Context
This is my comment on the study on “Intellectual Property Rights and Distributed Ledger Technology with a focus on art NFTs and tokenised art”, commissioned by the European Parliament’s Policy Department for Citizens’ Rights and Constitutional Affairs at the request of the JURI Committee. The whole analysis is important, it should be widely distributed, I recommend to read it with great care. The study is well written, very informative and a good introduction to the field, which is the goal of this study. Legal issues of the current NFT markets are addressed and analysed in detail with a clear structure and focus.
Dr. Katharina Garbers-von Boehm, Helena Haag, Katharina Gruber: Intellectual Property Rights and Distributed Ledger Technology with a focus on art NFTs and tokenised art, Policy Department for Citizens’ Rights and Constitutional Affairs Directorate-General for Internal Policies, PE 737.709 – October 2022
https://www.europarl.europa.eu/thinktank/en/document/IPOL_STU(2022)737709
This study, commissioned by the European Parliament’s Policy Department for Citizens’ Rights and Constitutional Affairs at the request of the JURI Committee, aims to provide an overview over Intellectual Property Rights and Distributed Ledger Technology with a focus on IP issues relating to art NFTs and tokenized physical art works.
1) Royalties
However, some of the statements regarding resale royalties I would consider as inaccurate and even problematic. Let me give some examples:
“NFTs/smart contracts bring about the opportunity to fully automate resale royalties for secondary sales.” (IP rights and DLT, 7)
“Another common function that can be stipulated by the creator of the smart contract is that resale royalties are paid automatically to the author of the digital work each time the NFT is resold.” (IP rights and DLT, 14)
“Furthermore, the smart contract can be programmed in such a way that the creator of the NFT automatically participates with a certain percentage in the resale amount in the event of a resale.” (IP rights and DLT, 39)
“Most smart contracts provide for automated “royalty payment” to the creator of the NFT for any future sale of the NFT. In most cases, thus, a resale royalty payment based on copyright law is economically not necessary.” (IP rights and DLT, 39)
“The application of the resale right to the sale of NFTs is ultimately unnecessary, as stated above. Every author can ensure a percentage participation in the resale proceeds of an NFT by programming the smart contract accordingly and thus initiate a kind of resale right – in comparison to the legal regulation – in any amount and without possible difficulties in enforcement.” (IP rights and DLT, 40)
It is a common misconception in the sector that only with the right smart contract implementation creators can easily receive automated payments of royalties to their wallets when NFTs are being resold. If I see this correctly, no references are provided that would support these assumptions. Only one source is cited in the footnotes, and this particular reference leads to a marketing website, run by the Ethereum Foundation.
The problem with these statements is not only that they are not accurate in technical regards. In the public discourse, the benefits of NFTs are frequently promoted by parties which have a financial interest in the adoption of NFTs. Promising automated payments of royalties for secondary token sales is an easy way to get the attention and benevolence of creators and rightsholders. In my experience, these false claims may eventually result in incorrect expectations and a willingness to use or invest in the technology, which could result in a large loss of resources such as time, money, and trust.
Automated payments
Although there are some initiatives to tackle the issue, automated royalty distribution built-in to ERC721 or ERC-1155 smart contracts is currently not technically feasible and factually not implemented in smart contracts on major NFT blockchains, like Ethereum or Polygon. The Ethereum improvement proposal EIP-2981 on a future “NFT Royalty Standard” allows creators and rightsholders to “signal a royalty amount to be paid to the NFT creator or rights holder every time the NFT is sold or re-sold. This is intended for NFT marketplaces that want to support the ongoing funding of artists and other NFT creators.” (EIP-2981: NFT Royalty Standard, https://eips.ethereum.org/EIPS/eip-2981)
Including the royalty rate into the smart contract is for mere information purposes. The EIP explicitly desincourages to implement a custom transferFrom()–function, which would require the royalties to be paid on every transfer. “The royalty payment must be voluntary, as transfer mechanisms such as transferFrom() include NFT transfers between wallets, and executing them does not always imply a sale occurred.” A buyer could transfer an NFT between his own wallets, which might not be considered a resale that should trigger royalty payments to the respective creator wallet.
In my opinion, it would be important to make it very clear that what is called “royalties” are currently mostly voluntary payments by the platforms that facilitate the resale transaction. Payments to creators depend on the willingness of the platforms to transfer a fraction of the resale price to a wallet address communicated to them by the original minter in the smart contract or NFT metadata file.
It is worth noting, that only recently Magic Eden, the largest NFT marketplace on the Solana blockchain, triggered a controversial debate about NFT resale royalties when it announced that it would no longer pay these to creators.
Here are a few selected links to the ongoing debate on NFT royalty payments for secondary sales:
https://decrypt.co/112110/magic-eden-flip-flops-on-solana-nft-royalties-making-them-optional
https://finance.yahoo.com/finance/news/magic-eden-ceo-royalties-enforcing-211130542.html
https://www.youtube.com/watch?v=3oxBeA7TNSI
P2p transactions
It should also be noted that NFTs can be sold and transferred peer-to-peer, i.e. directly from seller to buyer without necessarily using centralised marketplaces. For such direct transactions it is more than questionable whether the amount specified by the original minter in the smart contract or NFT metadata file is even taken into account and transferred to the specified address. NFT metadata are not easy to locate and interpret for technical laymen, as the study correctly describes.
Property and copyright law
I would support the interpretation that (re)selling an NFT is not about selling and buying the creative work, although this often seems to be the perception and expectation of the general public. It is certainly not about the transfer of IP rights for the creative work from seller to buyer, which is much less discussed in the public discourse. As a consequence, “the actual resale of an NFT is generally not an act of use relevant to copyright.” (IP rights and DLT, 40)
A (re)sale of an NFT is about change of control over a token. And one could say that the creative work is a representation of this token. The creative work is only a publicly visible signifier of an intangible and imperceptible cryptographic asset – the NFT –, which a token holder may possess but depending on the legislation in many cases probably doesn’t “own” in a legal sense.
The owner of a token is strictly speaking only a holder or controller of the token. So can this control over a token be called ownership, considering the fact that a holder would loose this ownership when he factually and cryptographically loses control of the token, e.g. by losing his private key? Or wouldn’t it be much more accurate to call the control over a token a possession, which lasts only as long as the holder has the power of disposal over the token, has access to the key material of his wallet, or as long as the token is not assigned and transferred to a third party by means of a digital signature. Possession is defined in the German Civil Code (BGB) as actual control of a thing (“tatsächliche Sachherrschaft”), which is acquired through “actual domination over a thing” (“tatsächliche Gewalt über eine Sache”). The relevant question to be answered from the legal community and policymakers is whether to consider control over an NFT ownership or possession, or whether the NFT is subject to property law at all.
Conclusion
When the NFT sector talks about royalties, these payments are in fact voluntary payments of “creator fees” by the resale platforms or buyers after the transfer of control over a token. So, while it is certainly helpful and relevant to distinguish the technical domain of tokenisation on the one hand from the domain of creative works on the other, distinguish property law on the one hand from copyright law on the other, the current discussion about “royalties” again creates a blur, confusion and false expectations of how both are intertwined. NFTs are considered as an innovation of the creator economy, while in fact they are a specific variant or model of the token economy. Creators expect or even demand royalty payments (indeed a creator fee), while they actually provide no hint or means to even remotely apply licenses or copyright law to the NFTs. This brings me to the second point.
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2) Copyright violations
Copy & upload
In the summary of the study it says:
“Despite the finding that, if someone tokenises a digital work that was created by someone else, copyright infringement will not be established for the tokenisation itself if an “off-chain” minting is concerned, in most cases the creation of the source which precedes the actual minting, will constitute a reproduction. In addition, the online display of the work as a token, even in thumbnail form, may constitute a copyright infringement, if the author did not give its prior consent. Therefore, as a conclusion, NFTs minted without the consent of the author of the underlying work, as a general rule, are violating the author’s copyright, if the underlying falls under copyright law.” (P rights and DLT, 8)
If I read correctly, the study comes to the conclusion that one can speak of copyright infringement in the context of NFT minting under two conditions:
- when the creative work is being copied;
- when it is made available to the public;
both without consent or authorisation of the original creator or current rightsholder.
I think that it is necessary to distinguish two cases:
- when an NFT is minted for the first time; and
- when an NFT is minted for the second time;
both without consent or authorisation of the original creator or current rightsholder.
In the process of minting an NFT for the first time, the creative work is usually uploaded to the minting platform, which again usually copies and uploads the content to a persistent data storage, like IPFS. The creative work could also be directly uploaded to IPFS or another proprietary hosting server by the original minter. In most cases, the creative work is made available to the public by the original minter without any constraints, digital restrictions or access management. The current NFT market doesn’t consider the creative work as the rare collectible, but the NFT – which proves the point of the study. As with fungible tokens, the value of the NFT is generated by the limitation of the total quantity of digital tokens. On the perceptual level of the creative work, on the other hand, the scarcity of the token is reflected to by the fact that the creative work is ubiquitous. The cryptoart of the 21st century is meant to be seen and shared. Its value is generated precisely by making the creative work available to the public – on platforms, in digital and physical museums and galleries, etc. With the token on the blockchain, its holder acquires “bragging rights”, so to speak, and the more publicly and prominently the artwork is seen, the more exclusive and valuable is the control of the corresponding token.
Regarding the first case – an NFT is minted for the first time –, I believe that the study comes to the right conclusion: A rights protected work is copied and made available to the public by the original minter. Uploading the creative work to a minting platform, IPFS or any other hosting server, thus making it available to the public, without consent or authorisation of the creator or rightsholder can be considered as copyright infringement, as I understand.
But regarding the second case – an NFT is minted for the second time –, I think that one has to come to a different conclusion: once a creative work is published and openly accessible on IPFS or any other hosting server, with many smart contracts anyone can re-mint an NFT without any copyright infringement, without illegally copying the creative work or illegally making it available to the public.
As the pointer to the creative provided in the NFT metadata is simply a content-derived hash of the creative work, any re-minter could simply provide the same hash (the IPFS-URI, or CID) or the URL to a hosting server of the original creative work to the metadata of the new mint without having to copy the media file or making it available to the public again. During this process of re-minting, one creative work serves as referent (or signifier) of multiple NFTs. One could say that the so-called “right-click-re-minting” does not require a right-click. The new token simply refers to the exact same creative work that that already references (or signifies) another token.
Of course it depends on how the smart contract is designed, but in the decentralised web3 usually a pseudonymous third party can re-mint an NFT into a smart contract without any credentials, authentication or need for authorisation. Unless the smart contract includes white- of black-list of certain wallet addresses, smart contracts are open for transactions from third parties. Above, anyone can re-mint an NFT by using an existing CID, without copying, uploading or otherwise touching the original creative work!
The legal interpretation and focus of the study on the digital copy of the creative work and on making it available to the public as criteria for copyright infringement may be correct from a strictly legal perspective. But in my opinion it bears the consequence that re-minting a token with reference to the same creative work does not constitute a copyright infringement as long as a work is not copied or made available to the public by the re-minter. And if this analysis is correct, it should be clearly statet in the study.
NFT licensing terms
“Also it is important to understand that the buyer of an NFT, identical to the purchase of an artwork in the real world, as a principle, does not acquire any copyright in the tokenised work on which the NFT is based, and will not be entitled to use the underlying work in any way other than the free uses/limitations to copyright law that are currently in place, without the permission of the copyright holders and without paying royalties.” ( IP rights and DLT, 47.)
It is interesting to observe how persistently NFTs are considered to be “all about crypto art” or a “booster of the creator economy”, when in fact NFTs are rooted in a token economy that utilises art as visual representations for intangible, non-fungible assets. In most cases, buyers of NFTs do not acquire any rights to use the creative works, because that is not how it is intended to be. The explanation for the absense of any kind of awareness of copyright in the NFT space can be explained by the lack of legal knowledge among the creators of the NFT standards and their metadata. They simply didn’t consider copyright law while designing the standards. One could even say, they didn’t even consider art, but only “virtual collectables — unique pictures of kittens, collectable cards. […] No two kittens are alike.” Even basic metadata for NFTs are considered as optional, the EIP 721 suggests to provide a “name”, a “description” and a link to the “image”. Despite the emergence of a multi-billion USD global NFT market, it seems that nothing has changed or improved since early 2018.
Nothing would prevent creators or rightsholders to include a link to the license in the NFT metadata. This would be a simple enhancement of the current status quo and easy to implement, with huge benefits for the entire market. But the NFT sector seems intentionally reluctant to take any responsibility for the creative works or embrace any copyright regulation. In my opinion it would be extremely valuable to analyse from a legal perspective how the current, rather intransparent and confusing situation could improve significantly for original minters, buyers and potential (re)sellers of NFTs, when creators or rightsholder clearly expressed under what terms and conditions the creative work that represents the token is made available to the public.
Metadata binding
I would see three options to bind licenses, rights management information or any other sort of metadata to the NFT.
1. License pointer
The simple solution would be to provide a pointer to a license document in the NFT metadata. This would mean that anyone with access to the NFT, the smart contract-ID and token-ID in particular, would be able to resolve the license document via the NFT metadata. The downside is that the license is only discoverable when the smart contract-ID and token-ID are known to a buyer. When the creative work is disconnected from the original metadata or when the platform facilitating the token (re)sale does not present the link in the course of the transaction the license will not easily be discoverable.
2. CBE – can’t be evil
The second solution has been suggested by a16z. The US-based investment firm has developed the “can’t-be-evil” (CBE) licensing templates and provided a number of six license documents, which are inspired by creative commons-licensing templates, to be used by the NFT community itself under a CC0 license. The CBE-model suggests to encode a chosen license to the smart contract of the NFT project, which would mean to implement a pointer to the license, on-chain. ( a16z Contracts, https://github.com/a16z/a16z-contracts)
“With licenses referenced on-chain and in the metadata, marketplaces could potentially pull a given NFT’s license type and display it within the NFT’s listing. This could help inform buyers of the rights associated with the NFT they’re interested in purchasing, and strengthen the legal enforceability of the license.” (Miles Jennings and Chris Dixon, The Can’t Be Evil NFT Licenses, https://a16zcrypto.com/introducing-nft-licenses/)
This model addresses the urge of many NFT advocates to put as much content, data and process on-chain. But this second solution also comes with the same downsides as the first one: all blockchain-related details need to be known to discover the terms of the creative work.
3. ISCC
A relatively new, third solution suggests to connect the license document to a content-derived, decentralised identifier of the creative work, the ISCC code. The ISCC is a new open, decentralized identifier and lightweight fingerprint for creative works, designed for the web3, and future ISO standard for the decentralised identification of digital media files. (ISO/CD 24138 Information and documentation – International Standard Content Code, https://iso.org/standard/77899.html)
The system uses a combination of cryptographic and similarity preserving hashes and a simple fingerprinting system to generate the ISCC. This allows search and content matching even if the file has been altered or manipulated. Any user can generate the same or similar ID from the same or similar media file only by having access to the creative work without the need to exchange metadata about the file beforehand. The ISCC does not have to be applied, or bound to the content. By design, all digital media files already have an identifier and lightweight fingerprint for anyone to extract and use, thus the connection between the ISCC and the creative work cannot get lost.
If there is an interest to inseparably bind metadata, rights or licenses to the NFT, the ISCC may become a relevant standard for the NFT space, as users would not need to know smart contract-ID, token-ID or other metadata to identify the referent of the NFT.
ISCC codes can be declared on any public blockchain in the process of minting the NFT, together with declaration metadata containing all relevant information. The necessary ISCC registrar and hub smart contracts are currently live on Ethereum and Polygon. All ISCC declarations will automatically be listed in the ISCC registry, a decentralized, cross-chain, content registry. https://iscc.id is one implementation. Anyone can run, reproduce and verify the declarations. (ISCC – Decentralized Content Registry, https://github.com/iscc/iscc-registry)
With the declaration of ISCC codes on a public blockchain, creators and rightsholders can inseparably bind ISCC metadata according to the ISCC declaration metadata schema on-chain to the fingerprint of the content. (See an example) The declaration metadata can furthermore point to additional metadata, licenses, rights management information, retail websites, etc.
The first implementation of the ISCC system has been implemented by a US-based NFT minting service, called Mintangible.
In 2022, I had the opportunity to present the ISCC – International Standard Content Code in the context of the WIPO webinars on the the Copyright Infrastructure. The video recording might be a good starting point to get familiar with the ISCC and to evaluate the implications of this innovation:
https://c.connectedviews.com/01/SitePlayer/WIPOwebinars/?session=115162
Article 17
The ISCC system can also be useful in another context, mentioned in the study. “The relevant question is, whether NFT trading marketplaces fall within the scope of Article 17 Digital Copyright Directive and thus have to introduce upload filters if the conditions are met.“ (IP rights and DLT, 43)
Especially, when users of large, centralised web3 NFT trading marketplaces upload content and mint the NFTs in the smart contract, controlled by the NFT trading marketplaces, it is relatively easy to come to the conclusion that article 17 of the DSM directive will apply. But marketplaces not only showcase content which has been minted in their own smart contracts, they also make available to the public content referenced by third party smart contracts. And it gets even more complicated, when we consider that – unless white- of black-listed for certain wallet addresses – these third party smart contracts are open for transactions from third parties.
Conclusion
Eventually, the question remains whether “NFT marketplaces make digital copies of digital or physical art works visible to the public”; and if not, which is a conclusion I came to in this comment, does this mean that the abuse of copyright protected content in the NFT space cannot be regarded as copyright infringement?
Separating the token from the creative work opens up the opportunity to maintain a distance from any copyright regulation, which might be a desired outcome for NFT collectors and marketplaces. It might also be an intentional decision not to provide any rights management information or licenses for the creative work to keep this discourse and regulation at distance.
On the other hand, by using open identifier standards, open source technology to generate ISCC codes to inseparably bind metadata, terms and conditions to the fingerprint of the creative work on-chain, this would allow anyone to discover the connected information only be having access to the content. In case of a token (re)sale, a license could travel with the creative work and anyone, including the primary and secondary seller and buyer of an NFT, would know what they are allowed to do with the creative work, which represents the NFT.
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