NFT Ownership and Intellectual Property: What Are Your Rights?

02/04/2022

One of the most talked about stories in technology of 2021/22 has been the meteoric rise in popularity of non-fungible tokens (“NFT”). NFTs have been sold for millions of US dollars. New NFT projects are popping up all over the world, with famous brands like LV, NBA, Coca-Cola and celebrities like Justin Bieber, Eminem, Steph Curry all joining in.

Supporters claim that NFT technology revolutionizes the digital collectible industry as it allows collectors to truly “own” digital collectibles such as digital art. Is that actually the case; and what can you do with an NFT? This article discusses the intellectual property aspect of NFTs.

Table of Contents

• What Is An NFT?
• What Do You Get When You Buy An NFT?
• How To Determine What Ownership Rights Come With An NFT
• What Should You Be Aware Of Before Investing in NFTs?
• Smart Contracts Assigning Ownership May Not Be Effective in Law

What Is An NFT?

Generally speaking, an NFT consists of two components: a digital asset (the “asset”) and the code (the “token”) embedded in it.

The asset can be anything from texts, pictures, photographs, music, video or audio clips, in-game items, tweets, or even title documents of real life products or real estate. Anything that can be digitalized (i.e. convertable into digital form) can be minted as an NFT. The most popular form of assets right now is digital art – typically PNG or GIF pictures. It is possible to have the entire asset stored on the blockchain, but due to the high cost involved for storing data on the blockchain[1], assets are rarely stored on the blockchain itself[2]. In most cases only the code which points to the location of the asset (typically a HTML hyperlink to the asset stored on another server) is stored on the blockchain.

The token is what makes an NFT “unique”. It is a set of codes stored on a blockchain which identifies and tracks the asset into which it is embedded. Each token is “unique”, in the sense that it has its own unique string of letters and numbers (called a “hash”, think of serial numbers on limited edition products), which represents a unique position on the blockchain on which it is minted, and can be openly accessed and tracked. It serves as a form of openly accessible certificate of authenticity or proof of ownership.

NFTs can be created and stored in any blockchain; currently the most popular of which, is Ethereum, a successor of the BitCoin cryptocurrency which incorporates a “smart contract” functionality[3], with the ERC-721 standard being main standard for creating NFTs.

What Do You Get When You Buy An NFT?

There is widespread confusion as to what rights a buyer acquires when purchasing an NFT. Some buyers seem to be of the view that they acquire the underlying asset/artwork in the NFT and all of associated rights therewith, which is understandable given they have possibly spent a significant sum in acquiring the same. In reality, they are only acquiring the code/token in the NFT, not the asset/artwork itself [4]. They generally do NOT gain any intellectual property or commercial rights when buying NFTs.

It is important to understand that ownership of an NFT token and ownership of the intellectual property rights of its underlying asset/artwork (most significantly copyright in the case of digital art) are two separate concepts. Ownership of an object (for NFTs, being the token/code that is written on the blockchain) does not mean ownership of the rights copyright owners have in the underlying work, such as rights to use, exploit, monetise or create derivative works.

At law, copyright arises when a creator creates a work which is capable of being a copyright work (these works are prescribed by law and are relatively narrow. An art work is an example of a copyright work).  The copyright in the work generally belongs to the creator of the work, and, unless and until assigned to others, and remains with the creator. The creator needs not register it with a government authority. Most importantly, copyright in the underlying work does not change hands when the work does. For example, buying a copy of Spiderman comic book grants you ownership of a physical copy of the comic book. You may read and enjoy the book, and sell the book on the second-handed market, but it does not allow you to make Spiderman merchandise or adapt the comic to make a Spiderman movie. This was demonstrated when a decentralized autonomous organization (a “DAO”, a type of organization structure popular amongst cryptocurrency circles) found to their chagrin (and to the amusement of the Internet) when they announced their plans to make Dune NFTs after purchasing a Dune story bible for €2.66 million in an auction[5], only to backtrack after finding out that they are not legally entitled to do so.

The principles above are enshrined in the Berne Convention for the Protection of Literary and Artistic Works of 1886 (the “Berne Convention”) and are adopted in copyright laws in most jurisdictions around the world (including the Copyright Ordinance of Hong Kong) and seldom deviate across countries.

Buying an NFT is akin to buying an expensive portrait from an art gallery: a buyer can enjoy the art purchased, he can view it on a computer, can print it out and hang it up as home decoration, can use the asset as his a media avatar (though there are often limitations to that). However, unless there are specific terms and conditions allocating specific rights therein, a buyer does NOT have copyright to the asset purchased. In most cases, it is only the ownership to a specific copy of the asset which is acquired, the privilege to be registered (or more precisely to have a designated wallet registered) as the current owner of the token on the blockchain, the bragging right of letting the world know he own an NFT.

How To Determine What Ownership Rights Come With An NFT

Different NFT projects allocate different ownership rights to buyers of their tokens. Currently there is no effective protocol in blockchain technology (including the smart contract system) for copyright terms to be baked into the token itself (as smart contracts are not designed to be read by humans and are not equipped to deal with actual legal relationship and entitlements). There is also commonly no copyright information shown on listings in popular NFT marketplaces like OpenSea. Very often the only way to know what ownership rights you are purchasing is by going to the websites of the NFT projects in question, and to find and examine the Terms and Conditions published by the project creator.

In most cases, you will find terms such as “[the creator] owns all legal right, title and interest in and to the art, and all intellectual property rights therein.” This means that the creator owns and retains the copyright of the assets sold. Further, any terms where the creator grants a license to a buyer (such as “[the creator] grants you … license to use, copy, and display the art…” and/or “[the creator] reserves all rights in and to the art not expressly granted to you”) means that the creator retains ownership of the copyright and the buyer are only granted licenses to use the asset.

Here are some examples of NFT licensing terms below:

• For NBA Top Shot NFTs, NBA only grants buyers a limited, personal, non-commercial licence to use. Buyers cannot modify the assets (basketball highlight clips, photographs or videos of players), cannot use the assets for commercial purposes (e.g. making advertisements containing the assets), cannot produce merchandises, etc.. Buyers are required to adhere to certain rules in using the assets[6]. This is normally the case for NFTs created by big brands.
• Some NFT projects, such as Meebit[7] adopt the NFT Licence drafted by the famous NFT company Dapper Labs, Inc.. Under the terms of the NFT Licence, buyers are granted a limited commercial licence to use and exploit the assets, provided that such uses do not generate the buyer gross revenue exceeding US$100,000 each year[8]. This means that buyers can commercialise their assets purchased, but only to a limited extent.
• Some projects such as the famous Bored Ape Yacht Club (BAYC) grant buyers an unlimited commercial licence to use and create derivative works based on the asset purchased[9]. Being able to create and sell one’s own merchandises of arguably the most famous NFT collection is often touted as one of the major selling points of the project. Indeed, some BAYC owners have already created and sold their own merchandises[10]. Still, notwithstanding the licence granted, the creator still has ownership of the copyright to the BAYC artworks.
• Some projects, most notably World of Women, fully assign and transfer all copyright (except moral rights which cannot be assigned in law) in the assets to the buyers[11]. In such cases, buyers DO have ownership of all rights to the assets and are completely free to incorporate the assets in their commercial work, free to create derivative work and merchandises. Buyers may even register the assets as their own trade marks or copyright or design.

Such Terms and Conditions detailing ownership rights may not always be easy to locate. Some projects, such as Azuki[12], Cryptopunks[13] do not publish their Terms and Conditions on their websites. Some projects may only mention their copyright terms in their Discord servers. Some projects may even have contradictory terms[14]. It is therefore prudent to conduct proper due diligence and understand what you being purchased. Use of NFT assets in breach of the Terms and Conditions may expose a buyer to legal claims.

The copyright licence granted to buyers usually terminate whenever a buyer part ways with the NFT, which means a buyer will lose all ownership rights the moment the NFT is sold to others.

What Should You Be Aware Of Before Investing in NFTs?

Currently, blockchain technology can only be used to track the chain of ownership of NFTs: who minted the token, who was it sold to and for how much. Blockchain technology is not a one stop solution for digital art. NFT trading is also so novel that regulations have yet to catch up. Investment in NFTs therefore often falls back on the age-old mantra of “buyer beware”. Please consider the following when investing in NFTs:-

• NFTs are unique in the sense that each NFT has a unique identity code/token to identify the same. However, nothing ensures that the asset attached to a token is unique. The same piece of artwork can be used and reused to create as many NFTs as its creator desires (and for which the creator cares to pay). Owning a Nyan Cat NFT does not mean you have ownership of the only Nyan Cat NFT.
• Whilst it is claimed that NFT tokens can act as “certificate of authenticity”, such claim is in fact quite misleading. Blockchain technology cannot ensure that it is the rightful copyright owner minting NFTs for works. Scams and thefts in the NFT space are rampant. There are countless complaints of artists whose works were stolen and minted into NFTs by third parties without their consent or knowledge. There are also complaints of scammers impersonating well-known artists to sell NFTs[15]. NFTs may also contain misappropriated trade marks or image rights/likenesses of celebrities. NFTs minted from stolen or unauthorised work are likely worthless. Further, sale of such NFTs may expose a buyer to infringement proceedings. As both legitimate and non-legitimate NFTs can be listed for sale on NFT platforms, it can be difficult to distinguish between the same.
• Anything that can be digitized can be minted into an NFT. Nothing in blockchain technology can verify whether an asset is capable of copyright protection. Subject matters that are not protected by copyright (such as words and titles) can be minted as NFTs, as can works in which copyright has long expired (works in the public domain such as paintings of artists who have long passed away).
• For the reasons mentioned above, conducting due diligence on NFTs, such as checking on copyright subsistence, ownership encumbrances, previous licences, is very difficult. Sellers are not required to disclose any defects in title or encumbrances. Furthermore, NFT marketplaces (which operate akin to stock markets) are not designed to facilitate such due diligence. Buyers of NFTs are at risk of buying NFTs encumbered with existing rights (for example the seller may have had an existing licence agreement in place).
• It is important to understand what has been built into the smart contract faciltating the NFTs. The creator of NFTs has total ownership and autonomy as to what is incorporated into their NFTs. Taking an extreme example, Kaiju Kongz has incorporated smart contracts in its NFTs which will automatically destroy (“burn”) the NFTs with no refunds if they are re-sold below a certain price point on secondary markets[16].
• Most NFT assets are not stored on the blockchain itself but are on other servers. There is always a risk that the asset will be irrevocably lost (and the NFT becoming worthless) if the asset is taken down from its servers.
• There are various high profile phishing attacks, scams and hacks affecting blockchains and NFTs[17]. Due to the nature of blockchain technology, it is impossible to reverse a fraudulent transaction and recover stolen NFTs. Be careful where you store your NFTs (it is recommended to use offline cold wallets instead of hot wallets online) and how you store your passwords to crypto wallets. Do not grant access of your crypto wallet to anyone.

Smart Contracts Assigning Ownership May Not Be Effective in Law

As a final “post script”, some NFT projects purport to assign copyright in assets by way of smart contracts. It is questionable whether such assignment is effective in law. Under section 101(3) of the Copyright Ordinance (Cap. 101 of the Laws of Hong Kong), which is mirrored by many corresponding copyright statutes in other jurisdictions, such as US, UK, Australia, an assignment of copyright is only effective where it is (i) in writing; and (ii) signed by or on behalf of the assignor. Smart contracts are self-executing programming codes. Despite the name, they are not real contracts in law (as distinguished from digitally signed contracts) and, more importantly, are not signed by or on behalf of the assignor. It is therefore, doubtful whether such an “assignment” of ownership is valid in law.

[1] As of the time of writing on 7 April 2022, it costs around US$2.15 to store 1 KB of data on the Ethereum blockchain. It would therefore cost around US$2,201 to store a 1MB PNG file on the Ethereum blockchain, not counting other fees associated.

[2] Cryptopunks, a collection consisting of small and simple 24×24 pixels images, is stored entirely on the blockchain.

[3] Smart contracts are automated programs that can be stored on Ethereum blockchains.  These programs are designed to automatically execute themselves upon reaching certain conditions, one common usage is that when NFT moves from one wallet to another on secondary markets, a certain percentage of the transaction fees will be re-directed to the creator’s wallet. Such functionality is not possible on the BitCoin blockchain.

[4] This is probably part of the reasons why critics of NFTs say that one can simply “right-click” and copy a NFT for free.

[5] https://www.theverge.com/2022/1/17/22887948/jodorowsky-dune-bible-spice-dao-derivative-script

[6] https://nbatopshot.com/terms

[7] https://meebits.larvalabs.com/

[8] https://www.nftlicense.org/

[9] https://boredapeyachtclub.com/#/terms

[10] https://medium.com/@deconomist/bored-ape-yacht-club-the-case-for-licensed-commercial-use-rights-b1bbd463d189

[11] https://worldofwomen.mypinata.cloud/ipfs/QmYccLQNUyDD4p7tqdQ9iCcJgiejxUKqWt2FypkVygorLu

[12] https://www.azuki.com/

[13] https://www.larvalabs.com/cryptopunks

[14] For example, the Terms and Conditions of the aforementioned Bored Ape Yacht Club contain the term “you own the underlying Bored Ape, the Art, completely”, which seems to indicate that buyers own all rights to the asset, but the later paragraphs state that buyers are only granted licenses to exploit the assets.

[15] https://www.theverge.com/2021/3/20/22334527/nft-scams-artists-opensea-rarible-marble-cards-fraud-art

[16] https://kaijukongz.io/#home

[17] https://www.engadget.com/opensea-phishing-attack-190402620.html