In a memorable skit on Saturday Night Live, Pete Davidson-as-Eminem inquires about what a non-fungible token (“NFT”) is and why they are selling for so much money. In this succinct article, The Treachery of Images: Non-Fungible Tokens and Copyright, Professor Guadamuz admirably answers the first question and explains why the second one is a puzzle. With respect to the market for NFTs, he explains why those using copyright law to capture the economic value in this emerging market often misunderstand how distinct the exclusive rights under copyright are from ownership of a non-fungible token on a blockchain.
Based in the United Kingdom, Professor Guadamuz applies U.K. copyright law to determine whether and when the process of creating and selling an NFT may (or may not) implicate copyright rights. For the most part, this analysis tracks with that under U.S. law, but to readers based in the United States, this aspect of the article also yields some comparative insights about when and why the differences between U.S. and U.K. copyright law may matter.
So What Is an NFT?: The question is really two: what is a “token” and what makes it “non-fungible”?l The answer to both starts with a blockchain, that is, a cryptographic distributed and decentralized ledger that records transactions in an immutable record. The immutable characteristic of the ledger enables digital assets to be unique, and cryptography is supposed to protect against copyists who would undermine a token’s “non-fungible” character by distributing counterfeit copies. Various kinds of data can be recorded on such a ledger. A “token” is one type of data—a programmable digital unit recorded on the blockchain. Functionally, a token is encryptable code that can represent any digital or physical object, and this code can be unique.
While use of NFTs in connection with copyrightable works of art is a subject of considerable interest, minting NFTs in connection with art works is merely one use for an NFT. More particularly for copyright lawyers, Professor Guadamuz nicely explains how and why in most cases the NFT is metadata about a copy of a copyrighted work, not about the intangible work of authorship itself. In the case of digital art, a digital copy of the work frequently is used in the creation of the metadata, but the resulting metadata recorded on the blockchain as a token generally is not a copy of the work of authorship. This is the central point of confusion in much copyright discourse around NFTs.
To dispel this confusion, Professor Guadamuz carefully describes the process of creating, a.k.a. “minting,” an NFT of a digital image with a reader concerned about copyright law in mind. His example uses the Ethereum blockchain that supports, among other things, the Ether cryptocurrency, and which is currently the most popular blockchain for recording data about copies of works of art. The blockchain uses technical standards for recording both fungible and non-fungible tokens.
As he explains, the two key components of the relevant standard are the tokenID and the contract address. The first is a unique value generated upon creation of the token. The contract address is the source of some copyright confusion because a copy of a digital work can be used to generate the contract address, but the address itself is metadata about that copy. In the example of Professor Guadamuz’s image, the contract address is: 0x8c5aCF6dBD24c66e6FD44d4A4C3d7a2D955AAad2, which no one would argue is a reproduction of the original expression in the source work. When combined with the tokenID and any other optional data that the relevant standard permits, the token is unique—a unique piece of metadata about a copy of a copyrighted work.
I encourage readers to work through Professor Guadamuz’s full description of how NFTs work at a technical level. For purposes of this review, the key takeaway about the facts is that, although the metadata file that comprises the NFT is unique, there is no technical constraint on the owner of a copyrighted work (or any other referent of the metadata) from minting additional tokens. Each token will be unique, but an unlimited number of these unique tokens can represent the same copy of a copyrighted work.
Since scarcity is the source of much of the economic value or speculation in markets for NFTs, the scarcity is, at a technical level, only in the metadata file. Any other constraints that would provide scarcity in relation to a copy of the copyrighted work or in the work itself must be legal constraints. If you record a song and then mint an NFT with that file and transfer the NFT to me, what do I own? Presumably I own title to the NFT. You could also represent that ownership of title to the NFT entitles the owner to also hold title to a particular copy of the song. In that case, it is the law that treats your intent to affect the transfer title in a copy of a work. Without that additional legal element, transactions in NFTs are transactions in title to metadata.
Professor Guadamuz identifies examples that show how the press and, likely, many participants in the NFT marketplace do not appear to understand this. After describing some high-profile NFT transactions—such as Jack Dorsey’s $2.9M sale of an NFT of his first tweet – Professor Guadamuz very rightly points out: “It seems difficult to believe that all these buyers are spending such amount[s] of money for what amounts to a short metadata file and a string of numbers and letters of dubious artistic value, but in fact, this is what most NFTs actually are.” (P. 1372.)
What’s Copyright Got to Do With It?: A reader knowledgeable about copyright would likely answer, “nothing,” and Professor Guadamuz mostly agrees. He discusses some transactional uses of NFTs, including a “tick box” option to indicate that transfer of the NFT also transfers ownership in the copyright in the NFT’s referent work. The law in the U.K. is similar enough to U.S. law that this issue is primarily whether ticking that box is sufficient to be a signed writing by the author. He demonstrates that using NFTs for licensing purposes is difficult but that the NFT can be programmed to act as a royalty collection vehicle, which potentially could create an automated droit de suite or otherwise as a payment mechanism.
With respect to rights enforcement, he first works through any possible claims that the act of minting an NFT, even without authorization of the copyright owner, could directly infringe the rights to reproduce, adapt or communicate the copyrighted work to the public. The only plausible claim would involve an NFT that includes a hyperlink to a copy of the source work, as many NFTs do. Under the complex jurisprudence in the European Union, one could treat the minting of an NFT that includes a hyperlink to a copy of the source as a communication to the public, but only under narrow circumstances. The analysis under U.S. law would be similar, except that inclusion of the link would not be a direct infringement of any exclusive rights and could at most give rise to secondary liability for infringement of the rights to display or perform the work publicly. This result could change if the appellate courts agree with some district courts that have held that an embedded hyperlink exercises the right of public display.
In this article, Professor Guadamuz performs an important public service by patiently walking the reader through the technical complexities of how NFTs work and then, with similar care, by considering the potential copyright implications for the creation and transfer of NFTs.
