'The treachery of images: non-fungible tokens and copyright' by Andres Guadamuz in (2021) Journal of Intellectual Property Law & Practice comments
This article tackles various questions regarding non-fungible tokens (NFTs) and copyright, including whether an author can use an NFT to transfer copyright, several applications of tokens as digital rights management, and the issue of potential copyright infringement in NFTs. These questions are analysed from a UK perspective, specifically looking at cases from England and Wales and Scotland, while also covering a few relevant Court of Justice of the European Union decisions.
This is a relatively recent technology, which will require a lengthier technical explanation to analyse the legal issues that are raised. In some instances, the public perception will be dealt with as well, as it has become evident that there is considerable misunderstanding not only about what an NFT really is but also about the ownership and copyright issues that surround the technology. The article analyses the use of NFTs for digital rights purposes, particularly the transfer of rights, and while assignment by electronic means is possible, it is not yet clear whether an NFT can lawfully transfer rights.
Guadamuz argues
In April 2021, a sketch by celebrated neo-expressionist artist Jean-Michel Basquiat drew considerable press coverage due to a potential copyright dispute. Basquiat, who passed away in 1988, is well known for his use of thematic juxtapositions1 but is also remembered as an artist who died in his prime in tragic circumstances. His artwork is critically acclaimed, and it often sells for considerable amounts of money; a painting called Untitled sold for over $110 million USD in 2017, making it one of the most expensive art sales in art history.
Daystorm is an art collective that owned the Basquiat mixed media work called Free Comb with Pagoda, and they announced that they would be making a non-fungible token (NFT) of the work. NFTs are the latest hype in the art world: they bring together smart contracts and blockchain technology. This would not have generated much interest if it were not for the fact that their announcement included the statement that the NFT would transfer not only the ownership of the digital file, but the new owner would be given the choice to destroy the original work if they so desired.
This drew the ire of art enthusiasts and prompted several legal questions as to whether this would be possible under copyright law. There is something decidedly distasteful in the destruction of a physical work of an important 20th-century African-American artist, but also there was the fact that this was done to generate interest and scarcity in a ploy to boost the price of the auction. The outrage reached the art licensing agency that manages Basquiat’s artwork on behalf of his estate, and they declared that Daystorm only owned the physical copy of the work but did not possess any of the accompanying copyrights.
The artwork was immediately removed from sale. The Basquiat sketch is just the latest example in a growing number of works that are prompting legal questions regarding the interaction between copyright and NFTs. Recently, an art collective purchased a copy of a work by Banksy, burnt it and turned it into an NFT. A viral video of a baby biting his brother’s finger, popularly known as ‘Charlie Bit Me’, was sold as an NFT for UDS $500k, with the video being taken offline after the sale.
What exactly is an NFT? Can one use it to transfer copyright ownership on a work or does it work like a licence? What happens if one creates an NFT of a work without permission? Is it infringement?
This article will tackle these questions from a UK perspective, specifically looking at cases from England and Wales, and Scotland, while also covering a few relevant decisions of the Court of Justice of the European Union (CJEU). This is a relatively recent technology, which will require a lengthier technical explanation to analyse the legal issues discussed. In some instances, the public perception will be dealt with as well, as it has become evident that there is considerable misunderstanding not only about what an NFT really is but also about the ownership and copyright issues that surround the technology. While NFTs are not entirely related to copyright, and in some way they are trying to bypass legal transactions in favour of technical solutions, this contribution will concentrate on the copyright questions, also will tackle some of the emerging issues about the technology.
A quick note about balance. This work will take a generally neutral approach to the study of NFTs, but this is a subject that is not devoid of controversy. There have been concerns raised about the viability of this model from various perspectives. It is not the remit of the work to tackle these, and the approach will be to view NFTs at face value. The concerns range from the environmental cost of running blockchain technology, to the use of tokens for money laundering, to the existence of often crippling transaction fees that could make it difficult for artists to profit from their work.
In discussing copyright and scarcity Guadamuz argues
The very nature of NFT markets goes against copyright in the first place. It could be argued that in some ways NFTs are incompatible with copyright. Smart contracts are presented as a manner to bypass regulation and enforcement at all stages: the disruption of legacy legal structures such as copyright law is the desired outcome. It is no coincidence that during discussion of potential copyright infringement in the community, NFT users and artists dissuade each other from using legal recourses. Instead, they try to get the community itself to police possible violations. The goal in many cryptocurrency circles is precisely to do away with the need for lawyers and copyright. In a way, it tries to live by the motto of ‘Code is Law’.
Besides the disruptive nature of NFTS, another of the premises behind them is that of scarcity, by making non-fungible digital works available for sale. The idea is that there is value in these items because they are unique.166 A creator can write a song and everyone can listen to it, but the NFT is sold as a unique version of the work that has been digitally signed by the author: this in theory makes it more valuable. NFTs are therefore better understood as collectors’ items, uniquely signed versions of the work and not property of the original itself.
As we have argued, there is practically no ownership transfer involved in NFTs, with a few exceptions. As a result, the scope for copyright is limited. While there appears to be a belief in some circles that an NFT is somehow a digital title to the original, an NFT is more akin to a receipt of a signed version of the work and not the actual thing itself.
We could look at this from the perspective of the justifications for copyright; under some circumstances, there are those who argue that scarcity itself is a part of copyright. Under the economic justification, copyright is seen as generating value for the author because it creates artificial scarcity over the work. Conversely, the lack of enforcement of copyright can cause the loss of value of the work as more people have access to free versions of it. The increasing capability of producing perfect copies of a work has been at the heart of the copyright battles of recent years, where the growing digitization of works have eroded the possible scarcity value of copyright.
But this is only a look at scarcity as an element of the economic justification. If we look at copyright as potential incentive to generate works, or even as a vehicle to encourage the dissemination of works, then the loss of scarcity is less serious and can explain the rise of copyleft-like licensing models that encourage the creation of a cultural commons.
But even if we maintain the usefulness of copyright as means of maintaining an artificial scarcity, can NFTs help in propping up this justification for the existence of copyright? Not exactly: the problem is that in many ways the scarcity in NFTs is illusory, as opposed to the regulated artificial scarcity generated by copyright. As it has been covered throughout the article, the scarcity represented by an NFT is illusory because the NFT does not act as a barrier to access and copy the work: it acts as a signed receipt that the holder can display. The work itself is available to everyone else for the most part, so the scarcity is for the unique token itself and even that can be copied. So, if copyright generates artificial scarcity, NFTs generate no scarcity whatsoever; on the contrary, it could be used to open works into the public domain in a form of patronage.
Moreover, NFTs appear to be in direct conflict with copyright when we look at them from the perspective of fungibility; for the most part, copyright works are intended to be fungible. This is what is often referred to in copyright theory as non-rivalrousness. The basic formulation of this concept often goes like this: If I have a pie, I can eat the pie, and you can’t eat it. If I have a song in any format, my enjoyment of the song does not detract your own use and enjoyment of the song in any other way. The works are non-rivalrous and for all purposes fungible. It does not matter which copy of the song you are listening to, as they are interchangeable.
All this said, there is also a non-fungible element to copyright works. In principle, some copyright works start life as a unique item: think of the first manuscript of a book typed by an author or written on paper by hand, the original music written by the composer or an original sketch by a famous artist. These can be copied and published, hence the very nature of the existence of copyright protection. These originals could also have economic value on their own right as non-fungible items Artists create unique works of art all the time: a painting, a sculpture, a drawing or a photograph. These original items have value in their own as non-fungible items, but copyright grants exclusive rights on subsequent uses of their work, so that a photographer can allow a photograph to be copied and published and a painter can make copies of their work, even if the non-fungible version is held in a museum.
There can also be an interaction between fungible and non-fungible elements in art: some artists create limited editions of their own work in the shape of limited-edition lithographs or in the shape of numbered editions.
From a copyright perspective, NFTs are no different. For the most part, an NFT does not confer a title of ownership on an original work: it is just a cryptographically signed receipt that one owns a unique version of a work. So NFTs are less relevant from a copyright perspective, not only because of the reasons explored in previous sections but also because they are just metadata of the work. While the idea behind the NFT is one of scarcity, it is only an illusory scarcity: nothing stops the creator of a digital asset that is turned into an NFT to create more copies of the work and sell these ‘unique’ versions to the highest bidder. True, this would in principle dilute the value of the NFT, but the market is so full of different platforms that it may be possible to post different tokens of the same work in various platforms. There is nothing in the technical infrastructure of the Ethereum smart contract that stops the creation of more ‘unique’ versions of the same resource.
In many ways, this is similar to what is going on with the limited edition lithograph market, where some artists have been accused of re-issuing a work that had been sold before as a limited edition. This was already litigated in the USA, where a photographer re-issued a limited print edition in a different size, and got sued because it was decreasing the value of the sold copies. The photographer won, and the judge decided that ‘although both the Limited Edition works and the Subsequent Edition works were produced from the same images, they are markedly different’. One can see a similar decision in this instance, where there is no indication that an NFT will be in any way unique or not subject to future re-issues.
