First Mover Asia: NFTs Have a ‘Digital First Sale’ Problem

ALSO: Short interest is rising on China tokens while bitcoin treads water just above $23,000.

AccessTimeIconMar 1, 2023 at 1:08 a.m. UTC
Updated Mar 1, 2023 at 2:57 p.m. UTC
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Good morning. Here’s what’s happening:

Prices: Crypto is once again becoming the domain of short sellers.

Insights: Interpretations of copyright law around the principle of digital-first sales are stuck in the Napster era, and haven't caught up to blockchain.

Prices

1,088.86
−18.1 1.6%
$23,141
−313.6 1.3%
$1,607
−22.3 1.4%
S&P 500 daily close
3,970.15
−12.1 0.3%
Gold
$1,831
+14.4 0.8%
Treasury Yield 10 Years
3.92%
0.0
BTC/ETH prices per CoinDesk Indices; gold is COMEX spot price. Prices as of about 4 p.m. ET

China Tokens Lead Declines

As Asia opened for business on the first day of March a number of China tokens were squarely in the red.

Web3 ecosystem token Neo, which is part of China’s national Blockchain Service Network, is down approximately 8%. Conflux’s CFX token, which is unique as its token is used by China dapp developers, is down 12.5%. Filecoin’s FIL token declined 5.5%.

Short interest on these tokens continues to build, according to data from CoinGlass. NEO is split down the middle between long and shorts, at 50.26% and 49.74% respectively, while CFX has dipped into majority short territory at 52.71%. Filecoin’s FIL, for its part, is nearly even.

Meanwhile, bitcoin and ether are also beginning the day in the red. Bitcoin is opening the business day in Asia at $23,141, down 1.3% while ether is at $1,607, down 1.4%.

CoinGlass data shows a nearly even split between longs and shorts for bitcoin and ether.

Traders might be looking to initial jobless claim numbers, scheduled to be released Thursday, for guidance.

At the same time, there’s still a concern about a lack of market liquidity causing stakeholders to be worried about everything from price swings to delayed token launches.

All eyes will be on bitcoin to see if it can push back and maintain $25,000, or if we are going back to $20,000.

Asset Ticker Returns DACS Sector
Loopring LRC −4.5% Smart Contract Platform
Avalanche AVAX −4.3% Smart Contract Platform
Decentraland MANA −4.0% Entertainment

Insights

NFTs' 'Digital First Sale' Problem

Like many things in crypto, the law hasn’t caught up to the speed at which the industry moves.

That includes copyright law.

Based on a current but outdated reading of the law, the entire secondary market for non-fungible tokens (NFT) is illegal. And the original creators of the NFTs could – based on how the law is currently understood – invalidate the entire secondary market.

All because of something called the "first sale" doctrine and the current lack of a digital counterpart.

Why is there no digital counterpart? Because the courts’ understanding of technology is stuck in the Napster era.

The disc is yours, the IP mine

Do you have a Blu-Ray copy of "2001: A Space Odyssey"? Go ahead and sell it once you are done watching it. The disc is yours after all. But that same version downloaded from Amazon Prime’s store? You don’t own it. It’s not yours to sell.

This is the tricky world of the ‘first sale’doctrine, outlined in 17 U.S. Code § 109. The law holds that you can sell your property, even when it contains copyrighted intellectual property such as a Blu-Ray disc of a movie or even a painting.

But should that copyrighted material exist in digital form, such as a movie in file format, a video game from the Xbox Live Store or a monkey jpeg, this is where things get complicated – and illegal.

Why? Because courts think there’s no effective way to transfer a copyrighted digital file from one party to another while ensuring the original is deleted (therefore the file isn’t reproduced, rather than just transferred).

Writing in the Wake Forest University Journal of Business & Intellectual Property Law, Joshua Durham explores the intersection of NFTs and the principle of digital first sale, a legal framework that was heavily debated during the turn-of-the-century days of Napster but now is in need of an update.

Central to the debate over the digital Right of First Sale is the "exhaustibility" of files.

When you sell a Blu-Ray or a book to someone, they have the sole ability to enjoy it. But with computer files, there is no concept of ownership – you are simply given a license to use it – and courts haven’t gotten comfortable with confirming that a file is deleted on the first user’s computer. After all, files aren’t "exhaustible"; they can be copied an infinite amount of times. Or in crypto parlance, 'double-spent."

Durham highlights that the U.S. Copyright Office would not allow for a principle of “digital first sale” because it would have required a mechanism to ensure confirmation of the deletion of the sender’s copy or some form of automatic deletion.

This is why digitally purchased movies and games come wrapped in Digital Rights Management software that controls how you can use the file.

Around 2011, a firm called ReDigi tried to provide an online digital peer-to-peer marketplace that attempted to respect the first sale principle and take it into the digital era.

On ReDigi users would “forward and delete files.” There would never be two copies of the same file.

The courts didn’t like it, and found that it reproduced files and was thus an unauthorized reproduction, although the original was destroyed.

“Policymakers have concluded that since digital transmissions required reproducing a copy of a file (the work), digital transmissions infringed on the exclusive right of reproduction,” Durham writes. “A digital distribution of a reproduced copy was thus unlawfully made, and beyond the scope of the first sale doctrine.”

Double-spending and blockchain

But all of this seems a bit outdated for the blockchain era.

After all, blockchain’s key tenet is the prevention of double-spending. Or, to put it another way, you can’t reproduce a bitcoin or an NFT. Should you be able to do this then crypto wouldn’t have scarcity since it would be infinitely reproducible.

Double-spend attacks are a critical threat to blockchains and much is done to try and prevent them.

So for NFTs, there can’t ever be two of the same tokens. During a transfer of an NFT there’s no reproduction or transmission like there would be for ReDigi’s marketplace. There’s no infringement on the right of reproduction.

This is something that’s only possible with blockchain, before we were just sending copies of the file which wouldn’t qualify for protection under the first sale doctrine.

“Any unscrupulous NFT creator may invalidate all secondary sales of their NFTs through the outdated reading of § 109,” Durham writes.

After all, they didn’t authorize the sale. In a direct reading of the law, it would be similar to Apple going after someone selling copies of songs they have obtained from iTunes.

Of course, this isn’t going to happen. NFT creators expect, and almost always want, a lively secondary market.

But it’s a case of the law not catching up to the times. On one hand blockchain technology satisfies all the problems prior cases have identified with the nature of digital first sales. It’s just that there needs to be clarification from the courts, so there’s no monkey business.

Important events

CoinDesk TV

In case you missed it, here is the most recent episode of "First Mover" on CoinDesk TV:

Coinbase will suspend trading of Binance USD (BUSD) starting March 13 because the stablecoin doesn’t meet its listing standards, the U.S. cryptocurrency exchange announced in a tweet Monday. Lumida CEO and co-founder Ram Ahluwalia shared his reaction. Separately, Forbes reported that Binance moved $1.8 billion of collateral meant to back its customers' stablecoins to hedge funds last year. Forbes Director of Data and Analytics Javier Paz joined the conversation. And, bitcoin (BTC) continued its weekend encampment near $23,500. Options Insights founder Imran Lakha shared his crypto markets analysis.

Headlines

Proposed Bitcoin Vault Feature Could Thwart Malicious Hackers: The feature is still in draft form and would require a soft fork in order to be adopted into Bitcoin Core.

The Future of Crypto Markets Will Be Driven by Developments in the East: Crypto investors need to keep an eye on geopolitical shifts playing out on the regulatory landscape, specifically some upcoming changes in Asia.

Goldman Sachs Says It’s Open to Adding Staff to Digital Assets Team, Bloomberg: The investment bank’s tokenization platform was used by Hong Kong to sell digital bonds last week.

DeFi Trading Platform Aurox Seeking Funding at $75M Valuation: The DeFi-focused software developer firm is seeking to raise up to $1 million in a crowdfunding campaign on tZERO.

Dapper Labs Ruling Dunks on Private Networks: A landmark ruling is bringing the NBA Top Shots creator back to court, and potentially opening up securities concerns for other NFTs.

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