NFTs Are Still in Development
Tim Berners-Lee’s original source for the WWW is being auctioned by Sotheby's as NFT. At an opening bid of $1,000 how cool is it to have bid on history? But NFTs still raise a lot of questions on the meaning of NFT ownership and the rights they entail.
I am a lazy person by nature; there’s just no point denying that. But when my high school track coach announced that we were having a day off from practice, I made my PR and got home in record time which more than made up for a practice-free afternoon. I did take the bus, but that’s details, details, details…
Once at home, I scanned the living room. Seeing nothing special without hesitation I was already one foot into my bedroom. And there it was. Sitting in my bedroom was a box from UPS. But not just any box. I knew what was inside. More boxes.
I am not going to torture my readers anymore. The box was a delivery containing my Campagnolo Super Record Gruppo. My sweat-infused hands were trembling as I took out the first box, which was the crankset. Now I am a crankset guy — have always been and always will be. That was also the biggest box in the gruppo. The two crankarms, and the chainrings nestled in the custom molded velvet that would have been worthy to inter royalty.
Later that night I slept with my gruppo in bed. I was not worthy. So, I did it again the next night. And the following. The dream-filled nights continued. Until a few days later when another box arrived. I don’t think anyone has been this excited since Prometheus accidently discovered the art of making fire.
Inside the box was a beautiful Colnago frameset with a special limited edition candy apple red paint job. I had a hard time sleeping that night as I would be building my new bike by assembling the Campy parts onto beautiful Colnago.
A- Well, the same Colnago bike company is offering one special edition “C64 NFT” which combines all 67 years of historic Colnago moments into a unique NTF bike. This is going to be Colnago’s grand piece de resistance. No one dares to even fathom what the eventual price this unique gem will eventually settle for.
B- Well, the same Colnago bike company has unveiled what it calls a ‘one-of-a-kind’ opportunity to buy a special edition ‘C64 NFT’, a unique digital render of the brand’s popular C64 carbon fibre bike in a one-off design that celebrates the brand’s historically significant models.
Did anyone stop foaming to catch what this NFT really represents? It’s NOT a physical bike. It is just a rendering. In fact, it is not even a physical design, like geometry, frame angles, tubing material, specifications, etc. So, with a design, at least you can go a frame builder who can source out the materials, and framebuilders and actually build it. This NFT is not even that. It’s simply a digital rendition
What you do get is the bragging rights of owning one of the most exclusive “bikes” ever conceived, and I stress bike in quotes!
Have NFTs reached the crazy era yet?
I have a passion for things on two wheels or four legs, and I have to admit that this Colnago NFT is special, but only because I can’t imagine the hernias people will get when they find out how much one actually paid for mere bragging rights. Have we become that vain?
Yes, we have and there it will be interesting to see what the winning price of the “special one off” will eventually settle at. Maybe I just don’t get it. I can see Lee-Berner’s ground breaking code, or Neil Armstrong’s footprint on the lunar soil but this is really pushing it.
What the Colnago offering demonstrates is that the market is pushing the envelope for innovative concepts of what can be represented and monetized by NFTs. Not all will work out as good investments or even be ever sold. But that is progress isn’t it — two pedals forward and one back. And still the details of what an NFT buys is still not completely defined.
What is better understood is that NFT can represent both tangible and intangible assets. Real estate, a concert ticket are examples of tangible assets. But what about digital art? Maybe I can’t touch it but at least I can see it. No worries as tangibility is not an issue, although more complex issues related to copyrights, licensing, and transferability still are not clear.
What do you own when you buy an NFT?
When you buy an NFT, you hold the right to claim ownership of the NFT itself and the right to exclude others from claiming ownership of the NFT. Beyond that, it will depend on whatever terms govern the NFT, which has to be clearly stipulated in the NFT’s smartcontract.
This is an area that I think NFTs will need further development as it is not easy to deciper what is written in the smartcontract. All smartcontracts will have metadata to which is attached the terms and conditions as well as the licensing agreement to which this smartcontract is bound to.
That means anyone with legal trading or even a brilliant self-taught attorney like Lincoln should be able to wade through the legalese of the smartcontract. But not quite, because there is also software code that is related to events which can cause triggers. An example is that in the event that the NFT is sold, a portion of the resale proceeds will be sent to the original author. Was this mentioned in the licensing terms? It should have, but who or what enforces that the code will be consistent with the licensing term? They may not be, either as a coding mistake, or something more nefarious.
Unless explicitly stated otherwise, ownership of an NFT does not entitle you to ownership of the digital asset, the underlying artwork, or anything else for all that matter. As discussed below, ownership of an NFT also does not, by default, grant you any rights to the intellectual property of the underlying asset.
Who is the Author?
In the simple and most cases, that is where an individual independently creates a piece of digital artwork or music, the said individual is the author. But there are scenarios where the works are created throug
If you are talking about an individual who independently creates a piece of digital artwork or music, the answer is straightforward: the individual is the author. contributions of multiple people, works created by employees or commissioned artists. Those issues are cleared by legal prior contractual obligations.
But what about works that are created by artificial intelligence? For an example there are software that can convert a photograph into using pixelated images. Who is the author? The person who fed the original image into the software? Maybe it’s the owner of the original photograph. Or maybe the terms of the software states that they become the owner.
The answer quickly becomes less simple when dealing with other scenarios, such as works created through the contributions of multiple people, works created by employees or commissioned artists, works derived from other works, and works created with the assistance of artificial intelligence or other technology developed by others. These are some of the thorny issues we have had to sort through with our clients.
A key point to keep in mind is that the author remains the author forever. The copyright owner may change, but the author is always the author. This is important because certain rights, like the right to terminate copyright transfers after a certain length of time, and moral rights, belong to the author and cannot be waived.
Who owns the Copyrights?
Copyrights are the crown jewels of intellectual property (IP) ownership. Its protection is granted to the creators of original works of authorship such as literary works (including computer programs, tables and compilations including computer databases which may be expressed in words, codes, and schemes or in any other form, including a machine readable medium), dramatic, musical and artistic works, cinematographic films and sound recordings.
Copyright law protects expressions of ideas rather than the ideas themselves and is conferred on literary works, dramatic works, musical works, artistic works, cinematograph films and sound recording. For example, books, computer programs are protected which would cover Lee-Berners code and the NFT in question.
The quick answer is the author initially owns the copyright in their work unless and until they transfer ownership of the copyright to someone else. So, unless the NFT includes a transfer of copyright in the underlying asset-which is not the case by default, then the author, not the NFT holder, owns the copyright. Some implications of this are discussed below.
A point of clarification: as a general matter, the NFT itself will likely not be protected by copyright. NFTs typically comprise a ledger or record of ownership and a link to an underlying asset. I am skeptical that this data suffices to constitute an “original work of authorship” to qualify for copyright protection. That said, so-called “on chain” assets-NFTs that embed the underlying asset itself-may qualify.
This means that the NFT does not protect itself, including the NFT’s smartcontract from enjoying copyright protection? That means, ironically, that the code in a smartcontract, can be copied, whether or not (probably not) the subsequent NFT’s have any legal bearing to the ownership that the first NFT had. What it means is that the smartcontract for an NFT covering a Van Gogh painting, can be copied and reused for another piece of artwork. This is actually good which it means that there is movement towards standardization. It’s part of development and maturation.
Can Copyrights be Transferred
The author is free to transfer ownership of the copyright, but to do so, the transfer must be in writing and signed by the copyright owner. Until that happens, the author retains the copyright. The same rules apply to subsequent copyright owners. How to implement copyright’s “signed writing” requirement in the context of the blockchain — with digital wallets and absolute anonymity — is a wonderful question.
The copyright owner is free to transfer their entire copyright in a work to an NFT holder. The scenario we expect to see more frequently, however, is for the copyright owner to grant the NFT owner a license to make certain uses of the work. Copyright is often described as a bundle of “exclusive rights” that the copyright owner is free to break up and grant to others as they please. There is nothing preventing a copyright owner from exercising that power through the mechanism of an NFT. Likewise, an NFT issuer may wish to restrict certain uses — for example, prohibiting unsavory uses for brand protection.
This license is viewable in the smartcontract. For example, the NBA Top Shop license grants the owner of a “moment” a non-exclusive license “to use, copy, and display” the moment solely for “personal, non-commercial use,” “as part of a marketplace,” or “as part of a third-party website or application that permits the inclusion” of the moment. On the other hand, the CryptoKitties license allows NFT owners to make commercial use of their kitties as long as the use does not result in earning more than $100,000 in gross revenue each year.
Viewing the NFT Smartcontract
I don’t think many NFT holders have ever viewed the NFT smartcontract. It is not difficult to do as ALL NFTs will have a contract address which is immuatable along wth the contents of the smartcontract which resides in the address. If you do own an NFT, I would encourage you, as an interesting exercise, to examine and walk through the NFT’s smartcontract. Similarly you can go through the exercise of examining smartcontracts listed in the OpenSea marketplace. Below is an example.
Other IP and legal issues raised by NFTs?
NFT development is running at breakneck speeds. Here are other issues that I envision that will be raised — in no particular order:
- What rights and remedies does an author/creator have if their work is tokenized without their permission?
- What are implications of the unauthorized tokenization of trademarked goods and services?
- In case of violation of license terms and contractual restrictions surrounding an NFT, what legal remedies or reliefs will be available?
- Does a licensee of an existing work need to go back to the licensor to acquire additional or different rights to create an NFT in connection with the work, or does the existing license cover the use?
- How do you design NFT projects to comply with existing laws and regulations, such as auction laws, tax laws, securities regulations, anti-money laundering statutes?
- What rights and remedies does an NFT owner have, and against whom, if the underlying asset disappears or changes?
My company, QuantDART, is a crypto investment company. One of financial products is a Shari’ah compliant product which means that investment decisions be made in accordance with Islamic principles. Examples of these principles to be in Shari’ah compliance would be not to invest in riba (interest-based products), vices such as pornography, gaming (gambling), alcohol, pork and pork products.
We work closely with a Shari’a advisory firm, which provides Islamic guidance and scholarly analysis in order to certify that our processes, activities, and holdings meet Shari’ah compliance such that our financial products are suitable for market.
The area of Digital art NFTs opened up intense discussion between the advisory firm and myself. While they mentioned that NFTs by nature can be Halal, if they meet certain requirements, such as not being offensive, the nascent nature of NFTs caused some disagreements on the process of certifying compliance.
While in debates with the firm on to proceed with Halal NFTs, it forced me to analyze further what NFT ownership really entails. In fact, we are learning and deepening our knowledge and understanding of NFTs, not just in respect to the Halal market but also in general, so in that sense I know that we are part of that development process.
If the NFT is going to mature into a bona fide business instead of a fad, the legal framework and issues will have to be thoroughly vetted. The courts will have to eventually rule and decide on how existing laws will be interpreted should conflicts arise as NFT development is pushing the envelope of both technology and the edges of lunacy, such as the Colnago “bike”, or the first deleted ever deleted tweet? Which raises the question: what if Jack Dorsey were to delete his first ever tweet which was recently auctioned off as an NFT? Can he even do legally do that now?
Separately, copyright and licensing standards, along with smartcontract models need to established in order to make it easier to fully discern what the NFT includes in and excludes in the ownership.
While these aspects of automation and immutability give rise to the underlying power of smart contracts, they also pose a very real challenge to smart contract adoption: non-technical parties engaged in a business deal using a smart contract must rely on a trusted third-party to read, verify, and validate the contract’s legal and programmatic correctness. This is a very large departure from traditional contracts that are human-readable even without a lawyer’s help.
Without a programmer’s oversight, how can someone agreeing to a smart contract be sure that the underlying code accurately reflects the agreement being entered into? Because smart contracts are computer programs, they require specialized programmatic knowledge to understand their codified logic, so careful and trusted analysis of the underlying code is pivotal to securing a contract’s safety for all participants.
Is this merely shifting the onerous of previous third-party trusts and legal services to technical smartcontract experts? The NFT marketplaces, like OpenSea, should take the lead since this will benefits its users.
In the meantime, the NFT market will spur and unlock creative spirit in many areas, and I look forward to seeing the fruit of these development. If you really like the underlying content, then by all means, acquire it, enjoy it, and take pride in ownership. As in investment, I would advise caution to the wind. And read the smartcontract.