While there is nothing inherently illegal about NFTs, there are a number of legal pitfalls related to NFTs, particularly related to copyrights.
KEY POINTS
- Generally speaking, NFTs are legal, but there are a number of legal pitfalls related to NFTs, particularly with copyrights.
- "Owning" an NFT doesn't necessarily mean you own the copyright - in most cases, you don't.
- What you can do with your NFT is defined by the creator/copyright holder. Often you have to hunt down this information.
In this article, we’re going to take a look at NFTs and copyrights, as well as let you know what to watch out for when you buy an NFT.
But please be aware - I am not a lawyer and this is not legal advice. If you are going to make a big investment into NFTs, you may want to consult a lawyer.
The Internet and copyright
The 1990s Wild West days of Napster and rampant copyright infringement for musicians eventually did come to some conclusion, but the music industry changed forever because of it.
People suddenly discovered that they didn’t have to run down to the store and fork over some cash for a physical CD. They could just click a button and download it. For nothing.
What followed was an onslaught of ugly court cases as the record industry tried to use force to clamp down on the inevitable—people wanted their art (in this case, music) on the cheap, and at the click of a button.
Record stores closed, and the industry was in turmoil.
So, when Steve Jobs came to the rescue, offering a new music store where users could legally download songs for as little as $.99, the big record labels all got on board. They had no choice.
Then music streaming happened. And musicians have been struggling ever since.
It was into this perfect storm that NFTs were launched, and Kings of Leon made big news when it decided to sell its latest album as an NFT. Finally, it seemed, a band could again make a decent cut from selling its creations.
To learn more about what musicians are doing with NFTs, check our article on music NFTs.
That, coupled with headline busting million dollar NFT sales, and the art world was suddenly on fire. NFT sales boomed.
But now the question of copyright has come up. Who owns the copyright of an NFT?
Understanding copyright
Part of the problem is that the digital age has added confusion to a subject that wasn’t really understood in the first place. Even today, buyers of physical artwork often aren’t entirely sure if they own the copyright to the painting they have just bought.
Owning a piece of art doesn’t necessarily mean the owner has the right to modify, derive works from, or distribute it.
The artist could simply sell the exclusive rights to distribute work, as book authors and musicians do, but the copyright to the work itself may remain with the artist.
Copyright is automatically granted to the creator in the United States, and if you’d like to get a simple breakdown of what rights artists have in the USA for their work, you can take a look at the US Copyright Office’s circular.
Copyrights can be transferred by contract from the creator to someone else.
But this is certainly not always the case when people buy NFTs.
Buying an NFT doesn’t automatically grant you copyright
The only way a buyer can receive the copyright for that NFT would be if it was explicitly stated by the creator or the actual copyright owner.
What rights do you actually get?
Since NFTs are not the same as copyrights and since only the creator (or the copyright owner) can actually transfer any rights (as much or as little as they want), you need to look for statements of IP and copyright that might go along with the NFT.
Although, bear in mind that copyright law differs from country to country, and so any transferred copyright ownership might not be valid in another jurisdiction.
Example: Bored Ape Yacht Club (BAYC)
Bored Ape Yacht Club is a premiere profile pic NFT project known for its strong community and the ability for Ape owners to use the IP that comes along with their Ape to create derivative works.
But do you actually own the copyright to your Ape?
Let’s take a closer look at the BAYC website to see what we can find out.
But first, an important note: this is not a legal interpretation, just my casual observations.
On their Terms and Conditions page, under “Ownership”, they state the following:
“You Own the NFT”
But, as we already know, that does not mean you own the copyright.
They go on to say the following under Commercial Use:
“Subject to your continued compliance with these Terms, Yuga Labs LLC [owners of the Bored Ape Yacht Club] grants you an unlimited, worldwide license to use, copy, and display the purchased Art for the purpose of creating derivative works based upon the Art”
So here we see that you do not own the copyright, but are rather granted a license.
As there are yet to be standards or norms around such terms and conditions, it is important to look closely at each project to see what rights you are actually granted (and consult a lawyer if you ever have any questions).
Want to hear it straight from a lawyer's mouth?
As I have been saying through out this article, I am not a lawyer. But Jeremy Hogan, presenter in the video below, is an attorney that explains many of the key points related to copyrights and NFTs.
Who minted the NFT?
In the U.S., only the copyright holder can transfer copyright to you. So, you must verify that the person minting the NFT actually has the rights to sell that copyrighted work—usually, this is the creator or the entity that employed that creator to do the work.
OpenSea has a verification program (look for the blue check mark on the project’s page). Although such systems are helpful, they are not foolproof.
At this early stage of the game, NFT investors need to do their own due diligence before buying an NFT.
Before you make any purchases, join the artist’s or project’s Discord, follow them on Twitter, and check out their website for any announcements regarding upcoming NFTs. Look for what other people are saying about the artist/project. You could also contact them directly to ask them about an NFT that is being sold under their name.
Minting an NFT from someone else’s art
The US Copyright Act specifically prohibits derivative works or distributing copies of the work.
Is an NFT a derivative work itself?
What if the NFT simply points to the content, which is housed on a central server somewhere? (see note below on NFT content storage)
Lawyers and legal scholars over time will more precisely clarify how NFTs and copyrights work, but the bottom line is this:
Stay away from NFTs that are minted without the creator’s/copyright holders consent.
A Twitter Bot Example
Let’s look at an example of a Twitter bot called @tokenizedtweets, which went on a minting spree creating NFTs from tweets.
All someone had to do to create an NFT from a tweet was to @mention the bot below a tweet along with an ETH wallet address - and boom - you’ve got yourself an NFT of the tweet.
It’s important to point out here that the NFT simply pointed to the tweet url. The tweet itself wasn’t stored on the blockchain (see more on this below in the section on NFT storage).
People were actually creating NFTs of famous people’s tweets (without their permission) and then attempting to sell them on NFT marketplaces.
William Shatner noticed this bot and complained about it on Twitter.
William Shatner's tweet on March 7, 2021
Twitter eventually banned the bot.
Where is the NFT actually stored?
While not directly related to copyright, where NFT content is actually stored does relate to ownership.
In many cases, the content that goes along with the NFT does not live on the blockchain.
Yes, the NFT (which is the certificate of ownership) lives on the blockchain, but the artwork or music or whatever the content may be, could live somewhere else.
And in the worst case scenario, the content could live on a centralized server controlled by a single entity (and that entity is not you).
If that is the case, it leads to an obvious question: if you own an NFT whose content is controlled by someone else, what do you actually own?
It also leads to some practical questions - what if that entity decides not to pay their hosting bill … poof, your NFT content is gone.
Don't let this happen to your NFT content
Many projects do consider this issue and use various technologies to decentralize their content storage. For example, IPFS is a common choice as well as services such as Arweave.
Note on Fractionalized NFTs (F-NFTs)
Since we are discussing legal issues related to NFTs, there is an additional issue that is starting to brew in the NFT world - fractionalization of NFTs, sometimes known as F-NFTs.
As the price of premium NFTs have skyrocketed, smaller investors have been priced out of these projects. To satisfy the demand of smaller investors wanting to get in on these projects, platforms that break up the ownership of NFTs into smaller pieces have become increasingly popular.
Fractionalizing NFTs has brought some legal scrutiny to this space. For example, has the NFT now become a security, and therefore, regulated by governments?
SEC commissioner Hester Peirce even warned that F-NFTs could be considered securities in comments she made at a conference in March of 2021.
Final Thoughts
NFTs have incredible potential to put power back in the hands of artists. Their initial boom might eventually settle, but I believe NFTs are here to stay.
And as institutional investors get involved, there will be more legal clarity around NFTs.
In the meantime, I firmly believe that simply stopping innovation is the greater mistake.
Every new tech goes through growing pains.
