This is the second part of our two-part article on NFTs, which attempts to demystify some of the intellectual property issues surrounding NFTs. If you have a basic understanding of what NFTs are and how they work, please do read on. If, however, you don’t, or you would just like a refresher on the basics, please read the first part here.
 
What rights do I get when I buy an NFT?
 
With the recent hype around NFTs and the allure of a potentially lucrative investment, a multitude of people ranging from tech geeks to rappers have flocked to purchase NFTs of their own. However, many don’t stop to think: “What exactly do I own when I buy an NFT?” There seems to be a common misconception, especially on social media, that NFTs equate to the underlying asset they represent, and that buying an NFT is the same as buying the underlying asset. Hence, an important distinction must be made – NFTs and the asset it represents are distinct and separate from one another. When you buy an NFT, you are buying the right to claim ownership of the token itself, i.e. a record of ownership of the unique rights the token represents, and the right to exclude others from claiming ownership of the token. Beyond that, it would depend on the terms governing the NFT.
 
What this means is, absent terms stating otherwise, buying an NFT does not necessarily equate to the purchase of the asset or the intellectual property (“IP”) rights in the underlying asset itself – remember, you are only purchasing a digital token which gives recognition that its owner has a right to do something; it can represent exclusive ownership or access rights to the underlying asset, but it doesn’t have to and often does not. It is thus important for would-be purchasers of NFTs to distinguish the types of rights granted with the NFT acquired.
 
In the context of an NFT marketplace where tokens are linked to sales of digital content, buying an NFT usually only gives you ownership of a specific copy or version of the work that the NFT represents. In the context of a video clip, for example, the owner of the NFT representing the video clip may have the right to download it or stream it but will not necessarily have the right to the original video clip itself. It is a common misconception that buying an NFT automatically gives the buyer a proprietary right to every copy or version of the underlying asset.
 
As discussed below, ownership of an NFT also does not, by default, grant you any rights to the IP of the underlying asset. Given that the hype surrounding NFTs lately seems to be in relation to art trading, we will be focusing our discussion below on copyright ownership.
 
Who owns the copyright in the NFT?
 
A point of clarification: copyright ownership in the NFT itself rarely comes up as an issue since in the context of selling an NFT in connection with related content, we are mostly interested in the IP rights in the content and not its cryptographic receipt. But because we are copyright nerds, let’s attempt a rudimentary analysis anyways.
 
An NFT does not manifest as a digital file. Rather, it is an entry in a ledger linked to an underlying asset or access rights that gets added to the blockchain and which becomes part of the records of cryptographic hash strung onto previous records, thus creating a chain of identifiable data blocks. This, in our view, is unlikely to cross the originality threshold and constitute an original work of authorship to qualify for copyright protection although an interesting argument might arise as to whether it qualifies if the data embeds something “original” like the underlying asset itself.
 
But when someone “mints” an NFT, the process also involves an underlying smart contract code that governs the qualities of the NFT which are added to the relevant blockchain on which the NFT is managed. A smart contract is a piece of software that is processed by a distributed ledger and as with any other software, it is protectable by copyright (so as a cautionary note to anyone who uses an existing smart contract code, check the licence terms even if it is open source).
 
Who owns the copyright in the underlying work of an NFT?
 
Now that we’ve discussed the issues on copyright ownership in what is essentially just a cryptographic receipt, let’s deal with more important things like IP rights in the underlying work itself.
 
Taking a step back, it is important to bear in mind that “copyright” is actually a bundle of multiple exclusive rights, typically including (i) the right to reproduce the work; (ii) the right to distribute copies of the work; and (iii) the right to communicate the work to the public. The author of the work is usually the owner of the copyright in a piece of work, meaning they own all these rights and nobody else can carry out those acts unless permission of the copyright owner is obtained. Only the copyright owner has the right to create and sell copies of the original work.
 
Hence, when you purchase an NFT representing a piece of copyrightable work, or when you purchase a copy of any copyrightable work at all, you do not necessarily purchase ownership to the copyright of the work. For example, if you were to buy a painting from an artist at an auction, you own that specific physical copy of the painting and would be able to sell that copy of that painting to someone else later on, or display it in your home, but you would not be permitted to print the painting onto shirts and sell those shirts online, as this would infringe the artist’s copyright. Therefore, when you purchase an NFT of an artwork, you are merely purchasing ownership rights to that unique token, which in most cases would grant you ownership of a specific copy of the artwork. Absent terms stating otherwise, the original artist still retains the copyright in the underlying artwork (including the exclusive right to reproduce the artwork and to distribute copies of the artwork).
 
Of course, the creator of the work can choose to transfer the copyright in their work with every purchase of the NFT, but this would have to be expressly set out in writing to prevent any issues of uncertainty of rights. Alternatively, the author can opt to transfer certain rights associated with the copyright, as opposed to the entire copyright, or grant only a licence to the purchaser to use the work. Whilst such transfer/licensing of rights are typically done by way of a written and signed agreement, the creator of an NFT can opt to include the agreement in the metadata of the NFT, thus linking it to the NFT, and make it available for all to see.
 
There is therefore a danger of misleading advertising when it comes to NFTs, as it is not immediately clear what exactly a purchaser gets when purchasing an NFT. For example, a newcomer to the NFT market may equate the NFT to the art itself and thus be thoroughly disappointed to find that their purchase of the NFT doesn’t come with a physical printout of the art or even a digital file containing the art in high-resolution, let alone the right to use it. Sellers, and to an extent the NFT marketplaces, thus have the responsibility of ensuring that every potential purchaser knows exactly what they are buying, or risk adverse legal consequences.
 
Conclusion
 
Hence, potential buyers and owners of NFTs should take steps to ensure that they are fully aware of what exactly their NFT represents. Sellers and NFT marketplaces should also provide information relating to the NFT (including what rights it represents) in an easy to access location (e.g. on the page displaying the NFT). As the underlying technology which forms the basis of NFTs evolves, NFTs will gradually become more mainstream and drastically change the way we represent ownership of assets. Whilst the current hype surrounding NFTs is centred on their use to represent ownership of digital art in NFT marketplaces, soon enough, even important documents such as house deeds may be replaced by NFTs, and homeowners may soon find that proof of ownership for their house will be found on the blockchain rather than in a drawer of their bedroom.
 
There is no doubt that disputes over NFTs will eventually make their way to the courtrooms. Whilst we are copyright nerds by night, we are lawyers by day, and thus gleefully look forward to judicial pronouncements that could shed light on some legal perspectives of this developing area.
 
Article by Natalie Lim (Partner) and Cheam Tat Sean (Associate) of the Intellectual Property Practice of Skrine.