Non-fungible tokens are packets of data stored on block chain, which can form the subject matter of transactions and taxation. They have varied uses, and are mediums to foster innovation and operate as a stream for revenue. NFTs have the potential to be both tangible (works of art) and intangible (virtual games), and are created through the process of minting which enables it to be accorded a unique certification and non-fungible authenticity certificate. While these are largely viewed as assets, there is a lacuna in the intellectual property laws to regulate them. Copyright law leaves unaddressed whether they can be protected under the traditional theories, which gives rise to certain legal questions yet to be addressed.
NFT and copyright law
Disruptive technology such as (NFT) expands the discussion on the application of intellectual property laws since these platforms allow for creating digital art while also using the same for digital currency. NFTs possess unique digital certificates and present digital assets on the internet platforms and are not the asset in itself.
A mysterious seller, Daystorm, had recently announced the auction of artwork of Basquiat’s mixed media work in the form of NFT, raising questions, since they stated that the work could also be deconstructed as per the discretion of the highest bidder. While Basquiat’s estate has issued a statement that Daystorm only manages the physical copy of the work and enjoys no other rights, the statement pertaining to deconstruction has received the attention of artists worldwide since it involves the questions of moral rights under copyright law. Another instance is burning an artwork by Bansky and then turning it into an NFT.
If an Indian author/artist creates an original work, it is protected under the domestic laws, Berne Convention and benefits from around 176 different national bundles of copyright rights under international conventions. This presents significant issues since the owner is entitled to separate and exploit the protected work around 176 times, coupled with the varied application of the doctrine of exhaustion domestically.
a) Current principles governing NFT transactions
The work must be expressed in a tangible form or medium (fixation) to be protected under copyright law, as per RG Anand v. Deluxe Films. Ordinarily, the purchase of physical art will involve a transfer of ownership and any associated rights except moral rights. However, for NFT works, the following principles apply:
- Purchasing NFT does not amount to owning the digital asset:
Purchasing NFT does not mean the purchase of digital assets but a token. The cryptographic link between the purchased token and digital asset does not entail an immediate transfer of ownership and copyright. This understanding is reflected in Christie Inc’s sale policies that the purchase of NFT does not vest any express or implied rights in the underlying digital asset. However, explicit agreements allowing for the purchase of the digital asset may be provided.
For instance, Mintable provides an option to transfer the copyright (which is included in the final version of the smart contract), and platforms such as HupLife are redesigning its policies to be Berne compliant.[i]
- Purchasing NFT does not transfer the copyright
While the purchase does not automatically entail the transfer of copyright, smart contracts may be designed to include terms addressing personal, non-commercial use; or a license for commercial use.[ii]
Licensing or transferring copyright in such digital assets involves coordination online and offline.[iii] Online efforts include forming smart contracts, which must explicitly provide for the transfer/license of copyright, whereas offline coordination consists of the dispute resolution process. The principles already apply to such platforms as no transfer of ownership and copyright in the artwork occurs unless expressly agreed, easing the formation of smart contracts. But this can cause confusion for physical works converted into NFT, since two versions of the work are available from the same author. The owner must then distinguish between what uses are permissible under smart contracts and traditional contracts. A greater degree of diligence is required to record all offline transactions on the digital ledger to determine what uses step beyond the licensing agreements.
- Revenue, Infringement and liability
Separating the digital asset from its ownership and copyright alters the nature of the work and those who can sue to enforce the rights.
- Sound recordings or musical works
For instance, creating and selling music via NFT requires careful consideration of associated rights such as those of music labels, merchandise licensees etc. In addition to the traditional copyright requirements of originality, expression and fixation, NFT platforms operate on the premise that all copyrights vest with the one generating the NFT, so parties must consider what rights must vest with the owner to sell the NFT and confer the purchaser with digital certificates. Since transactions will involve payment of royalty via cryptocurrency, it is essential to negotiate who is entitled to the revenue generated, and in what percentage.
However, creating art through NFT increases the reliance on blockchain technology, therefore increasing the advantages to the artists/authors. The reliance on sharing works through NFT increases the adoption of smart contracts and digital ledgers, thereby reducing the chances of any secret deals between platforms (such as the highly referred deals between spotify and established labels), and allows other artists to share their work and reap monetary benefits without any intermediary platforms. The downside is that there will be the multiplicity of disputes on the issue of artists’ collectables, such as the deal between the Recording Academy and OneOf; or even the proposal to sell moving images and sounds of the boyband BTS by their company HYBE. While the unalterable ledger will contain information about the purchaser, there is no requirement by some platforms such as OpenSea to use verified names or addresses, which makes it difficult to institute a suit for infringement if the work was downloaded and circulated. This might not be an issue for rare collectables with limited sales, but it creates a legal nightmare for generally available merchandise.
- Infringement of personality rights
Using NFT for art also violates personality rights, which have been recognised through judicial decisions such as TITAN Industries v. M/s Ramkumar Jewelers. For instance, a search of “Will Smith” on OpenSea, the largest NFT marketplace, displays about 6,597 results. It cannot be interpreted that all of those works have been authorised to be minted by Will Smith, thereby constituting infringement. Additionally, when the transacted NFT is minted without the artist’s authorisation, they would not be able to enforce the rights and recover any profits from the unauthorised sale due to the immutability of the blockchain.[iv]
- Liability for infringement
Copyright law allows for defences against liability for infringement such as fair use, which will form the primary question before the courts. In Global Yellow Pages v Promedia Directories (case decided in Singapore) the court required copying the whole work to constitute infringement. Since NFTs involve minting, it will become difficult for courts to enforce infringement provisions for the NFT purchaser (of the token) based on lack of sufficient locus standi, and, therefore can only require the owner of the digital asset to initiate the suit.
Second, suppose the owner of the copyright and the digital asset pursues an action for civil (Section 55 Copyright Act, 1957) or criminal (Section 63) remedies under the copyright act, the question of the liability of the NFT marketplaces facilitating the transactions must be addressed under 79 of the Information Technology Act, 2000 and Intermediaries Rules 2021. While the intermediaries cannot be held liable unless they possess the requisite information, it increases the standards of due diligence and requires swift action in case of acts in violation of the law. However, blockchain technology poses an issue due to complex layers of privacy; it becomes difficult to identify suspicious transactions.
The non-applicability of the first sale doctrine to digital works, because the owner can retain the original work and transmit a copy of it to the purchaser, there is a problem of “double-spend” in which infinite reproductions of the art may be made by the owner of the work. NFTs encompass blockchain technology that aids in tracking the original and subsequent transactions through ledgers, the double-spend problem is addressed.
The last five years have seen a boom in the usage of NFTs, and it is pertinent to evaluate significant concerns such as copyrights and taxation in a digital world where anyone can create and sell digital assets. The sellers must seek to ensure that smart contracts clearly define the corners of the transaction, including adequate safeguards to oversee activities of third parties if the contract provides for licensing. Second, the industry must also address the concern over the unalterable ledger. If there is an error or fraud in the original entry, the non-editable nature of the ledger will potentially lead to liability of the intermediary platform. To address these concerns, there is a need for legalisation of cryptocurrencies and NFTs, to prevent it from becoming oversaturated and the hub for violation.
[i]Andres Guadamuz, The treachery of images: non-fungible tokens and copyright, 16 Journal of Intellectual Property Law & Practice 1367 (2021).
[ii] Balázs Bodó, Daniel Gervais, João Pedro Quintais, Blockchain and smart contracts: the missing link in copyright licensing?,26 International Journal of Law and Information Technology 311 (2018).
[iv] AlexanderSavelyev, Copyright in the blockchain era: Promises and challenges, 34 Computer Law & Security Review 550 (2018).