| Part 1 | Part 2 | Part 3 | Part 4 | Part 5 |

If you have been reading any technology and art news in the last week, you may have come across the newest hype in the world of distributed ledgers and cryptocurrencies, and it is the sudden rise of the non-fungible token (NFT). The breakthrough for this technology came in the shape of a cat. But not just any cat, an old meme cartoon rainbow cat, Nyan Cat (10 hours of Nyan goodness here). News services quickly picked up the fact that a unique digital copy of the meme had been sold for 300 ETH (just over 460k USD at today’s prices). A new crypto fad was born, with every day bringing up new reports about NFT art being sold. Grimes sold over $6 million USD worth of digital artworks, while Kings of Leon announced that their next album would be offered as an NFT.

But what is an NFT really? To understand them, we first need to discuss tokens. One of the most heralded uses of distributed ledger technologies is that of the tokenization of assets, where a token is a programmable digital unit of value that is recorded on a blockchain. There are various types of tokens, and they can represent anything: commodities, loyalty points, shares, coins, etc. The most popular token standard is found in the Ethereum infrastructure, with the deployment of tokens using a specific type of standard (ERC20) that sets out the rules for fungible tokens. Fungible goods are by definition exchangeable, it doesn’t matter what specific item you’re selling or buying. Commodities tend to be fungible, silver, gold, oil, grains. Conversely, non-fungible goods are those which are unique, so a specific silver necklace, or a golden statuette, or a painting. Non-fungible goods use a different token standard (ERC-721).

Despite the sudden hype, NFTs are not really a new development in the blockchain community. The first popular implementation of the concept came about with the collecting game called CryptoKitties, which are unique cats that are written into the Ethereum blockchain. The game became one of the most successful implementations of the non-fungible token standard, and became so popular that it eventually slowed down the Ethereum transaction ecosystem as people were obtaining and trading their kitties. Things stabilised, and while it has remained popular, the hype never reached the peak of 2017, while there are still rare unique kitties that fetch good prices.

For the most part of the intervening time, fungible tokens were the most prevalent use of tokens in Ethereum, but CryptoKitties had opened the door to the idea of unique digital assets, and a few websites started offering “unique” digitial artworks as non-fungible tokens. But then the current bubble in cryptocurrency happened, and NFTs also surged. In short, the increased price in most cryptocurrencies has lifted all elements of the blockchain environment, and that includes NFTs. The rising exchange rates means that any use of cryptocurrency to purchase digital artwork would also increase the price of the artwork. Nothing has changed since CryptoKitties, there’s just more money slushing around. So these newly minted cryptomillionaires started spending more money on digital assets in the shape of NFTs. When Nyan Cat was sold for such a large amount of money, the full hype was in effect.

The idea behind the NFT is that of scarcity, by making non-fungible digital works available for sale, the idea is that there is value in these items because they are unique. Everyone can still use Nyan Cat, but there is a unique digital version of the meme, this in theory makes it more valuable. It’s like trading cards, the more rare a card, the more value it has. As explained by the Cent project, which offers an NFT service for tweets:

Owning any digital content can be a financial investment, hold sentimental value, and create a relationship between collector and creator. Like an autograph on a baseball card, the NFT itself is the creator’s autograph on the content, making it scarce, unique, and valuable.

This is an extremely important point that I think is being lost, these are collector’s items, they are not property on the original itself.

So if there is no ownership involved, what does copyright have to do with this? Strangely enough, some people are thinking about NFTs in copyright terms. There is a lot of confusion about what an NFT actually is, and just browsing any Twitter discussion of NFTs and copyright, there seems to be a belief that the NFT is somehow a digital title to the original, an actual claim of property. Instead, an NFT is more like a receipt that you own a signed version of something, not the actual thing itself.

This misconception may come from the fact that there is a belief that scarcity is built into copyright law, but nothing can be further from the truth. If we think about creative works subject to copyright protection in the terms of fungibility, then it is clear that copyright works are intended for the most part to be fungible, what is often called in copyright theory as non-rivalrousness. If I have a pie, I can eat the pie, and you can’t eat it. If I have a song in any format, my enjoyment of the song does not detract your own use and enjoyment of the song in any other way. The works are fungible, non-rivalrous.

However, there is also a non-fungible element to copyright works. In principle, some copyright works start life as a unique item, let’s say the first manuscript of a book typed by an author, or written in paper by hand (hence the name manuscript); the original music written by the composer; or an original sketch by a famous artist. These can be copied and published, hence the very nature of the existence of copyright protection, but these originals could have economic value on their own right as non-fungible items. Artists also create unique works of art all the time, let’s say a painting, a sculpture, a drawing, a photograph. These original items have value in their own as non-fungible items, but copyright gives the artist a number of exclusive rights on subsequent uses of their work, so a photographer can allow a photograph to be copied and published. A painter can make copies of their work, even if the non-fungible version is held in a museum.

There can also be an interaction between fungible and non-fungible elements in art: some artists create limited editions of their own work in the shape of limited edition lithographs, or in the shape of numbered editions.

From a copyright perspective, NFTs are no different. An NFT does not confer anyone a title of ownership on an original work, it is just a cryptographically signed receipt that you own a unique version of a work. The maker of Nyan Cat still owns Nyan Cat, the person who paid 300 ETH only owns a copy of that. Jack Dorsey is famously selling an NFT of his first tweet, but that doesn’t mean that the buyer will own the tweet, just a digitally signed screenshot of it. It’s unreal just how many people on Twitter are missing this very basic distinction, which serves to explain the hype surrounding NFTs. By the way, the people bidding for a copy of Jack’s first tweet tend to be a bunch of people with lasers in their Tweet avatars, a sure sign of a crypto bro, but I digress.

So NFTs are useless from a copyright perspective, as what is being sold is a digital version of the work, not the work itself. Crypto enthusiasts tend to throw around grandiose words such as personal sovereignty, but at least when it comes to NFTs, there’s not much there. While the idea behind the NFT is one of scarcity, it is only an illusory scarcity, nothing stops the creator of a digital asset that is turned into an NFT to create more copies of the work and sell these “unique” versions to the highest bidder. True, this would in principle dilute the value of the NFT, but if you already sold a copy, who cares? There’s nothing in the infrastructure of the Ethereum smart contracts that stops the creation of more “unique” versions of the same resource.

In many ways, this is similar to what is going on with the limited edition lithograph market, where some artists have been accused of re-issuing a work that had been sold before as a limited edition. This was already litigated in the US, where a photographer re-issued a limited print edition in a different size, and got sued because it was decreasing the value of the sold copies. The photographer won , and the judge decided that “although both the Limited Edition works and the Subsequent Edition works were produced from the same images, they are markedly different” (case Sobel v Eggleston). One can see a similar decision in this instance, where there is no indication that an NFT will be in any way unique, or not subject to future re-issues. In fact, I have spent the last couple of days browsing several NFT artwork portals, and I have already seen several “unique” artworks being offered in several different sites.

So much for scarcity.

But could NFTs be used as some sort of digital rights management, or even proof of purchase? This is something being claimed by Cent, the NFT tweet people, where they claim that an NFT can work in this way:

“What copyright enabled for the printing press, blockchain enables for digital content. It’s about creative ownership; controlling what you create. Guaranteed ownership doesn’t just entail IP security, it can bring more projects to life and incentivize collaboration. Blockchain makes licensing easy, calming insecurities for creators and collaborators.

Specifically, Non-Fungible Tokens are flourishing as ownership technology. NFTs enable:
• Indisputable rights and royalties on projects.
• Licensing contracts with guaranteed terms.
• Authenticity verification for any digital file.
Operating with these primitives in a frictionless p2p payments network changes the velocity of content that can be distributed. Anyone can purchase a license to distribute a piece of content. And the rest of us don’t need to pay the big-box distributors, as we can better satisfy our increasingly specific tastes and “buy directly” from the creators and curators of creative work, rather than scroll endlessly through libraries of irrelevant content.”

But one can’t use an NFT as proof of ownership! I could take a painting I don’t own, post it as an NFT, and it would not mean that I own the painting (edited to add: this is already happening). Garbage in, garbage out, just because there is an ownership claim written in the blockchain it doesn’t mean that it’s true (see the guy who owns the Mona Lisa). Moreover, people could be making claims about works that have dubious copyright status, take this digital art sold as an NFT, it’s part of the crypto-enthusiast bible, Elon Musk smoking a joint. Sort of reminds me of Jeff Koons and his many attempts to make 3D art out of photos.

So can we use NFTs as digital rights? How would that work? Sure, the hype is strong right now, but will it be sustainable for artists everywhere? The problem is again trying to generate scarcity when copyright works better with non-scarcity. The more popular a work is, the better. I can definitely see some uses for limited amount of time, until people wise up to the fact that they don’t actually own the work, just a digital receipt of the work.

I’m not saying that there won’t be some value in the NFT market, as someone who is a keen Pokémon Go player I am quite attached to my digital assets, namely Pokémon which exist only in my mobile phone. I played World of Warcraft for many years, and I would spend exorbitant amounts of time and resources to have access to a rare mount, or a unique piece of transmog gear. So I am no stranger to giving value to digital assets. But at the moment the NFT fad may be pushed by a misconception about the ownership status of the digital works. Lots of existing artwork being sold in NFT portals are nothing more than Bitcoin and libertarian propaganda.

So copyright theory may be able to teach us something about NFTs, and it is to be careful with what you buy, and the unique claims to those items. You may not be buying a unique item after all, just a receipt. I will finish with the amusing words of Twitter user @mcclure111 :

ETA 1: Some people were bothered by this explanation, so here’s another one:

By the way, in a meta experiment, an NFT of the tweet announcing this blog post is up for sale.

ETA 2: people are finding out the other problem with NFTs, transaction costs.

Categories: Blockchain

10 Comments

Anonymous · April 17, 2021 at 12:09 am

Ill answer your rhetorical question of the following sentence: “True, this would in principle dilute the value of the NFT, but if you already sold a copy, who cares?”. Practically any future buyer of that artist´s NFTs would care. The artist would loose credibility.

    Andres Guadamuz · April 20, 2021 at 3:03 pm

    You assume that there’s perfect information, there’s no such thing, dodgy businesses get away with bad practices all the time. An artist wouldn’t care.

    It’s already happening, I’ve seen the same works sold in different versions in different platforms. It’s impossible to keep track.

      rastiazul · April 21, 2021 at 8:00 pm

      Its impossible to keep track of everything, I never meant to say that it wont happen or its not already happening like you say but really famous artists wouldnt get away with easily. Lets not generalize.

        Andres Guadamuz · April 24, 2021 at 5:27 pm

        Even big artists in the non-digital space get away with it.

        rastiazul · April 26, 2021 at 9:04 pm

        Example?

        Andres Guadamuz · May 8, 2021 at 9:42 am

        Take the photographer I mention in the article who was sued for re-issuing prints, and won. And here’s an article discussing that this is common practice in artistic circles, and it often does not have an effect on the artist doing it, on the contrary, it’s accepted practice:

        https://pdnonline.com/features/fine-art-photography/what-does-limited-edition-really-mean/

FBC · June 13, 2021 at 4:32 pm

Hello Prof. Guadamuz. How are you? I have been following your publications on NFT and copyright. I confess that I am quite uncomfortable with the subject and with the NFT’s relationship with copyright. Considering new technologies, it would be much easier to interpret NFT as a form of economic exploitation of copyright works. It would be like a new economical right, alongside the right of publication, public communication, etc. I understand your point of view that the NFT, being just a certificate – structured in codes – does not contain the work itself (at least in most cases – one of the kinds of NFTs). But, understanding that the NFT has no relationship with copyright will allow the creation of a market in which third parties can make use of works, creating the NFTs, earning money from it even on resale. If we interpret NFT as a copyright, it would be easier to require that only copyright holders can mint and sell NFT. It would also be a way to guarantee the effectiveness of the right of sequel for who, in fact, is the owner of the work, and not third parties. It would also be a form of respect for the public domain, allowing this economic exploitation by third parties, just as a publisher can publish a work in the public domain. Separating copyright from the NFT only amplifies opportunistic and unethical behavior. I really wanted to be able to discuss this topic with you. Thanks

Debunking NFT myths — The blog of Sebastien Meunier · March 11, 2021 at 8:36 am

[…] am not a lawyer, so I let you check this thread by Nelson Rosario. That piece by Andrés Guadamuz makes great sense as well, except the embedded tweet at the end of the […]

The Rise of Non-Fungible Tokens (NFTs) and the Role of Copyright Law – Part II - Kluwer Copyright Blog · April 22, 2021 at 8:27 am

[…] his trilogy, Guadamuz has addressed three interesting aspects of NFTs. First, he discussed fundamental misconceptions on the relationship between NFTs and copyright. After […]

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