NFTs and the Future of U.S. Copyright Law

By: Luke Vredenburg

Edited By: Alexandre Brunet and Rayyana Hassan

Following years of stagnant growth and ridicule from the majority of investors, cryptocurrency exploded in both popularity and value in 2018. Most headlines emphasized the future of decentralized finance and the role of Bitcoin as a potential universal currency. However, the blockchain technology driving the growth of cryptocurrencies was also being utilized in the digital art world. [1] This development would increasingly interest the public until mid-2021, when the creation and sale of these non-fungible tokens (NFTs) gained national media attention. [2] Despite the recent success of this market, the future of NFTs and their application in a rapidly increasing number of fields is heavily dependent on the legal infrastructure that dictates their effectiveness and security, a fact most evident with respect to copyright law. Thus, the federal government should adjust its copyright systems in order to provide support and protection to online artists.

Understanding the laws around NFTs requires knowledge of the process of making an NFT and their usage. Non-fungible tokens were created in 2014 with the simple goal of letting artists make profit off their online creations and have some autonomy over their work on the internet. [3] The process begins when an individual “mints” a piece of digital art, which attaches a unique link to the file that records all transactions of the work [4]. This allows artists to retain a sense of ownership despite digital art being extremely public, as they can track its usage. [5] However, artists make no money from this process. Unlike fungible assets which can be exchanged for another based on exact fractional values, such as one U.S. dollar being equivalent to ten dimes, NFTs are sold at auction with an assigned market value based on their perceived scarcity and quality. [6] 

By the third quarter of 2021, NFT sales reached $10.7 billion dollars, prompting a variety of industries such as music licensing, banking, and real estate to experiment with methods of implementing NFTs as a means of verifying ownership and reducing transaction costs. [7] For instance, real estate contracts associated with NFTs eliminate much of the paperwork and intermediate steps involved with transferring the property, all while keeping these documents publicly accessible and unalterable. [8] Likewise, musician’s albums can be connected to NFTs, giving consumers a form of digital memorabilia reminiscent of physical records of the past. Athletes often implement this method as well, attaching NFTs to their trading cards and signatures. [9] Although opponents of NFTs argue that they assist in pump-and-dump schemes and scams, the prospect of simplifying online commerce and strengthening digital ownership is enticing to both major corporations and general consumers. However, it requires a strong legal foundation in order to function properly. [10] 

Despite the promising future of NFTs, they present a unique set of challenges under current copyright law. 17 USC § 106 states that the original creator of a work of art has the exclusive ability to make copies of and display the work of art publicly. [11] However, unlike physical art, NFTs are already publicly available. Any individual can therefore make countless perfect replicas of a digital piece, mint them, and pass them off for their own, which can create immense legal repercussions for both the buyer and seller. For the seller, under § 504 of the Copyright Act, the sale of an infringing work, willing or unwilling, can make the seller liable for $750 to $30,000 per infringement. If proved to be a willing copyright violation, the fine increases to $150,000 per infringement. [12] In purchasing an NFT, the buyer must authenticate the piece by proving it is linked to the original artist, but this process still does not illustrate if the work is an original IP or simply a copy of someone else's work. Therefore, reselling the NFT would make the buyer liable for copyright infringement. Due to the lack of legal protections for buyers, this lack of transparency makes the current sale and purchase of NFTs risky, but this problem can be resolved through legal action.

Currently, artists must submit a Digital Millennium Copyright Act takedown request to NFT platforms in order to enforce copyright violations. However, this means NFT owners must constantly monitor countless websites to identify unauthorized productions of their works. [13] Collecting evidence and becoming aware of illegal works is a formidable challenge, so artists are seeking ways to gain further protection from illegal reproduction of their works while reducing the time required to do so. Recent federal legislation offers one way in which this could be accomplished. In late December 2020, Congress approved two new additions to the Copyright Act as part of the Consolidated Appropriations Act 2021. The first of these focused on deterring illegal streaming by creating harsher punishments, a philosophy that should be extended to NFTs and the copying and reselling of digital art. [14] The hope is that these punishments will discourage people from making illegal copies, protecting both producers and consumers. Even if these laws do not eliminate fraud, they will still play an important role in the marketplace. Artists and their customers will gain confidence in their transactions, and the countless industries seeking to implement NFTs into their business models will feel more comfortable doing so. 

Another legal issue regarding NFTs is the first sale doctrine, which states that companies do not have control over the resale of their intellectual property. Yet a key component of the NFT market is the royalties awarded to artists with each sale of their work. U.S. law has traditionally opposed royalties for artists, but this compensation is what attracts artists to post their work online, as they continuously benefit from its transactions. NFTs are coded with smart contracts, which automatically give a percentage of the secondary sale to the original producer. [15] This is useful not only in the world of digital art, but industries such as real estate where commission is a common aspect of the sale and music where artists are paid for the number of streams they recieve. 

However, a 2018 ruling by the 9th U.S. Circuit Court of Appeals in Disney Enterprises Inc. v Redbox Automated Retail LLC claimed that the first sale doctrine does not apply to digital assets, which could greatly benefit the NFT market. In 2017, RedBox began digital access codes to Disney movies at their kiosks despite not having a vendor agreement with the company. [16] These links brought customers to a third party site where users could download the films, which Disney argued constituted contributory copyright infringement. RedBox’s defense attempted to use the first sale doctrine to avoid liability, but this argument was thrown out by the court. The judges alleged that links represented the ability to create a physical copy in the future, but were not tied to a “particular fixed copy of a copyrighted work.” [17] Therefore, there could be no “first sale” of the product, giving Disney control over the resale of these links. [18]

Since the purchase of an NFT simply gives ownership of a link to the digital asset, the first sale doctrine will likely not apply to NFTs as well. Even in cases in which the NFT is associated with a tangible object such as a home or trading card, its ownership is attached to the corresponding digital token, meaning physical purchases may void this doctrine as well. If a similar case is brought before federal court, then smart contracts and royalties can be safely implemented without worry of legal repercussions. Federal and state governments should follow this ruling, as with the rapid growth of the NFT market, removing the hindrance of the first sale doctrine will have immense economic benefits to producers while simplifying aspects of legal contracts.

As countless corporations and celebrities continue to adopt NFTs into their businesses and industries, it is clear that NFTs are here to stay. Correspondingly, the U.S. should alter its copyright law regarding digital art and products. Improving protections for both consumers and producers will foster the development of the market and preserve the qualities of NFTs that attracted public and corporate interest in the first place. These changes do not have to be drastic, but the small details of the policies may make the difference between a new source of commerce and a collapsing market.

NOTES:

1. Anshu Siripurapu, “Cryptocurrencies, Digital Dollars, and the Future of Money,” Council on Foreign Relations, September 24, 2021. https://www.cfr.org/backgrounder/cryptocurrencies-digital-dollars-and-future-money. 

2. Gregory J. Chinlund and Kelley S. Gordon, “What Are the Copyright Implications of NFTS?” Reuters, October 29, 2021, https://www.reuters.com/legal/transactional/what-are-copyright-implications-nfts-2021-10-29/. 

3. Anil Dash, “NFTs Weren't Supposed to End like This,” Atlantic Media Company, April 2, 2021, https://www.theatlantic.com/ideas/archive/2021/04/nfts-werent-supposed-end-like/618488/. 

4. Simon J. Frankel, “What Copyright Lawyers Need to Know about Nfts,” Blomber Law, July 16, 2021, https://news.bloomberglaw.com/ip-law/what-copyright-lawyers-need-to-know-about-nfts. 

5. Ibid.

6. Nathaniel Lee, “'You Can Gain Everything and You Can Lose Everything' - Here's Why Experts Remain Skeptical about the NFT Market,” CNBC, November 29, 2021, https://www.cnbc.com/amp/2021/11/29/heres-why-experts-remain-skeptical-about-the-nft-market.html. 

7. Ibid

8. Leighton Emmons, “Why the Future of Nfts Goes Far beyond Gaming and Digital Art Work,” Nasdaq, November 10, 2021, https://www.nasdaq.com/articles/why-the-future-of-nfts-goes-far-beyond-gaming-and-digital-art-work. 

9. Ibid

10. Nicole S. Silver, “The History and Future of Nfts,” Forbes Magazine, December 10, 2021, https://www.forbes.com/sites/nicolesilver/2021/11/02/the-history-and-future-of-nfts/?sh=b7112186a163. 

11. Jonathan Schmalfeld, “How Copyright Violations Can Crash Your NFT Party,” Fortune, August 4, 2021, https://fortune.com/2021/08/04/nfts-copyright-violations-penalties-non-fungible-tokens-collectibles-nfttorney-jonathan-schmalfeld/. 

12. Ibid

13. Gregory J. Chinlund and Kelley S. Gordon, “What Are the Copyright Implications of NFTS?” Reuters, October 29, 2021, https://www.reuters.com/legal/transactional/what-are-copyright-implications-nfts-2021-10-29/. 

14. Sara A. Lieman and Margaret A. Esquenet, “Introduction to New Copyright Law Provisions: Felony Streaming Penalties and The Case Act,” Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, February 18, 2021,

15. Ingram Yuzek Gainen Carroll & Bertollo, LLP, “Buying & Selling Nfts: Navigating the Legal Landscape,” JD Supra, November 30, 2021, https://www.jdsupra.com/legalnews/buying-selling-nfts-navigating-the-2284166/. 

16. David Grossman, “Disney Enterprises Inc. v. Redbox Automated Retail LLC,” Loeb & Loeb LLP, August 30, 2018, https://www.loeb.com/en/insights/publications/2018/09/disney-enterprises-inc-v-redbox-automated-retail__. 

17. Ibid

18. Ibid

BIBLIOGRAPHY:

Chinlund, Gregory J., and Kelley S. Gordon. “What Are the Copyright Implications of NFTS?” Reuters, October 29, 2021. https://www.reuters.com/legal/transactional/what-are-copyright-implications-nfts-2021-10-29/. 

Dash, Anil. “NFTs Weren't Supposed to End like This.” Atlantic Media Company, April 2, 2021. https://www.theatlantic.com/ideas/archive/2021/04/nfts-werent-supposed-end-like/618488/. 

Emmons, Leighton. “Why the Future of Nfts Goes Far beyond Gaming and Digital Art Work.” Nasdaq, November 10, 2021. https://www.nasdaq.com/articles/why-the-future-of-nfts-goes-far-beyond-gaming-and-digital-art-work. 

Frankel, Simon J. “What Copyright Lawyers Need to Know about Nfts.” news.bloomberglaw.com, July 16, 2021. https://news.bloomberglaw.com/ip-law/what-copyright-lawyers-need-to-know-about-nfts. 

Grossman, David. “Disney Enterprises Inc. v. Redbox Automated Retail LLC.” Loeb & Loeb LLP, August 30, 2018. https://www.loeb.com/en/insights/publications/2018/09/disney-enterprises-inc-v-redbox-automated-retail__. 

Ingram Yuzek Gainen Carroll & Bertollo, LLP. “Buying & Selling Nfts: Navigating the Legal Landscape.” JD Supra, November 30, 2021. https://www.jdsupra.com/legalnews/buying-selling-nfts-navigating-the-2284166/. 

Lee, Nathaniel. “'You Can Gain Everything and You Can Lose Everything' - Here's Why Experts Remain Skeptical about the NFT Market.” CNBC, November 29, 2021. https://www.cnbc.com/amp/2021/11/29/heres-why-experts-remain-skeptical-about-the-nft-market.html. 

Lieman, Sara A., and Margaret A. Esquenet. “Introduction to New Copyright Law Provisions: Felony Streaming Penalties and The Case Act.” Lexology. Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, February 18, 2021. https://www.lexology.com/library/detail.aspx?g=61fda160-3821-4538-af06-d703ec57cee5. 

Schmalfeld, Jonathan. “How Copyright Violations Can Crash Your NFT Party.” Fortune, August 4, 2021. https://fortune.com/2021/08/04/nfts-copyright-violations-penalties-non-fungible-tokens-collectibles-nfttorney-jonathan-schmalfeld/. 

Silver, Nicole S. “The History and Future of Nfts.” Forbes Magazine, December 10, 2021. https://www.forbes.com/sites/nicolesilver/2021/11/02/the-history-and-future-of-nfts/?sh=b7112186a163. 

Siripurapu, Anshu. “Cryptocurrencies, Digital Dollars, and the Future of Money.” Council on Foreign Relations, September 24, 2021. https://www.cfr.org/backgrounder/cryptocurrencies-digital-dollars-and-future-money.