Intellectual Property Law and the Challenges of NFTs

Non-fungible tokens, also referred to as NFTs, are regarded as one of the most pervasive yet confusing manifestations of the new era of digital assets. NFTs are digital certificates of ownership stored as a set of codes in the blockchain system. In several years, they have become a market mania flooding popular industries such as sports, fashion, entertainment, and art; in 2021, NFT art sales reached over $22 billion.¹ The introduction of NFTs to the mainstream art market has profoundly shaped how the market and artists themselves monetize art as work and product. NFTs have provided a new form of art expression and a new market form dependent on the emotional value carried by its product.

The psychology of the NFT market can be dissected into two crucial elements: collecting and community.² Firstly, NFTs grasp the human desire to collect unreplicable items. Ownership and validity can be tracked and verified when data is uploaded to a blockchain ledger. The sense of scarcity, uniqueness, and exclusivity that NFT products created eventually molded those tokens into perfect bragging rights in the online community. Secondly, NFTs use social media influence, celebrity interest, and an exclusive community of consumers to attract more and more potential customers in the current generation. With intense hype, many watched the rise of this new market with awe while not entirely understanding its particular attraction.³

That unidentified allure also led to product and market uncertainties. While many market regulations in traditional art markets still apply to NFTs, there are loopholes in the way intellectual property law applies that remain uncertain. The intellectual property rights of many artists and creator companies are at risk due to the unique shared ownership structure of NFTs, the lack of regulation surrounding digital assets, and a loophole in intellectual property law regulations.

The potential flaws of the IP law system in NFT markets were first brought to public attention when artists on social media complained that their art had been minted into NFT form without consent. Liam Sharp, an artist for DC Comics, tweeted on social media that he had to “completely shut down the entire @DeviantArt gallery as people keep stealing [his] art and making NFTs.”⁴ The fashion brand Hermès also notably filed a lawsuit against a crypto artist for selling “MetaBirkins,” an NFT depicting the classic Hermès Birkin bags as digital fashion wear, accusing the artist of violating the company’s copyright.⁵ This case alerted the general public of plagiarism and copyright violation risks in NFT markets. It also addressed to what extent the creation of an unauthorized NFT can directly lead to copyright infringement. NFTS lie in the digital market, not the traditional one, but the creation of NFTs based on pre-established work infringes the copyright of the underlying piece already established in the conventional marketplace. With the increase of copyright lawsuits, namely the one between Hermès and MetaBirkins, lawyers warned NFT creators that the unauthorized minting of NFT might result in an intentional or unintentional infringement of copyright. The concern will persist among this newly born market until courts resolve to what extent copyright law can apply to NFTs or a judicial expansion of copyright protection.⁶

Previous IP laws that worked in the traditional market suddenly become inapplicable to the new digital world. The fundamental fracture in the protection system lies within the unique ownership structure of NFT artworks. As NFTs are transacted through open markets or auctions, it is always the current owner of the NFT, whether a creator or purchaser, who owns the ability to sell it on the secondary market for a profit. This means that NFT copyrights are not owned by the artists but by the individual who minted the works into NFTs. However, because of the intricacies in minting and selling NFTs, many parties are involved in a single NFT transaction, including the creator of the art, the minter of the NFT, the blockchain, the marketplace, and both primary and secondary purchasers of NFT. The complicated list of stakeholders behind a single NFT makes identifying legal liability and rights more complex than a tangible piece of art. Moreover, because copyright is distinct and separate from the underlying work, a sale of the work does not necessarily transfer ownership from the owner to a subsequent purchaser, absent an assignment or exclusive license.

While the complicated transaction system already made the legal tracking of copyright hard to navigate, the issue of NFT copyright tracking even gets more challenging when potential theft and fraud are involved in identifying the originality of NFT art. Minting an NFT includes producing a “digital signature” that links the NFT to its creator as it is uploaded to the blockchain system. When a potential minter of an NFT “lies about their identity” and disguises themself as the original creator to plagiarize the original work and claim the ownership of the copyright in the digital market, the current regulation over NFTs are insufficient to protect the copyright of the original creator.⁷ Moreover, no existing law establishes criteria for determining whether an NFT is considered a copy of an underlying work or an original piece. The open nature of the blockchain system also allows different owners to hold other portions of the copyright. For example, concerning music minted into an NFT, you could draft an associated smart contract with provisions that provide performance rights only to the purchaser of the NFT while retaining all other rights for the artist, who could then sell one of their ownership rights to a different purchaser through separate NFT.⁸ While blockchain makes such transactions of these various rights relatively easy, it creates a more significant risk of purchasers unintentionally practicing a right they no longer own through the transaction process.

NFTs and digital assets are a realm that is currently so new that traditional IP laws cannot cover and protect property rights. Courts and legal institutions have yet to address whether the law should extend copyright protection to digital assets that are highly dependent and connected to a pre-existing work in the traditional market. Due to the lack of clarification concerning whether or not a NFT is an independent work of art or a “copy” of an underlying art, NFTs are currently incompatible with the contemporary construction of copyright laws This means that NFTs are not copyrightable, even though they are already a mature and booming market. Moreover, U.S law currently only grants works of authorship to be “fixed in any tangible medium of expression” to be eligible for copyright protection. NFTs, as well as the entire digital market, are intangible and likely exist outside the scope of U.S copyright law and are highly dependent on their “real” counterparts to be regulated.⁹

Due to the complicated transaction structure of NFT art, the lack of criteria that determine the originality of a minted NFT, and the inability to place digital assets under the protection of current copyright laws, the NFT market faces an urgent need to reform its system to protect the right of its sellers and buyers.¹⁰ Since the majority of digital assets infringement on copyright happened as a result of the lack of awareness of the legal right different NFT works carries, different digital art marketplaces, such as Opensea, Rateable, and SuperRare need to offer proper training on the property laws of NFTs before allowing a user to enter the market. Such action can let both the buyer and seller be well-educated on the difference between applying copyright law in the digital market and the traditional one they are familiar with. Moreover, the reason behind the hesitance of contemporary courts to pose a judicial expansion of copyright is the lack of criteria to determine the originality of NFTs and the content it carries. Hence, instead of robustly extending the pre-existing copyright laws to the realms of digital assets and new technology, it is more urgent to establish a well-rounded subjective way to determine the originality of a piece of art. This act not only can solve the tricky problem of originality and influence the proper expansion of copyright protection on NFTs that dwells in the blockchain but also provide overarching protection for the original works of independent artists to avoid future infringements.

References

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2. Contributor, Benzinga. "The Psychology Behind NFTs: Why We Spend Millions On JPEGs." Benzinga. Last modified June 15, 2022. https://www.benzinga.com/markets/cryptocurrency/22/06/27552978/the-psychology-behind-nfts-why-we-spend-millions-on-jpegs. ↩

3. "What Does Psychology Tell Us About the Explosion of NFTs?" Stagwell | Transforming Marketing. Accessed October 31, 2022. https://www.stagwellglobal.com/what-does-psychology-tell-us-about-the-explosion-of-nfts/. ↩

4. Liscia, Valentina D. "Artists Say Plagiarized NFTs Are Plaguing Their Community." Hyperallergic. Last modified December 29, 2021. https://hyperallergic.com/702309/artists-say-plagiarized-nfts-are-plaguing-their-community/. ↩

5. "The Hermès and MetaBirkins Lawsuit Could Set Legal Precedent for NFTs." Input. Last modified July 28, 2022. https://www.inputmag.com/style/hermes-metabirkin-nft-lawsuit-legal-precendent-potential. ↩

6. "Federal Court Rules MetaBirkin NFTs Entitled to First Amendment Protection in Hermès Trademark Case." The National Law Review. Accessed October 31, 2022. https://www.natlawreview.com/article/federal-court-rules-metabirkin-nfts-entitled-to-first-amendment-protection-herm-s. ↩

7. Khandelwal, Harsch. "Minting, Distributing and Selling NFTs Must Involve Copyright Law." Cointelegraph. Accessed October 31, 2022. https://cointelegraph.com/news/minting-distributing-and-selling-nfts-must-involve-copyright-law. ↩

8. "The Fiction of NFTs and Copyright Infringement." Last modified April 12, 2022. https://www.pennlawreview.com/2022/04/12/the-fiction-of-nfts-and-copyright-infringement/. ↩

9. "The Fiction of NFTs and Copyright Infringement." Last modified April 12, 2022. https://www.pennlawreview.com/2022/04/12/the-fiction-of-nfts-and-copyright-infringement/. ↩

10. Garcia, Jeremy. "NFTs – Dickinson Law's Inside Entrepreneurship Law Blog." Sites at Penn State | Powered by CampusPress. Accessed October 31, 2022. https://sites.psu.edu/entrepreneurshiplaw/tag/nfts/. ↩