible.

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. But if Fern’s license survives, what about any royalties Fern promises to pay Alice? Should they be handed over to Bob too?

So far, we’ve discussed four different possibilities for what happens when Alice sells the NFT to Bob:

  1. Fern’s license terminated.
  2. Fern’s license remains in effect, but Bob can license the same rights to others.
  3. Fern’s license continues, and Bob cannot license the same rights.
  4. Fern’s license for new derivative works terminates, but they can continue to use existing works.

It is conceivable that the court would adopt any of these outcomes. In fact, there is no clear consensus as to which is generally the best solution. But everyone who has done projects on the basis of the National Trust, which has not answered these questions, has great confidence in the court that if the deal goes bad and the parties end up suing each other, the court will take care of it. Many NFT projects do not have clear buyer rights

Some popular NFT projects, including CryptoPunks, are released without explicit copyright terms. This is a legal risk for all involved.

Without clear terms, someone could contact the creator of the NFT series and buy the underlying copyright to the artwork, then sue the NFT buyer for putting the image in their profile picture – as there is no license that explicitly grants them the right to do so . This was not the intention of the creators and purchasers, and we hope that the courts will not cooperate with such malicious lawsuits in such copyright-based attacks. But the court doesn’t seem to have a clear understanding of cutting-edge blockchain technology and community norms either.

After the original CryptoPunks was released, its creator, Larva Labs, later returned and attempted to retroactively add copyright permissions. Some legal scholars doubt 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 release and minting is trickier than granting them up front.

Some NFTs create copyright problems using artwork stolen from artists or well-known works that are not affiliated with the NFT creator and have no license to use. Copying these works as part of NFT marketing (eg for OpenSea listings) may in itself violate copyright. NFT creators may engage in false advertising by implying that NFT owners will acquire the rights to these stolen works. And since copyright infringement is “strict liability,” NFT owners who copy stolen artwork may also be liable for infringement, even if they were misled.

While straight-up scammers are unlikely to care about infringement, unfortunately, many well-intentioned projects — like the case of Andy Williams — also seem to believe that NFTs that mint works in a certain way automatically carry some copyright benefit work.

In the future of Web3, everything absolutely happens on the blockchain, nothing can happen unless approved by the blockchain transaction, and it should technically be impossible to publish a photo without the express permission of the copyright owner of. But that world is not the world of today, and a world in which one cannot speak without prior permission would be deeply dystopian. This would go completely against the values ​​of freedom and openness that blockchain is supposed to represent.

No matter what you think of NFT’s copyright issues, launching them with a broken copyright license does no one any good. While some cryptocurrencies and Web3 projects aim to get rid of the existing legal system, or replace it entirely, many creative NFT projects operate within the existing legal system. Responsible NFT creators should not launch projects built on well-known, unpatched libraries of vulnerable smart contracts, nor should they contain legal provisions that could prove disastrous.

Still, many projects seem to have far less consideration for the legal aspects of their designs than technical and artistic designs. If code is the law, then countless NFTs are built on flawed code.

Source public number: old yuppie

Source: The Verge By James Grimmelmann, Yan Ji, and Tyler Kell Jun 8, 2022, 8:30am EDT

footnote:

[1]: According to the current draft revision of the Uniform Commercial Code, she is “entitled [to herself] to receive almost all the benefits of these bitcoins.”

[2]: Tungsten cube weighs 2,000 pounds, measures 14.545 inches on a side, and is located at Midwest Tungsten Service’s warehouse in Willowbrook, Illinois.

[3]: TungstenDAO’s description of the Tungsten Cube NFT rights on OpenSea, an entry in a smart contract deployed on the Ethereum blockchain using the ERC-1155 standard, explained: “One visit 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 receive physical ownership of the cube “by a cargo truck.” If she sells the NFT to Bob, Bob will have the right to access the Rubik’s Cube once a year, or burn the NFT and get the Rubik’s Cube.

[4]: You can view the creation of this NFT online on the Etherscan blockchain explorer here.

[5]: U.S. copyright law defines a “reproduction” as “a physical object … the fixation of a work by any means now known or later developed, and which may be perceived, reproduced, or otherwise communicated, directly or otherwise. By means of a machine or equipment.

[6]: Legally: “The transfer of ownership of any physical object, including the reproduction or phonogram in which the work was originally fixed, does not in itself transfer any rights in the copyrighted work embodied by the object ; and in the absence of an agreement, assignment of copyright title or any exclusive rights under copyright does not transfer any property rights in kind.”

[7] : Section 204(a) of the Copyright Act provides that an assignment of title to copyright, except by law, shall not be effected unless the instrument of assignment, instrument of assignment, or memorandum of Duly authorized agent to sign. (emphasis added)

[8]: Electronic signatures involve “the process, attached to or logically associated with a contract or other record, performed or employed by a person who intends to sign the record”

[9]: “Every time you transmit a covered work, the recipient automatically obtains a license from the original licensor to run, modify, and distribute the work, subject to this license. You are not responsible for enforcing compliance by third parties with this license. certificate.”

[10]: “Each recipient of licensed material automatically receives an offer from the licensor to exercise the license rights in accordance with the terms and conditions of this public license.”

[11]: “Any digital work or other content with authorship made available to owners of digital collectibles through the Platform intended as an “additional benefit” (as the term is defined in the Digital Collectibles Clause) will be identified as such Classes on the Platform or at the time of download. As long as you own the applicable Digital Collectibles under any license terms provided at the time of download, or if no such terms are provided, any such Content will be licensed to you for that particular digital collectible.”

[12]: That is “translation, musical arrangement, dramatization, fictionalization, film version, sound recording, artistic reproduction, abridgement, condensation or any other form in which the work can be recast, transformed or adapted.”

[13]: Specifically, “Yuga Labs LLC grants you an unrestricted license to use, reproduce, and display the purchased artwork worldwide to create derivative works based on the artwork.”

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/the-tangled-truth-about-nfts-and-copyright/
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