What You Need To Know About Royalties And Licensing In Web3

After the fallout over secondary sales, issues around royalties and licensing are playing more of a role in artists’ thinking around web3. With the “easy money” having run out in the crypto crash, there’s less to go around and NFT platforms are doing whatever they can to stay profitable: proceeds from secondary sales are being dropped to 0% all over the NFT marketplaces.

As artists reevaluate the relationships that have been built up on web3, it’s important to understand legal issues around smart contracts, copyright, IP, and licensing as best we can, and think about how web3 tools might change those concepts.

Cynthia Gayton is an attorney, speaker, and author in the worlds of engineering, IP, and blockchain. She came to talk to us about problems with copyright, royalties, and licensing with art on web3.

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Understanding Royalties and Licensing for Web3

Terminology has been an obstacle in web3. It’s inconvenient when it’s causing confusion about what genre of art we’re looking at, but it’s much more serious when we’re getting into discussions about legal issues like contracts, copyright, licensing, etc. Gayton talked us through some of the problems she’s seeing in the web3 space and tried to clear up some of these concepts.

Neither smart nor contracts?

Smart contracts are, as is sometimes quipped, neither smart nor contracts. The code these “contracts” are executing needn’t be very sophisticated, and many are not legally binding and often unenforceable.

Gayton’s talk mostly focuses on US law, but much of what she covers is applicable elsewhere. Under US law a “valid and enforceable contract” must meet certain conditions: for example, both signatories must be “competent parties”, meaning of sound mind and legal age. If a minor misusing their parents’ credit card accepts the Terms & Conditions on an NFT marketplace, the minor may have the right to void that purchase. So this question of who is accepting the contract matters, as does the question of who’s offering the contract. Traditionally this would be the artist, but on web3 the NFT buyer is usually interacting with a marketplace like OpenSea.

If they can only see signatories as pseudonymous wallets, smart contracts can’t appreciate f real-world complexity. And while crypto-to-fiat exchanges like Coinbase are required to gate access to their services KYC, some are not. So at the moment, it would be a mistake to rely on this code to replace real world enforcement of contract law, even if access to that code was gated by KYC/AML.

Gayton points out that while we sometimes see DAOs trying to buy real estate or physical objects, this can’t work on crypto rails without some serious legal reform. In some US jurisdictions, digital contracts won’t stand: certain transactions, often real estate purchases, have to be signed in writing. In other words, in the United States, laws differ from state to state, especially in relation to transactions involving cryptocurrency,

For example, digital art platform Feral File asks artists to sign a physical contract before they even mint any NFTs on their behalf, and those NFTs come with the Sales Agreement and a statement of Artist and Collector rights. They’re running their operations firmly within existing norms of contract law for the arts sector, because otherwise, it’s uncharted territory.

While certain laws and regulations could be written into smart contracts, it’s a legal gray-area you don’t want to rely on to protect your art or property. The blockchain’s transaction record may be useful as evidence if a contract dispute escalates to a court case, but that’s about as far as the tech will go in relation to the existence of a contract and its enforceability at this point.

For all the talk of trustless infrastructure, “code is law”, and “disintermediation”, the NFT marketplace revolves around a handful of platforms running on T&Cs that may be changed at any time. Gayton asks if a platform’s smart contract says one thing and their T&Cs another, which of these is going to be treated as controlling by a court?

It is important for artists working on these platforms to understand what they’re getting into, which means reading over at least some of the T&Cs. When an artist uploads their work onto a platform, what are they giving away? What usage rights does the platform have over that image? Collectors need to do some due diligence as well. If the marketplace goes bankrupt and the server shuts down, will their NFTs still be able to display the art? If they sell it on another platform, will the artist see a cut of the sale? What on-chain and off-chain contracts govern that?


What is a royalty, really?

Under US copyright law the creator or rightsholder of a work can license the usage rights to that work to other parties. The payment that the rightsholder receives, proportional to the licensed work’s usage or earnings, is called royalties.

But since 2018, Gayton thinks the word “royalties” has been confused with “commission” with regard to secondary NFT sales.

“What’s really happening are commissions. People are getting paid a commission as a result of the sale. The royalty is not being paid to the copyright holder necessarily, especially on secondary sales. You can sell your Hermes Birkin bag, right, that you own personally. And as part of that sale , you can request a 20% commission from the entity selling your bag for you, and that is not the same as a royalty. If you want to support an artist who created the work, make sure that it is the artist that is being paid royalties. he current owner of an NFT is an example of someone being paid a commission upon sale. I don’t have any problem with that, but don’t mix up the rights that the artist has by virtue of having created the thing with somebody who’s reselling it. It’s not related to whether the current owners [of the NFT] are the creators of the work or have a copyright interest in the work. And this, I think, creates a lot of confusion for folks, especially collectors who are trying to support artists.”

Does web3 fix this?

Part of Gayton’s interest in web3 is that it brings up interesting new challenges and opportunities with regard to contracts, copyright, royalties, licensing, etc.

Despite their immutable provenance, blockchains have so far failed to address issues around copyright infringement and piracy. Just because a piece of information is recorded on-chain, that doesn’t necessarily mean it’s true; it’s another bit of due diligence that collectors have to carry out if they want to protect their collections. Fraudulent or copyright-infringing NFTs are still rife on general-purpose marketplaces like OpenSea; while more niche digital art marketplaces are free of this, it’s because of the staff running it and not the technology.

We’ve talked about some of the weaknesses of current web3 technology compared to the existing contract norms, but what issues are there with existing copyright? Gayton thinks web3 could solve some issues around this. When registering a visual work in the US, there’s only so much room on the form to list copyright claimants.

In a collective work, this could cause issues, where someone who contributed a small part to the work isn’t listed on the copyright, or contributors like them, aren’t included because of wariness around copyright issues. Beyond just digitizing the application, the financial and contract rails on web3 could make managing royalties for collectives simpler, more transparent, and more automatic.

The generative works that are popular on web3 also pose an interesting copyright issue. If a work is generated by an automated system, designed by the human artist(s), or modified over time, can that be copyrighted? A US court just ruled that AI-generated works can’t be copyrighted despite the level of input needed from a human artist.

As ever with web3 and the law, it’s a gray area that’s now subject to “regulation by enforcement”. New norms will have to emerge on a case-by-case basis, so it’s important that artists figure out what they want, what tools will help them get it, and how the tools they’re currently using are or are not serving them well.

In the US, the creator of a work is automatically recognized as its copyright holder as soon as they make a mark on the paper or the screen. But Gayton tells us that it’s hard to pursue a copyright infringement claim — e.g. in the case of a copyminted NFT — without having registered the work with the copyright office. Blockchain Art Directory’s Fanny Lakoubay wonders how many artists in web3 take the time to protect themselves with that. Art By City’s Slava Mushyakov mentions that they’re working this step into the flow for getting artists into their protocol. Whether they’re smart contracts or paper ones, web3 offers a chance to rethink the tools and processes artists have available to protect themselves and their works.

WAC Weekly is part of WAC Lab, a new program unleashing the full potential of Web3 for the arts and culture produced by We Are Museums in collaboration with TZ Connect and Blockchain Art Directory, and powered by the Tezos ecosystem.

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