NFTs: infinite royalties for copyright owners or a new tool for fraudsters?

Non-Fungible Tokens (NFTs) have been around for more than seven years now, however, they gained mass popularity only in the last couple of years.

What is an NFT?

Unlike fungible tokens (such as Bitcoin or money), each NFT represents a unique individual value often referred to as the “hash” or “mint address” of the NFT. Like cryptocurrency, NFTs are created (or “minted”) using blockchain technology. Unlike cryptocurrency, each NFT is unique and cannot be replaced with an identical token. Due to the nature of tokens, a user is not purchasing the actual copyrighted work but rather a link to its digital copy, although sometimes a copy of the work can be included with the NFT. An NFT can therefore be compared to an artist’s signature on a digital artwork.

The curious feature of NFTs is their flexibility, as virtually anything can be linked to an NFT, with some of the most successful examples including Andy Warhol’s artworks and the first ever tweet.

Inevitably, the concept of NFTs raises questions about copyright ownership and enforcement.

Copyright ownership

The first thing to clear up is that a purchase of an NFT does not, in itself, transfer the underlying copyright, which stays with the original rights holder. An NFT is, effectively, just metadata about an artwork, not an actual artwork itself. Therefore, a question exists of whether one can “own” an NFT.

Ownership of an NFT does not mean the ownership of an underlying asset. By law, an assignment of the original copyright must be made in writing. Until there is an actual assignment agreement between the parties, copyright in the underlying work will remain the property of the creator. Alternatively, copyright can be licensed, which does not transfer the ownership of copyright but rather provides a licensee with the right to use the work subject to the terms of a particular licence.

By analogy with buying an artwork, if one goes to a gallery and buys a piece of art, the copyright in that artwork is not transferred to the buyer, nor do they receive a licence to reproduce that art. All one receives is the physical property of the artwork which one might then display at home or in their office.

When one buys an NFT, the position is much the same. Usually one will only receive a link to a digital copy of the underlying artwork, but sometimes they will receive a digital copy of the artwork itself as part of the NFT. In the same way, therefore, as if one was to buy an artwork, buying an NFT does not transfer any rights in the underlying artwork, and, in fact, may not even provide the buyer a copy of the artwork at all. What one is buying is essentially a unique signature linked to that artwork.

The introduction of NFTs provides a potential infinite revenue stream for artists – not just that it gives them an opportunity to earn money from the creation of an NFT, but also to receive potentially unlimited amounts of royalties from each subsequent resale of that NFT because the terms on which they are traded usually provide for royalties to be paid to the creator of the NFT. This makes NFTs particularly attractive to online content creators, such as digital artists and game designers.

Abuse of NFTs

By their nature, NFTs either contain an encrypted copy of a digital work or a link to the digital work. Creating an unauthorised copy of a copyrighted work (where for example a copy of the work is included in the NFT) or communicating that work without authority of the rightful owner to a new public (where for example a link to the digital work is included in the NFT) is, by law, likely to be an infringement of copyright. Only the original owner or rights holder (i.e. an assignee or, in some cases, a licensee) can therefore legally create an NFT, although it is arguable that where the NFT does not include a reproduction of the underlying work, no infringement occurs.

The recent hype around NFTs and the disproportionate overinflated demand compared to scarce supply gave a fruitful ground for fraudsters. As a result, a number of artists in the UK and abroad have been subject to fraudulent offerings of their works in the form of NFTs.

Recently, a well-known Russian artist made a Google search of her name and came across several Google images with an “NFT” mark. It turned out that some of her artworks were linked to NFTs and traded on an online platform without her knowledge or consent. The artist raised her concerns with the trading platform and found out that one of the platform administrators had himself become a victim and unwittingly bought an NFT of that artist’s work from a fraudster.

Enforcement

Unfortunately, infringements of copyright in NFTs are not rare. Fraudsters are using the novelty and hype around the technology to earn as much money as possible until tighter regulations or court precedents are introduced. Law is always reactive and it will take its time to catch-up. Unfortunately, this will give plenty of opportunities for crooks to fill their pockets. As yet, there are no precedents in English courts and NFTs are largely unregulated in the UK.

At the moment, it appears that the best way forward for copyright owners is to run regular checks for fraudulent NFTs. In turn, NFT purchasers should take time to investigate whether the NFT for sale has actually originated from a rights holder and not from an unauthorised source. It is also worth keeping in mind that a purchase of an NFT does not transfer copyright in the original work. Therefore, the only thing a purchaser can use their NFT for is to sell it on or to keep it for personal enjoyment. Whether this limited enjoyment is worth millions of dollars is something for everyone to decide for themselves, although undoubtedly the value is currently driven by the inherent uniqueness of NFTs.

One possibility is that future regulation of NFTs in the UK will be done via the Financial Conduct Authority (FCA), alongside cryptocurrencies, and enforcement will involve criminal charges against fraudsters and awards of damages (and in some cases injunctions and/or specific performance) against platforms, trading unauthorised NFTs. This should, of course, put additional pressure on the platforms to run checks against NFT sellers, to limit their liability.

If you have any questions related to copyright in NFTs or copyright generally, please contact any member of our Intellectual Property team.

If you aren’t receiving our legal updates directly to your mailbox, please sign up now