27 May 2021
Download – Copyright update – 1 of 4 Insights
"When does a model own her image?" asks Emily Ratajkowski as she reflects on her experience of working in the modelling industry. Writing last September, she probably did not expect to find the answer by auctioning her picture as a non-fungible token (NFT) at Christie's this year.
An NFT is a secure, blockchain-based certificate that represents an entitlement its owner has to a (usually) digital or physical asset (eg artwork or music) or experience (eg a backstage pass). The fundamental characteristic of an NFT is its uniqueness; in contrast to, say, a unit of a cryptocurrency which is the same as any other unit, the value of an NFT is in the blockchain-powered recognition that it uniquely represents the asset it attaches to. The scarcity of each token has led to them becoming the latest craze in the digital media and entertainment space and generating significant value for those that create and sell (or 'mint') them.
While understanding their uniqueness is key to understanding the value of NFTs, so understanding what it means to own an NFT, and what IP rights NFTs engage, is key to understanding how their advertising, sale and acquisition can operate. Get it wrong, and the minter of the NFT will be causing a range of intellectual property, advertising and consumer protection problems for themselves.
Indeed, the UK's advertising regulator, the Advertising Standards Authority, picked up on the importance of understanding the ownership question in its April 2021 guidance on advertising cryptocurrencies:
"It is important to remember that the NFT is not the piece of art or image itself, but a method of tracking ownership. If somebody sells you an NFT for a digital file, that does not stop them sending copies of that file to other people. The use of NFTs for copyright has also not been established and therefore, owning an NFT does not mean that you own the copyright."
Owning an NFT is different to owning the asset that it represents. When you buy an NFT you acquire a token entered on a blockchain, a digital ledger of transactions. While this token is unique, it usually ties to an easily reproducible asset. The purchaser of an NBA Top Shot Moment, an NFT that represents an NBA highlight clip, has ownership rights in the NFT: they can swap, sell or give their unique token away. Purchasers, though, cannot exclude others from accessing the highlight clips, many of which are available on YouTube. The NFT recognises that its owner has a right to do something; in the context of a video clip, for example, its owner may have the right to download it or stream it. The extent of the rights granted will be set by the minter of the NFT. But a right to access or view something is very different to owning rights in the represented asset.
The purchaser of Beeple's $69 million NFT artwork, 'Everydays – The First 5000 Days', owns the unique token. They do not, however, own copyright or any other intellectual property rights in the digital artwork itself. They cannot distribute or otherwise commercialise the represented asset.
It's therefore really important for everyone involved to be clear about what is and isn't owned. To illustrate the point, there have been moves to sell music copyrights as fractional interests to a multiplicity of NFT owners. If 100 NFTs were minted to represent a sound recording copyright, it would be very impractical for there to be 100 owners of that copyright. For example, how could 100 disparate owners, joined together only by having participated in the same NFT drop, easily license the sound recording? They couldn't. Instead, more likely, what they own is a fractional interest in the income stream generated by the sound recording copyright; the owner of the sound recording copyright would be obliged to distribute its royalties among the NFT owners.
There is also a more legal concern here: it is not at all clear that acquiring an NFT could satisfy the writing and signature requirements for transferring legal title to copyright under UK law. So the minters of these types of NFTs have to be careful not to mislead their purchasers to avoid falling foul of, for example, advertising regulation and consumer protection laws.
Even where an NFT is purportedly sold along with intellectual property rights in the represented asset, the seller must have these rights themselves. An NFT listing for a drawing by Jean-Michel Basquiat described "reproduction and IP rights that will be sold to the highest bidder in perpetuity". Following a complaint by the late artist's estate, the listing was removed from OpenSea, one of the largest NFT marketplaces. While the seller had purchased the drawing, it had not acquired any intellectual property rights. Basquiat's estate owned the copyright in the artwork itself.
The Basquiat episode highlights a challenge for would-be NFT entrepreneurs. Before minting the NFT, the minters should verify what rights they have in the represented asset and whether they extend to the production of the NFT and the subsequent use it represents. If the minter doesn't own or clear the rights in the represented asset, they will likely be infringing when, for example, putting the asset into the store from where it is accessed and when selling and granting access to it.
The NFT craze has seen digital tokens used in a range of projects. They benefit from two features of NFTs: their ability to represent almost any digital or physical asset; and the inherent value that can be attached to their uniqueness.
So far, most NFT projects have promoted NFTs as ends in themselves. By releasing NFTs alongside limited edition copies of the band's latest album, Kings of Leon promoted NFTs as a new type of collectable merchandise. Fans bought these scarce tokens for bragging rights. While these projects might seem gimmicky, this blueprint for commercialising digital assets has been profitable for many creators. Kings of Leon, for example, reportedly made $2 million from their NFT release.
There is also significant potential for NFTs to be used for generating value for creators from resale. Made up of computer code on a blockchain, NFTs can be programmed to transfer a cryptocurrency sum into the creator's digital wallet when the NFT is transferred to a new owner. Programming NFTs to operate in this manner is sometimes referred to as a "smart contract". An example of these payments is found in EulerBeats Originals, a collection of algorithmically generated audiovisual NFTs. Hosted on the Ethereum blockchain, these NFTs pay an 8% royalty to their original owner every time they are sold on.
NFT royalty arrangements can in this way be compared with the Artist's Resale Right (ARR), a visual artist's entitlement to a royalty payment when their work of art is resold through an art market professional. The key difference, though, is the NFT creator's freedom to determine the royalty scheme and have it encoded into the NFT and continue in perpetuity.
The popularity of NFTs is the latest way for creators to monetise their fanbase directly. On Patreon, creators sell paid subscriptions to their video content. Substack, a newsletter-publishing platform, allows creators to sell their writing to paying readers. By releasing NFTs on marketplaces like OpenSea, creators have a new way to get paid, by selling their fans unique digital assets.
While Emily Ratajkowski released an NFT to re-establish "authority" over her image, the NFT industry provides all creators with a new way to monetise their online presence. But before they do so they need to be clear what ownership rights they are monetising and what rights they need to own or clear to generate that revenue.
To discuss the issues raised in this article in more detail, please reach out to a member of our Copyright & Media Law team.
by Multiple authors