You may have noticed that NFTs have been popping up in the news. Digital artist Mike Winkelmann, known as Beeple, sold a collage of his works for a whopping $69.3 million worth of Ether, a cryptocurrency. Quite the sum for a JPEG file. Everybody seems to be jumping on the NFT train lately; Taco Bell has made NFT taco’s to keep in your digital wallets, tweets are being sold for millions and collectibles and art have seen dramatic price increases.
We have discussed what NFTs actually are in a previous blog, so now let’s delve a bit further into the rights. How are NFTs protected? Does the legal reality match what sellers and buyers expect?
A quick recap: NFT stands for non-fungible token, it is a crypto asset that is connected to an object. In this sense, it is kind of like an authenticity certificate. It is nothing more, nor less, than a position on the decentralised database that is blockchain, connected to an object. Such a position can be connected to real objects, such as a house or a watch, or to a digital object like a digital artwork, a baseball picture or an album.
NFTs can be purchased with any currency. A sale is completed when the position of the seller on the blockchain is transferred to the buyer’s account. NFTs are similar to cryptocurrency in the sense that they both use blockchain technology to record ownership (the position in the database) and validate authenticity. However, unlike cryptocurrencies, every NFT is unique because it cannot be divided into something smaller and therefore remains identifiable. This is what the “non-fungible” in NFT means. The most spectacular result of this technology is that it changes digital files from non-identifiable bulk into identifiable copies, hence introducing something very similar to identifiable physical objects.
An important note to make, is that an NFT does not mean ownership of the connected object. For example, the NFT of the Beeple collage that was sold does not mean that the collage itself now belongs to the buyer. It is just the position on the blockchain connected to that collage. In fact, the image is still available online in non-identifiable copies. The artist has not granted the buyer of the NFT e.g. an exclusive copyright license into the Beeple collage that he could use to control such online circulation. The buyer just has a unique position towards that collage, and therefore something similar to a physical copy of the collage. Collectibles, such as baseball cards, are another example. The picture on those cards may be widely available in all forms, a specific card may, however, be extremely rare and therefore very expensive.
What then, is being bought exactly with these NFTs? What is an NFT’s relationship with good old property rights?
In Dutch property law ownership is limited to material objects. Additionally, one can be entitled to so-called “goods”. Such goods are also rights. Such rights can be a right to receive money from someone. Or the right to use a piece of land. Or the rights into a domain name. As “intangible” as an NFT, in a way. Such entitlement is in many ways comparable to the good old ownership of tangible objects. So can one, under Dutch law, at least be a rightholder with respect to an NFT?
For simplicity’s sake, as well as keeping in theme with the current trend, let us take digital artworks as a guideline. With an NFT, you are entitled to the NFT itself, not to the underlying asset nor to the corresponding copyright. So, that would mean that NFTs themselves cannot be considered ‘goods’. They are not rights. They are nothing more than factual control over the position on the blockchain. Such factual control is pretty similar in a philosophical sense to “possession” of a material object or even ownership, but it is not a “right” under Dutch law. The blockchain ensures immutability and strict transferring rules. But it does not grant rights.
Consequently, property law would not apply. This feels counterintuitive, as there is lively trade going on and the owner of the NFT does have exclusive control. So there are voices in the Netherlands that advocate the extension of the old fashioned “ownership” articles towards digital assets. Also in quite a few cases judges have attributed typical “ownership” elements to digital assets. E.g. digital assets can be stolen; a standard software license can be traded just like physical carriers of such software. I am very much in favour of such an extension. The law should follow economic reality. And the current reality is that, in an economic sense, an NFT is very similar to a material object.
As mentioned, finally “owning” a much desired NFT does not always mean holding the associated copyright (or other IP rights) on the object the NFT refers to, as well. This is rarely the case, actually. So if I buy a Mutant Warrior NFT (brought on the market by R2 Collectibles and EOS Amsterdam, a company I own shares in), what can I do with that picture given that I don’t hold the copyright? Can I make another NFT out of it? Can I offer and sell my NFT? What are my options?
This is my NFT (it genuinely is):
If the seller or issuer did not clarify any of the above, which is usually the case, there is a way of looking at the issue that is similar to how the law looked at online publications in the early days of the internet. We lawyers call it an ”implied license”.
The idea is that a license is implied if it can be argued that the parties would have created a license, because the agreement wouldn’t make much sense otherwise. It can be argued that by allowing an NFT to be created for their work, a copyright holder implicitly also allowed that NFT and its picture to be sold, shown, shared, etcetera. Without such an implied license an NFT does not make much sense because the “owner” of an NFT could not make any use of an NFT.
Another solution could be digital “exhaustion”. Exhaustion is used in respect of tangible goods and certain software licenses. Exhaustion means that if a specific product (e.g. a book) or a software license (e.g. on a carrier such as a USB drive) has entered the market, the purchaser is allowed to resell it and market it to enable such sales. There is nothing the rightholder can do to prevent this. Applied to an NFT, this would mean that once an NFT has been sold on the market, the purchaser would be allowed to resell and market it (in order to resell) without the consent of the copyright holder. I could, as a proud owner of the Slimy Simon NFT, resell that NFT based on the exhaustion rule.
At the moment, it is not apparent how a judge would rule regarding exhaustion. It depends on whether an NFT would be regarded as “software”. If so, it is very likely that the exhaustion principle would be applied. If not, it is not clear yet. To me, it is obvious that a judge should apply the exhaustion rules, given the economic reality an NFT represents. However, a verdict could go either way.
In conclusion, we are legally in a no-man’s land. Which is exciting to lawyers like myself, but less so for those in business and compliance. When the time inevitably comes, I am confident that the judges will use their common sense when ruling on these cases and, in doing so, add legal certainty to an economic reality.
More to come: What happens when an artwork is tokenized without permission? Are NFTs software? Which rights does the copyright holder have and which belong to the buyer? How can you draft exclusive agreements in respect to NFTs? All of this and much more, only time will tell. In the meantime, we can enjoy all the trends, developments and legal speculation.