NFTs: A Legal Guide for Creators and Collectors

Non-fungible tokens (NFTs) have taken the world by storm, empowered a new generation of digital artists and turned many into millionaires and household names. Beyond allowing artists to monetize their work without expensive middlemen, NFTs hold the promise of unlocking radical new ways of expression, fan engagement and information dissemination.

As valuations for NFTs continue to climb and established rights owners enter the fray, intellectual property (IP) considerations will undoubtedly take center stage. Creators and collectors are going to inadvertently give up rights if they are not familiar with basic IP law. They can also get into serious trouble if they unintentionally violate the rights of others. Further, they need to read between the lines of the marketplaces on which they launch. We don't want to replace one traditional middleman with another blockchain middleman.

This article is intended to be a primer on some of the most important copyright considerations in the United States. It does not cover other equally relevant topics, such as trademarks and licensing considerations (including open-source and creative commons licensing), each of which warrant discussions of their own. 

The holder of a copyright has the exclusive right to copy, distribute, modify, publicly perform and publicly display the work. Unless specifically granted to someone else, these rights remain with the creator. 

When collectors purchase an NFT, they are usually getting the right to utilize the copyrighted work depicted by the NFT for personal consumption and the “pride of ownership” of the actual NFT. The collector generally does not expect to make commercial use of the image (other than to resell the NFT). Take music, for example. The actual rights to the copyrights to the song and recording belong to the copyright owner(s) (generally the artist and/or the record label). 

Depending on the marketplace, there may be additional terms attached. For example, Dapper Labs restricts the use of any purchased NBA Top Shots to “advertise, market or sell any third-party product or service.” Whereas, on its CryptoKitties platform, it specifically permits the commercial use of the purchased CryptoKitty up to $100,000 per year.

In the case of EulerBeats, a generative art platform, minters of an original NFT actually receive the exclusive right to commercialize their work, while purchasers of prints receive only the right to use, copy and display the original NFT for their own personal, non-commercial use. 

Creators face a different set of issues, including making sure they adequately protect themselves and don’t unintentionally violate IP laws that can get them in trouble.

Copyright protections kick into gear as soon as the work is “fixed in a tangible form of expression.” While registration is not required in the United States, it is necessary to bring a claim in court, to be eligible for statutory damages and recovery of attorney’s fees in successful litigation, and is generally good evidence of copyright ownership. Registration is also recommended if you have more than one creator. 

See also: State of Crypto: It’s Time to Talk About NFTs and Intellectual Property Law

It is important for creators to read the terms of the marketplace they’re working with, and to make sure their rights are reserved to avoid ambiguity at a later date. Most of these marketplaces require creators to grant a right to them, broadly speaking, to use, reproduce, modify, publish, display and distribute your “content” on a worldwide, non-exclusive and royalty-free basis. Normally, this is so these marketplaces can actually post the NFT on their platform for sale, use the creation as a marketing and advertising to promote their marketplace, and occasionally embed the creation within indexes for better user experience and ease of search. 

While most marketplaces limit the use to these purposes, some do not and even allow them to further sublicense these rights to third parties. This means that while creators largely retain their IP rights vis a vis the collectors of their NFT, they do specifically grant these rights to the marketplace on which they sell their art.  

Furthermore, moral rights protect a creator’s right to attribution and integrity. The right of attribution refers to the right to have a work published anonymously or pseudonymously. The right of integrity prevents intentional distortion, mutilation or other modification of a work that is likely to harm the creator’s reputation and prevents the destruction of any work of recognized stature. Moral rights generally apply to single works of visual art or those produced in limited editions of 200 or fewer and signed and numbered by the artist. 

See also: How NFTs Became Art, and Everything Became an NFT

Recently, a group minted a Banksy piece entitled “morons,” burned the original and sold the NFT for almost four times the original price. Banksy arguably would have a claim for copyright infringement for the commercialization of his or her work without consent. Had this been an original (rather one of 500 copies), Banksy would also have a claim for infringing on his or her moral rights. 

If you see unauthorized use of your creations or an infringement of your rights in someone else’s work, most platforms have a process under the Digital Millennium Copyright Act (usually found in their terms of service) where you can request the infringing content be removed. 

You can create anything your imagination can dream of, provided that it doesn’t infringe on the IP rights of another creator, contain illegal content and/or violate the content moderation rules of the platform you’re engaged with (including age-appropriate restrictions). Generally speaking, you can’t reproduce or create derivative works from someone else’s creation without the permission of the copyright owner. But there is one broad exception to this rule: fair use. 

Fair use is an American doctrine that allows for the use of copyrighted material without the permission of the copyright owner for certain limited, “fair” purposes. At a high level, this means you can use a copyrighted work for the purposes of commentary, criticism, news reporting, teaching, research and/or parody. 

See also: Burnt Banksy NFT Sells for $380K in ETH

In the NFT world, Beeple’s use of Homer and Bart Simpson or Buzz Lightyear can arguably be considered transformative works under the fair use doctrine because the artworks comment on the roles that such fictional characters play in popular culture and do not adversely impact the market for those property owners.  

We’re in the equivalent of what I like to call, the “recipe printing phase of the internet.”

As we advance beyond simply minting existing media onto the blockchain and harness the real power of Web 3.0, we’re quickly going to see NFTs transform the value of data as they interact with decentralized finance, and enable novel revenue sharing arrangements and new dimensions of engagement that we’ve yet to fathom. As NFT values continue to smash records (Beeple’s “Everydays: The First 5000 Days” sells for $69.3 million), and pieces change hands in vibrant secondary markets (CryptoPunk sells for $7.5 million), the IP rights of the creators behind these works are going to be more important than ever.

This article does not constitute legal advice.