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NFTs and the copyright dilemma


Author: Pavle Čuljković

September 2022


The ongoing evolution of the blockchain market has provided everyday conversations with topics such as cryptocurrencies, smart contracts, or NFTs, which seemingly (or actually) overshadow themes like the global pandemic, vaccines, travel or sports. One of the mentioned topics which gained popularity during 2021, and is continuing in that manner in 2022, is the NFT. The news that the former CEO of Twitter, Jack Dorsey, sold an NFT of his first tweet for the equivalent of USD 2.5 million or that the digital work of art “The Merge” by the artist Pak was purchased for a dizzying sum of USD 91.8 million occupied the attention of the digital and artistic world. But what are NFTs exactly?

NFT stands for non-fungible token, and it is a digital collectible. Any digital works can be turned into an NFT, but so can any real-world objects (e.g., paintings, music, clothes) that can be represented in digital form, such as a photo, video, or scanned document. In short, NFTs can be minted (created) from any work, they exist only online, and they are bought and sold online, usually with cryptocurrency. Most NFTs also include a link to where the work can be found in the form of a digital image, song, video, tweet or other media that exists in digital form, known as NFT Media. The NFT Media is separate from the NFT. While the NFT is unique, the NFT Media can be copied an infinite number of times and be stored in different digital locations. It follows then that one might wonder why people are willing to pay millions of dollars to own digital items that anyone can view/listen to for free?

The key to answering this question is the non-fungible part in the name of this increasingly popular technology. It means that every NFT is one-of-a-kind. Its uniqueness lies in the fact that NFTs consist of at least two essential elements – the tokenID and the contact address. The tokenID is a number generated upon the creation of the token and the contact address is a blockchain address that can be viewed anywhere in the world using a blockchain scanner. The combination of these two elements makes an NFT a one-of-a-kind digital asset which is created, stored and transferred on a blockchain network, with the ownership and transaction history recorded and verified on that network’s blockchain.

Although the NFT Media linked to the NFT may be accessed by many people, by programming the digital location of the NFT Media into the NFT, the location of the original digital work is forever engraved into the token. This means that the owner of an NFT can prove, without the need for a third-party intermediary, that they are the verified owner. The importance of the NFT in the digital world can be likened to that of an author’s signature on their book or a famous sportsman’s signature on their jersey – there are many copies of the book/jersey, but imagine the situation where there is only one signed book/jersey. How much would it be worth? That is the NFT – a unique signature in the digital world.

Since NFTs are metadata files which have been encoded using a work that may or may not be subject to copyright protection, a logical question that arises from this fact is – what is the relation between the NFT and copyright?

Popularization of NFTs and their connection with artworks has led to an increase in NFT-related litigation. For example, the production company Miramax sued the director Quentin Tarantino for trademark infringement, copyright infringement, breach of contract and unfair competition because of his alleged plan to auction off NFTs based on his movie - Pulp Fiction. But can NFTs infringe copyrights?

Let’s go a step back. There is widespread confusion that the owner of an NFT replicating an artwork also owns the physical artwork. One might, understandably, assume that when a purchaser pays millions of dollars for a digital asset that he/she would acquire more than a string of code. The truth is – the purchaser acquires just a string of code.

Of course, some NFT transactions may also involve a transfer of rights to the artwork that are connected with the token. It is possible to imagine a situation where an NFT seller is also the copyright holder of the artwork being replicated as an NFT and that he/she transfers copyrights on that artwork to the NFT buyer, however, such occurrences remain rare for now.

A less rare occurrence is that of artists complaining that their works are being minted as NFTs without their permission, which would seem like a clear case of copyright infringement; however, taking into consideration the fact that an NFT is neither an original work nor a copy of a work, but rather a string of code, there is no unauthorized copy, sale or reproduction of the protected work and subsequently there is no copyright infringement.

On the other hand, we have the interesting case of an NFT trading platform blocking an artist who minted NFTs of artworks of the famous street artist Banksy after Banksy’s authentication body, Pest Control, clarified that the NFT series was not affiliated with Banksy, which suggests that intellectual property rights still apply in the virtual world. As explained in the WIPO Magazine article by Andres Guadamuz (‘Non-fungible tokens (NFTs) and copyright’, dated December 2021), there might be copyright infringement if three requirements are met:

Still, it is hard to imagine that an NFT would meet all these requirements, making it difficult to imagine any NFT-related copyright infringements.

Nevertheless, in China, the first court decision regarding the relationship between NFTs and copyrights was issued in April, 2022. Namely, the Hangzhou Internet court (yes, that is a dedicated Internet court, one of several in China, established in 2017) issued a decision in terms of which an NFT trading platform and an unauthorized user selling an NFT on that platform were held jointly and severally liable for copyright infringement as a result of such sale. The claim was filed by the plaintiff Qice regarding an artwork called Fat Tiger Vaccination in respect of which the plaintiff had acquired copyright by signing a “Copyright License Agreement” with its author, Ma Qianli, and which was subsequently minted and released as an NFT.

The Hangzhou Internet Court found that when a copy of a digital work exists on a trading platform in the form of an NFT, it is set as a specific "digital commodity", and NFT transaction is essentially the transfer of ownership of a "digital commodity" which presents certain investment and collection value attributes. It also stated that when copies of digital works are stored in cyberspace and become a negotiable commodity through a unique NFT point, a legally protected property interest is created. In light of that, the Court highlighted that copying and uploading NFT digital works to the platform for trading falls under the control of the reproduction right and the information network transmission right, so the minter of the NFT digital works (seller) should not only be the owner of the copy of the work, but also the copyright owner or licensor of the digital work, otherwise it will infringe the copyright of others.

In its reasoning, the Court noted that the right of network transmission refers to the right to make the work available to the public by wire or wireless means so that the public can access the work at a selected time and place. It went on to explain that the NFT digital works are provided in the public Internet environment through minting, that the object of the transaction is the unspecified public, and that each transaction is automatically executed through a smart contract, which enables the public to obtain the NFT digital work at the selected time and place. As a result, it found that the transaction of NFT digital works is consistent with the characteristics of information network communication behavior.

It seems that this decision includes some debatable views as the Court appears to have equated NFTs with NFT Media, but this decision (if not appealed and reversed) could become guidance for further decisions in the NFT – Copyright field.

It remains difficult to reach a certain conclusion as to whether NFTs do or do not infringe copyright. The fact remains that an NFT by itself does not give its owner any rights regarding the original, physical artwork, while it could still potentially be harmful for copyright and IP rights in general, as the Hangzhou Internet Court found in its decision. Misunderstandings about the nature and the content of NFTs will nevertheless undoubtedly generate a substantial number of copyright disputes. As we already have the first lawsuits on this subject, it will be interesting to see how these disputes are resolved and whether other courts will hold similar views as the court in China. It will also be interesting to see if the decision made by Hangzhou Internet Court will be appealed and reversed. All in all, at this point in time it remains hard to tell if we are any closer to a conclusion that copyright may, in practice, be infringed by NFTs.