While in the last few years the technological market was taken over by cryptocurrency and blockchains, this year started with NFTs (Non-Fungible Tokens). NFTs have managed to create ripples and entered with a bang into the market with sales exceeding $2 billion in only the first quarter of 2021. Although NFTs existed long before, they took the world by storm in 2021 when an NFT of a digital collage, ‘Everyday: The First 500 days’ by Mike Winkelmann, was sold for USD 69.3 Million. According to TIME’s, art collectors have spent around $200 million on NFTs in March of 2021 alone compared to 2020; where around $250 million was spent throughout the whole year.
NFTs are being connected to many such artworks varying from music albums to videos and other such kinds of digital artwork. Many people are willing to compete in high-priced auctions for NFTS and have shown significant interest in buying varieties of NFTs over this year. One such marvelous instance was NBA Top Shot, which is an NFT marketplace on which fans can sell/buy or even trade certain clips or moments of their favourite players. Around USD 370 Million has been exchanged between fans on this Top Shot platform, buying packs online and trading them for different clips at higher prices.
With everything being tokenized in this industry such as art, games, etc, and with NFTs gaining immense popularity, you may be thinking, what is NFT and why does it have the technological & art industry swept off their feet? NFTs are a kind of digital asset or tokens that are minted and the certificate of ownership recorded on the blockchain technology. The NFTs represent other digital assets such as photos, videos, or even digital artworks. While NFTs are similar to other tokens like cryptocurrency, the major difference arises with fungibility. While cryptocurrency is fungible, that is not the case for NFTs. This has resulted in NFTS having certain unique characteristics which prevent them from being available in great abundance.
NFTs have got everyone talking in the legal world especially with respect to where these tokens stand in the realm of copyright; “the greater the potential market for a work, the greater need for copyright protection.” While it is of great importance to know what NFTs are, it is also essential to acknowledge how and with who the ownership rights would reside, along with the question of how would they stand in the copyright realm without a regulatory framework?
Since NFTs are digital artworks, the ownership provided would be given to that specific copy of that work bought by the NFT holder. We need to understand there is a difference between ownership of the NFT and ownership of the underlying intellectual property. A smart contract can be set up between the parties which would govern the NFT and specify the rights which are to be transferred on the sale of the NFT. An NFT owner would generally have access to the asset but exclusive control of the asset would be solely with the Intellectually Property(IP) owner. The copyright owner would have full access to the work including IP rights and would decide the conditions going under the smart contract. Eg. , For example, the NBA Top Shop license grants the owner of a “moment” a non-exclusive license “to use, copy, and display” the “moment” only for “personal, non-commercial use,” “as part of a marketplace,” or “as part of a third-party website or application that permits the inclusion” of the “moment”.
While a bundle of rights is given to the maker of the NFT such as starting a suit of infringement; in case of any unauthorized reproduction or adaptation. This has not stopped the increasing reports of works of these artists being minted into an NFT without them knowing about it. Moreover, many of these unauthorized digital copies are being sold through scam accounts. Such infringement also affects the moral rights of the author and these problems are more difficult to prevent due to the anonymity features of blockchain technology, because of this it becomes a challenge to verify who the original creator or who is the copyright owner of that underlying asset. The importance of moral rights also arises here with the basis being in the writings of Kant and Hegel, who observed that legal protection should be provided for artists who have expressed their wills and to provide enough incentive to maintain artists’ creativity.
Since NFTs are part of digital assets in the secondary market, the question arises where does it stand in the realm of copyright? Looking at this question from a jurisprudential outlook, we can highlight how the Lockean theory gives the justification that a person who labours on unowned/common resources has a natural property right to the products of such labour, and the state has a duty to protect that natural right. Similarly, Justin Hughes also argued while keeping Hegel’s Philosophy of Right in mind stating that inventors should be given permission to earn money, admiration from public by selling their works but should not be permitted to surrender their right to prevent others from falsifying their works. The roots from which these theories have grown is with the sole aim to protect the those that have worked to turn the idea into an expression, which is what copyright protects. At the same time, ensuring the copyright owners have full access to their work and preventing malpractice of the work.
However, while we have established the jurisprudential perspective of copyright, the obstacle arises regarding how this can be applied to NFTs which are sold on decentralized platforms? Many cryptocurrencies and digital assets of such are being purchased and sold on decentralized exchanges without the need to trust a centralized entity to be an intermediary. Such an exchange has no regards for information such as Know-Your-Customer requirements to ensure more privacy. Applying the already set law of the well-regulated markets on the emerging secondary market would only take a step backward, and this regulatory lacuna also leaves cryptoexchanges to self-select standards. This decentralization increases difficulty accountability issues due to the way the platform operates with no third party in the middle of the transfer, or without knowing private details of the counterparties. Many manipulative practices like publishing false information and identifying or controlling such market abuse get difficult to accomplish on such decentralised platforms.
While the responsibility of controlling such abuse is generally with someone, however, with the characteristics of decentralization, it is harder to respond to such expectations. Copyright jurisprudence places importance on protecting the work of the author and preventing misuse/falsification of that work. However, this clashes with the decentralised economy in which accountability is an issue in which there is absence of legal person to be held accountable for imposing sanctions. Since the transactions in a decentralised platform can be done without being traced, it becomes an issue with copyright owners.
Even though NFTs have created ripples in the art and legal world, there is still doubt as to copyright protection of original work considering the stumbling blocks along the way. Furthermore, remedies that are available to the copyright holder; interlocutory injunction and damages, can only be claimed if we know who infringed the rights, but people engaging and selling NFTs have the option to make it completely anonymous which acts as an obstacle. While NFTs are taking the world by a storm, a balanced regulatory framework is important for the copyright owners, preventing market abuse and ensuring stagnant growth in the markets.
ABOUT THE AUTHOR
Nandini is a fourth-year law student at Maharashtra National Law University Mumbai. With a keen interest in the realm of intellectual property law, she has gone forward and written this blog which deals with recent trends such as blockchain technology.