PART II
In the first part of this two-part series, we offered a brief overview of NFTs and their applicability in the art world. This second part discusses the copyright and other related legal implications surrounding NFTs.
Copyright ownership and NFTs in art
When considering the intellectual property (IP) implications of NFTs, it is important to distinguish between ownership of the NFT and ownership of the underlying intellectual property.
An NFT does not confer upon anyone a copyright title of an original work. It is merely a cryptographically signed receipt that you own a unique version of a work. The maker of Nyan Cat still owns the copyright on Nyan Cat, the person who paid thousands of dollars only owns a copy of that. Jack Dorsey, the CEO of Twitter, famously sold an NFT of his first tweet, but that does not mean that the buyer owns the tweet; the buyer owns just a digitally signed screenshot of it.
Thus, from the point of view of IP, ownership of an NFT is not necessarily useful. The rights granted by an NFT seller depend on the rights transferred via a license or assignment, and these can vary with every NFT.
Other than purchasing the token, buying an NFT does not confer copyright ownership. Owning an NFT, by itself, does not grant the right to print or distribute the work without the permission of the copyright holder, especially if the artist did not authorize the NFT in the first place. In the context of copyright, therefore, ownership of the underlying rights will only transfer if the author of the original work expressly agrees to transfer those rights to the NFT owner. If and when copyright is transferred, subject to the terms of the transfer, an NFT owner may not be permitted to reproduce, distribute copies, publicly perform, display, or make derivative works of the original work.
Enforcing copyrights in NFT-linked works
Copyright owners of works linked to NFTs without authorization will likely send takedown notices to sites that host such content, and to marketplaces that promote the sale of such NFTs. If the underlying work is consequently taken down, or if the relevant copy is deleted, the link to the NFT can get broken, and the NFT may then represent proof of ownership of a copy that no longer exists.
Accordingly, understanding the connection, if any, between the seller of an NFT and the copyright owner of the linked content should be part of the due diligence conducted by an NFT buyer.
Each NFT contains a unique serial number or "fingerprint" (also known as a hash) that cannot be reproduced. A hash will match only one specific copy of content because the hash is a cryptographic key literally generated from a specific digital file. (Interestingly, the NFT is just a link to content, and is primarily a hash, the NFT may have no copyrightable content itself. The software that creates the NFT is likely copyrightable.)
Predictably, the NFT craze has brought with it a host of spammers and infringers. These tend to be entities that are grabbing digital URLs and other digital content and releasing NFTs based upon them. This is possible because anyone can create an NFT for anything.
Other legal concerns with NFTs:
With NFTs being an emerging issue area, it is no surprise that the law does not necessarily address all of the concerns that may arise out of NFT ownership and trading. Some statutory provisions in Indian law that invite potential ambiguity are listed below.
Ownership
Under Section 14 of the Indian Copyright Act of 1957, the copyright owner of a creative work owns a bundle of rights, including the right to make reproductions and adaptations. Upon purchase of an NFT that relates to a creative work, the buyer receives a copy of the underlying work (in some digital format, e.g., .jpeg, .pdf, or .mp4) and the NFT itself, i.e., tokens get added to the buyer's digital wallet. Since the sale of an NFT involves making a copy of the creative work and communicating it to the buyer, any unauthorized reproduction, distribution, or adaptation may amount to copyright infringement.
Jurisdiction
As of now, the well-known NFT marketplaces are operated by entities established outside India. While FEMA governs cross-border economic transactions in India, there are no guidelines from the RBI around crypto-assets or NFTs. Under the existing provisions in FEMA, crypto-assets and NFTs could be treated as intangible assets like software and intellectual property. However, determining the location of an NFT is an open question as blockchains are global ledgers and Courts have recognised that crypto-assets "cannot be stored anywhere"
Licensing
An NFT generally does not transfer the copyright ownership to the holder (unless it is contractually so agreed). When licensing IP for use in an NFT, the scope of the license should be limited to that purpose and other restrictions should be considered. Typically, the license will reserve all other rights to the IP owner. For example, a creator may grant rights to create a limited number of NFTs associated with a copyrighted work, in order to maintain the scarcity (and associated value) of the NFT based on such work. Just like the buyer of a signed poster owns the poster itself, but not the underlying copyright, the buyer of an art NFT would own that digital item, but generally would not get the right to reproduce the artwork.
Infringement
An NFT creator could have misrepresented themselves as the creator/author of the underlying work. Or, the NFT could be associated with an infringing work. Or, the NFT buyer may have created a derivative work without taking a license. All of these circumstances may lead to infringement of an existing copyright. Due to the immutable nature of blockchain transactions, combined with the pseudo-anonymous nature of NFT ownership, it can be difficult to enforce IP rights against a buyer once an NFT is sold. Typically, an NFT is associated with a digital wallet address, but the identity of the wallet owner may be difficult to determine without sophisticated digital forensics. It is prudent for content owners to set up a watch service to identify unauthorized uses of their content. If your content is subject to copyright, aggressive (but proper) use of take down notices may prevent a sale of the NFT in the first place.
What lies ahead
The ownership of an NFT, like any other asset in the real world, is driven by the dynamics of demand and supply. Because NFTs are unique, there is a perception that this uniqueness lends it some additional value. In the art world, as with any physical painting or sculpture, an NFT can be a financial investment, it can be for the purpose of striking a connection between a collector and a creator, or can simply hold sentimental value. However, as with all crypto investments, the risk factor is dependent on strategy and a long term plan. What value gets attributed to the asset is determined by the market.
There are a number of important dangers or risks that potential NFT buyers and creators should be aware of. First, it is unclear to what extent current market activity is being driven by collectors (who are really interested in the underlying artwork or object) versus speculators and crypto-fans (who want to artificially manipulate prices). Secondly, there is a possibility of excess supply: each individual object is unique or in limited supply, but there is a potentially unlimited amount of NFTs that can be created, with very little effort. Any digital image or video or text can be turned into an NFT. However, not all of these will hold their value. Thirdly, there is still considerable regulatory fog around NFTs and associated technologies and markets, all around the world. Even as the technology evolves at breakneck speed, jurisdictions are still trying to understand the fundamental implications for consumer protection, or the ownership of intangible property. Until there is more clarity on these aspects, any active engagement with NFTs would be highly speculative.
To conclude, Elon Musk, in his song on NFTs, sold as an NFT, very rightly captured the mood when he wrote, ""NFT. For your vanity. Computers never sleep. It's verified. It's guaranteed."
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
