Evaluating NFT Rights
Despite a growing number of articles from experts, NFTs and the rights they confer are still fairly misunderstood. This isn’t particularly surprising as they combine blockchain and copyright, two subjects that are fairly difficult to understand. Additionally, they form only one basis of NFT valuation as the underlying asset (typically digital art) requires its own valuation inquiry as well.
While I am not a digital art critic, as a copyright attorney, I can offer some insight into the different rights that can be transferred, and how, if all things are equal, some rights will (likely) be more valuable than others.
With murals in Williamsburg, it’s hard to argue that NFTs haven’t “landed” Photocredit: Scott Beale
Copyright consists of several bundled rights that exist with the owner of the right, such as the author or whoever has purchased the rights from the owner. This purchase can be through a transfer of rights after the work is created through a contract, or beforehand either by having the author complete the work as an employee or independent contractor.
These rights include the exclusive rights to display the work, reproduce the work, make derivatives based on the work, distribute copies of the work, and perform the work. For the sake of this article, we will assume that the underlying work that the NFT represents is digital art, however, tokenization of other assets is a hot topic and worth paying attention to in general (with a particularly good argument for putting mortgages and deeds on a blockchain).
If a right is exclusive, this means that the person owning the right is the only one who owns that right: if an artist transfers an exclusive right to display, then nobody, the artist included, can display the art without infringing on the copyright of the individual with the exclusive right to display. This applies for the rights in copyright in general, and is why an exclusive right is typically more valuable than a non-exclusive right.
Often, the most valuable right in copyright is the right to make derivatives. A derivative is a work that incorporates copyrightable elements of the original work and is not fair use. Derivatives are how G.I. Joe and He-Man went from being a toy to a television show, or how Captain America went from being a comic book to a movie. While this is a relatively large jump across mediums, a derivative can also be as simple as adding or changing something. For an example involving digital art, this could be changing the color scheme. Derivative rights are usually not involved in NFT sales (or at least not for the industry standards, i.e. those issued by the NBA).
When a consumer purchases an NFT, often what they are buying is a non-exclusive license to display a work of digital art that is held on a central server. This can operate as a social media “flex” by having a high-profile work of digital art that the NFT owner can demonstrate is theirs to display, such as using it as a Twitter avatar with a link to their blockchain wallet in the description.
This is not always the case as all of the rights to the NFT can be transferred, however, this is what is typically purchased. There also isn’t much of a well-established “standard,” however, as NFT smart contracts can vary as much as their analog written contract counterparts, such as conferring more or fewer rights.
An example of fewer rights would be NBA Top Shot NFTs: the terms on the website clearly state that they can only be used for non-commercial purposes, limiting the NFT use even more than the unqualified, non-exclusive license to display that is often granted. The artist can also code into the NFT a royalty payment for subsequent sales, keeping a portion of whatever future sales of the NFT are made and affecting the resale value.
In addition, things can happen after purchase to diminish an NFTs value outside of usual crypto market fluctuations. For example, if an NFT holder has only a non-exclusive right, additional NFTs could be minted, include the same non-exclusive right, and not infringe on the first NFT holder’s right.
Similarly, artists need to police their copyright and trademark or risk losing value, which could include more infringement on the underlying art of the NFT. This includes actions like web scraping searches, sending cease and desist letters for copyright and trademark infringement, and following up with DMCA takedown requests and/or lawsuits if need be. While responsible artists with a brand to protect should take this duty seriously, having it backed up in writing is always a good policy. Although an NFT’s value will be affected by infringement, the NFT owner typically does not have the authority to police said infringement, and could face liability if they wrongfully attempt to do so.
With trademark, there are additional concerns: trademark owners have a duty to police their trademark, not only for infringement, but also for quality of use when the trademark is licensed. Should a trademark owner fail to do this, they may be barred from infringement claims in the future, weakening or altogether destroying their trademark and brand, undermining the value of the NFT.
When an NFT is purchased, a good thing to consider is that an NFT is similar in concept to a digital contract: a contract can bestow a broad variety of rights, and it’s important to understand what this particular contract is granting if you’re involved on either end of the deal. While the topic of evaluating art is a very complex one and exclusive rights to one piece of art will be less valuable than non-exclusive rights to another depending on the reputation of the art, artist, and other factors, an essential step in any NFT evaluation is understanding what rights are granted with purchase.
For the aforementioned reasons, if you’re going to shell out 6 figures for an NFT, you may want to consider investing 3 figures in scheduling a consultation with a knowledgeable attorney or other expert to explain the contract, Terms of Use, or whatever is used to define the rights of this rapidly-evolving asset class. While we are venturing into a new area of the application of the law to blockchain, at least until Congress, the courts, and agencies figure it out, the new players will still be governed by the same old rules.