An NFT is a digitized, authenticated token that is linked to a digital asset and is recorded on a blockchain. Typically, the blockchain does not store the actual tokenized work because it is too large. Blockchain protocols that support smart contracts are popular because they can offer both a cryptocurrency that can be used to make payments and a programming language that can support “smart contracts” that facilitate blockchain transactions. (“Smart contracts” is a bit of a misnomer; in our opinion, a more accurate description would be “blockchain applications.”)
Because each NFT contains a unique serial number or “fingerprint” (also known as a hash) that cannot be duplicated, NFTs are traceable and, as its supporters emphasize, incapable of duplication.
Because a hash is a cryptographic key generated from a specific digital file, it will only match one specific copy of the content. Hashes can be used by NFT owners to prove that they own a copy of the linked content from which the NFT was generated. In other words, the NFT is a blockchain-stored ownership record of this match that can be transferred to someone else, whose ownership will also be stored on the blockchain.
The “nonfungible” aspect of the NFT determines its value because the purchaser is purchasing an authenticated digital asset, similar to a certified nondigital asset, such as an autographed painting or a signed baseball card. When one buys a painting or a baseball card, no copyright rights are usually transferred, and the same is true for an NFT. The first publicly available tweet was recently sold as an NFT for $2.9 million. Because he was the author of the tweet, Jack Dorsey was able to verify its authenticity and avoid any claims of copyright infringement. It is not always as simple as that.
We highlight a few copyright issues that purchasers or those that acquire Rising Baseball Star NFTs should understand.
THE TRANSFER OF AN NFT ALONE DOES NOT CONSTITUTE THE TRANSFER OF THE LINKED WORK’S COPYRIGHT.
In general, upon fixation, the creator of a copyrightable work owns the copyright to that work. The employer or commissioning party owns the copyright on creation if it is a work for hire. If you are not the creator of a work and want to own the copyright to that work outside of a work-for-hire situation, you must have the rights transferred to you by the copyright owner. The transfer must be both express and written.
If the seller of an NFT expressly states in the written description of the NFT for sale that all or certain copyright rights will be transferred with the NFT, the question may be whether such a transfer is express and “in writing.”
Courts in the United States have upheld copyright transfers that are entirely in electronic writing and signed with an e-signature, as long as the other requirements of a valid bargain are met. Even the US Copyright Office, which has traditionally been a strong supporter of original signed documents, has recently ruled that transfer recordation can be accomplished by submitting a transfer with any legally binding signature, including electronic signatures as defined by the E-Sign Act. Even when the term “copyright” is mentioned, we expect disagreements about whether any copyright rights transfer in an NFT transaction. As such, it is important that you understand the mere transfer of an NFT alone does not necessarily constitute the transfer of the linked work’s copyright.
THE NFT MARKETPLACE AND THE FIRST SALE DOCTRINE
The first sale doctrine is a well-established principle of copyright law that, under 17 USC 109, allows the owner of a lawful copy to sell or otherwise dispose of its copy despite the copyright owner’s exclusive rights. Secondary markets, such as used bookstores, are made possible by the first sale doctrine.
Surprisingly, ownership of a lawful copy is not always what one would expect for digital assets. You may believe you own a digital book or an MP3, but in most cases, you only have a license to access those digital products and no ownership interest. You cannot rely on the first sale doctrine to sell your ebook or MP3 in such cases.
The ability to resell an NFT is arguably its primary value. So, the key distinction between an NFT linked to the copyrightable subject matter and lawful possession of an ebook must be that the NFT represents ownership of a specific lawful copy of something as opposed to a nonexclusive right to access it. This is an example of where the nonfungibility of NFTs comes into play.
Because the NFT represents ownership of a specific copy that is cryptographically linked to the NFT, it is more similar to the actual book or CD that you buy (of which there is only one). If NFTs are interpreted in this way, a single copy can be resold indefinitely, much like a physical book. One could also argue that because an NFT is nothing more than a digital code, the first sale doctrine is completely inapplicable.
In either case, the resale of the NFT is unlikely to be challenged by the copyright owner of the linked asset as long as the NFT creation and first sale were authorized by the copyright owner.
THE COPYRIGHTS IN NFTS ARE DIFFERENT FROM THE LINKED CONTENT
The software used to generate the NFT is most likely copyrightable. Therefore, if a content owner hires someone to create an NFT, the content owner does not own any rights in the NFT software unless it is work made for hire or acquired by assignment. As such, because the NFT is primarily a hash and not a link to content, it may contain no copyrightable content.
A derivative work is a work of authorship that is based on changes or adaptations to a copyrightable work. The creation of derivative works is the sole property of the copyright holder. However, an automated cryptographic key may not have enough authorship (i.e., creative spark) to be considered a derivative work.
As a result, Rising Baseball Star NFTs, apart from the linked asset, may not be copyrightable subject matter in all instances.
NFTS CREATION AND DISTRIBUTION UNAUTHORIZED
An NFT is created by generating a hash for a specific content file. That file will contain whatever work is being tokenized, such as art or a tweet, and it will be available anywhere in cyberspace. In the process of generating the hash for the NFT, the software may make a copy of the content file.
Currently, some services that generate NFTs require the user to upload the content file to generate the NFT. Furthermore, the display of the linked content is usually included in the marketing of the NFT. For these and other reasons, the creation of an NFT should generally necessitate the permission of the copyright holder and in absence of doing so, the NFT creator may open themselves to liability.
Copyrights can be divided almost indefinitely by contract. A copyright owner’s various exclusive rights can be transferred and divided based on geographic location, among multiple parties, in various media, and so on, and each divisible right can have its own duration, pricing, and payment terms. Artists could sell a percentage of any of their exclusive rights. Keeping track of these divided rights once granted, each of which may then be conveyed, can be extremely complex and difficult.
NFTs provide an opportunity to automate this process, allowing the original works or a divided right’s copyright owner to keep track of what they have sold and collect payments. However, this assumes that an NFT is used to convey any copyright rights at all, which, for the most part, it is not. When NFTs are used to transfer copyrights, blockchain accounting will almost certainly come in handy in keeping track of all of these competing interests.
NFTs are currently considered indivisible in the sense that they cannot be divided into smaller values, as cryptocurrencies can. As a result, a buyer of a high-priced NFT of digital art could sell fractional shares of his NFT via the blockchain. Furthermore, the creator of an NFT may be paid a percentage of the resale of not only the NFT he sold but also of each subsequent individual interest in that NFT. As such, it is important you be mindful of the copyright distribution mechanisms and how they can affect the future distribution and sale of Rising Baseball Star NFTs.