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NFT secondary markets: Unlimited royalties or one-time resale rights?

The growing craze behind NFTs (non-fungible tokens) and the exuberant prices which they sell for mean that more and more artists are considering selling tokens of ownership of their artworks on the blockchain as collectibles. The hype and the value involved, brings with it interesting innovations when it comes to the possibility for visual artists to earn from the resale of their tokens on the blockchain through automatic charging of royalties (or rather resale rights) by smart contracts.

Traditionally, the charging of royalties (for the purpose of this article, royalties are considered the same as resale rights, or ‘volgrecht’ in Dutch) for the original creator of a unique visual work of art has been facilitated through professional intermediary parties. These, of course, come paired with costly and time-consuming processes which have generally only been available to recognized, relatively wealthy artists. Another disadvantage to this system is that these so-called resale rights only kick in after the sale price passes a rather high threshold. Finally, the percentage of the royalties is low: in the Netherlands it’s 4% to start with. With each subsequent sale and price increase, the percentage lowers. All the way down to 0,5%.

NFTs are different in that respect. Since the dawn of NFTs, earning passive income from royalties of tokens that point to artworks is available to anyone that mints an NFT, and the royalties are not tied to a specific sale price. The percentage also does not decrease over subsequent sales.

Generally, most NFT marketplaces have the capability to, along with charging a marketplace fee, charge a fee for the minter of the NFT. These generally vary from 2.5% to 10% and is either fixed by the marketplace or adjustable by the minter. The minter can be the artist or a publishing company.

These marketplaces, such as Atomichub and Opensea, use different blockchains as a backbone, such as Wax, Ethereum, Flow, Tron or EOS. On Ethereum marketplaces, the fee for the minter can vary, but on Atomichub, the marketplace for the Wax blockchain, the percentage is set at 4%.

Notably on the Ethereum blockchain, different marketplaces implement the functionality for awarding royalties in their own ways. This means that an NFT can be minted on one marketplace and sold there, while the new owner can resell it on the secondary market (another marketplace platform) without honouring the royalties when re-minting the NFT on the new marketplace.

Luckily for the artist a standard has been developed for the Ethereum blockchain, which aims to standardize payment of royalties for NFTs across all NFT marketplaces. Whether this standard will be widely adopted by all Ethereum marketplaces is still to be seen.

Avoiding royalties illegal?

An interesting question is if not honouring the royalties on the secondary market would constitute copyright infringement since the buyer and consequent seller would not act in accordance with the implicit license under which the NFT has been published and sold. The resale rights, or royalties, are established in the smart contract of the original minting on the marketplace in which the NFT was created and might therefore be considered as the conditions that need to be honoured to allow further publishing of the NFT. One could argue that if a successive buyer and seller do not live up to such conditions, further publishing and reselling would be copyright infringement.

Should NFTs be treated like books or unique, exquisite art?

This also touches at important ideas about the exhaustion of copyrights: one could argue that the resale of an NFT should be treated as the resale of, e.g., a tangible work, such as a painting or a book. When it comes to resale of these types of works, an artist doesn’t have any rights (outside of the so-called mandatory resale rights which include paintings and other unique art works that are sold in the EU as detailed here above). NFTs, given their non-fungible, collectible or unique nature can then be compared to a concrete tangible object, and given that the exhaustion of copyrights aims to safeguard the freedom to resell tangible objects, there is surely a case to be made there.

On the other hand, lawmakers have introduced the exhaustion principle because they were of the opinion that copyrights shouldn’t interfere too deeply with ordinary human interactions. One shouldn’t need permission of the copyright owner to give a book to their friends on their birthday, for example. This founding argument has far less merit on the blockchain where all is visible, and the paying of royalties is or can be fully automated.

Given all of this, we are in favour of an approach where the “volgrecht” (resale rights) do apply on the blockchain, without the limitations of the offline world. So, no exhaustion of royalties would be applicable. That surely would be a practical and just outcome.

05 May 2022 - Blockchain and law, NFT

About Jetse Sprey

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Jetse finds solutions instead of problems and is able to break stalemates again and again. He speaks his mind and is not guided by what he thinks his clients want to hear.

He writes sharp, readable contracts. He has extensive experience with Blockchain and is an entrepreneur in this field himself. He writes convincing procedural documents and advice. He is knowledgeable in intellectual property, privacy and corporate law.

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