Legal Topics

NFTs are confusing. So, in an effort to save us all some strife, I’ll start with some vocabulary:

 

• NFT: nonfungible token

• Fungible: able to replace or be replaced by another identical item; mutually interchangeable (think cash or cryptocurrency; a dollar can be replaced by another, and you will have essentially the same dollar that you had before).

• Nonfungible: not able to replace or be replaced by another identical item (think trading cards; if you trade one card for a different card, you have something entirely different now).

• Token: a digital item with a “TokenID” to track and attribute ownership

• Blockchain: the place where the “tracking” and “attribution” of the token is stored; it is a shared database that stores information and maintains a secure record of transactions (think a title search/chain of title on a piece of real property; when you buy fungible or nonfungible tokens, the blockchain for those tokens gives you the history of that token—who owned it, how much those people or entities paid for it, etc.)

 

So, why have you been hearing about NFTs over the course of the last year? (Or, if you have not heard about NFTs, why am I writing about them, especially if they’re confusing?)

 

NFTs have essentially become a form of digital art collecting, and artists stand to reap thousands, possibly millions, of dollars from their images, videos, music, or even tweets. Anyone can make an NFT of anything digital.

 

This boom of such a niche, new market has sparked questions and concerns regarding the legitimacy of the trade—is it a scam? A bubble waiting to burst? Here to stay? I am no economist or financial analyst so I will not be getting into that, but here is an article that sets forth and discusses those concerns. (There is also a concern over the environmental impact of NFTs, as their carbon emissions are not insignificant.)

 

From an intellectual property and copyright perspective, however, NFTs pose a hoard of legal questions and impact copyright owners in several ways.

 

17 USC § 106 gives a copyright owner the exclusive rights to reproduce the work, create derivative works, and publicly display the work. It would be reasonable and easy to assume that the first owner of an NFT on a blockchain is that copyright owner with all of those exclusive rights; however, there is an important nuance here. Under copyright law, the copyright owner is the only person with the authority to transform a work into an NFT—that is, the original work is the work that exists outside of the NFT/blockchain world. The creator/owner of that work then exercises their right to create derivative works, and creates the NFT.

 

At face value, this seems similar to an artist creating a physical painting having the right to create prints of their painting to sell to the public. This analogy as it applies to NFTs falls through, though— I, and anyone else, can go look at an NFT right now, download it, and have it. A copy of an NFT is exactly like the “original”. You will not be listed on the blockchain, but you will still have something that is just as good as the owner’s. Given this ease of download, the indistinction between the original and a copy, how lucrative NFTs have been this past year, and the fact that anyone can create an NFT of anything, NFTs nearly invite copyright infringement. I can create an NFT of another artist’s work. I can create an NFT of an NFT that already exists.

 

To some extent, this concern is not new; artists have always had to monitor for unauthorized uses of their works. While NFTs may facilitate the resale of an artist’s work and make it easier for an artist to gain royalties, the nature of NFTs and the internet drastically increases that burden of ensuring no one is infringing an artist’s rights over that work.

 

It is certainly debatable whether the benefits artists reap from NFTs outweigh the burden of an increased ease in infringement and creation of counterfeit works. It is further debatable whether NFTs are truly that distinguishable from physical art. Regardless, United States regulations and laws have yet to address these issues. Assuming NFTs are a long-lasting medium for art, it will be interesting to see if and how they impact copyright laws. Affected persons and lawyers like me have a role in deciding how it will be.