NFTS AND COPYRIGHTS

Krishnamurthy and Co | View firm profile

WHAT IS AN NFT?

The term NFT stands for “non-fungible token”. NFTs are essentially digitalised assets which represent underlying works (as defined under section 2(y) of the Copyright Act, 1957 and hereinafter referred to as “Work/s”) such as art, memes, gifs, music and could even include shoes and clothes.

There is really no restriction on what physical commodity or asset can be converted and sold as an NFT. By definition, an NFT is a non-fungible asset that is distinct and unchangeable and cannot be divided or replaced. Accordingly, an NFT holder cannot switch his NFT for another, even if they are valued the same. For example, an INR 100/- note can be split into or exchanged for two INR 50/- notes or another INR 100/- note. Therefore, a commodity like money is fungible in nature while NFTs are not. Each NFT is supported by algorithms and meta-data, which tend to set it apart from other similar NFTs already in existence. If you own an NFT, you are the only person in the world with that unique token on the blockchain. They are units of value which have been created through “tokenisation” which is the process of making a digital representation of an asset using blockchain technology.

CREATING AN NFT

When one decides to create an NFT out of the Work, one must ‘mint’ the NFT. Minting of the NFT refers to the process of creating the digital representation of the Work, which is essentially tokenisation. Tokenization includes uploading it onto a specific platform or marketplace and then issuing a token which will guarantee its authenticity.[i]Several marketplaces like OpenSea, Bored Ape Yacht Club and SuperRare offer a forum for purchase and sale of NFTs to take place. NFTs are, therefore, metadata of the Work which is added to the blockchain. NFTs have built-in authentication in the form of a unique identification code which serves as proof of ownership. This promotes market efficiency and helps a seller to connect with the buyer directly without the help of an intermediary. This further streamlines the process of the transaction, thereby making the purchase and sale of NFTs quite feasible.

Therefore, NFTs are mere representations of the Work, and cannot be deemed as a new Work itself. The question then arises; What do you own when you buy an NFT?

COPYRIGHT PROTECTION OF THE WORKS

NFTs are unlikely to enjoy copyright protection because they merely represent certain works on the blockchain technology. They would not classify as original works or derivative works under intellectual property law. However, the Works on which the NFT is created may enjoy copyright protection. The rights in these Works are held by the Author/assignee, as mentioned below.

An author of the Work (as defined under section 2(d) of the Copyright Act, 1957 and hereinafter referred to as “Author”) is the one who creates the Work. The Author is also the sole owner of the Works unless (i) the Work is co-authored with another person, then both the Authors jointly own the Works; or (ii) the Work is commissioned by a person/entity or is created under employment, then the commissioner/ employers own the Works.

The ownership of the copyright in the Works provides the exclusive rights to the owner as specified under section 14 of the Copyright Act, 1957. This will include the right to mint the NFT of the Work.

The owner of the copyright in the Works can transfer the entire copyright in the Works to an individual/entity by assignment or provide the individual/entity certain rights over the Works such as the right to mint the NFT by way of a license. For minting an NFT, one must possess the right of reproduction of the Work and communication of the Work to the public. Without such right, minting an NFT of the Work will amount to an infringement of copyright.

OWNERSHIP OF AN NFT

As explained above, the authorship and ownership of Works based on which the NFT is created is different from having ownership of the NFT itself. The ownership of the NFT lies with the one who mints it. So, in practice, the owner of the NFT is not necessarily the Author of the Works. However, minting of an NFT of Works which someone else has the rights over will essentially amount to stealing of the Works and will be considered an infringement of copyright. Therefore, before minting an NFT, it is imperative that the one minting it has the rights to do so, either by being the Author of the Work, or by obtaining the copyright over the Work or by obtaining the specific rights to mint the NFT.

SALE OF NFTS AND THE RIGHTS OF THE BUYER

NFTs are most commonly sold by auction where the seller feels that there is a great demand for the NFT, and buyers will pay a very high price for it. Sellers can also list their NFT on the marketplace for a specific price and can sell it to a buyer for that price. Most commonly the sale and purchase of all NFTs takes place through the marketplace and the transaction is conducted through Ethereum cryptocurrency because the majority of NFTs are built on the Ethereum blockchain. NFTs derive their value from the Work which they represent. If the NFT is that of an extremely rare Work, then its value increases and the seller can sell it for a higher price. However, the market forces such as demand and the hype created around a particular NFT ultimately determine the value of the NFT.

As already explained hereinabove, when buying an NFT, the buyer is actually buying the metadata in the Work and not acquiring the underlying Work associated with the NFT or its accompanying rights. So how exactly can the buyer use the NFT? On purchase of an NFT, the buyer becomes the owner of the NFT and acquires a non-exclusive license to display the NFT in their e-wallet. However, the extent of this right is for personal purposes only and the buyer cannot commercialise on this right by displaying Works in any third-party website or product. For example, the buyer of an NFT can display the NFT in his token wallet but he cannot start his own line of clothes, shoes or other merchandise for commercial purposes, featuring the Works depicted in the NFT.

This is because most NFT sales do not usually involve transfer of copyrights, but there are instances wherein the seller offers to turn the token into an actual transfer of copyright ownership of the original Work, thereby transferring all the copyright in the artistic work as specified under section 14 (c) of the Copyright Act, 1957.[ii] Such transfer of rights should be set out in the terms and conditions or in a separate assignment/license agreement between the NFT seller and buyer. The buyer’s use of the underlying Work can sometimes be unlimited with minimal restrictions however considering the nature of rights attached to an NFT, it is extremely restrictive depending on what the owner of the rights chooses to sell.

We can consider the example of “CryptoKitties” which are NFTs where the owner is permitted to commercialise the featured artwork or the “kitty”, with the condition that this commercial use does not result in earnings exceeding USD 100,000 per year. But there are certain other NFTs such as the NBA TopShots which grant the owner of the NFT a license to “use, copy and display” the “moment” depicted in the NFT but it does not allow the owner to “reproduce, distribute or otherwise commercialise” the NFT.[iii]

The sale of an NFT is always accompanied by a ‘smart contract’ which is an agreement between the parties, which is written in code and stored on the blockchain. The NFTs are stored in the digital ledger blockchain which simultaneously creates a digital signature and helps in tracking the ownership of the NFTs. During a transaction, the smart contract enables the sale of the NFTs and identifies the ownership of the NFTs. While smart contracts are essential in identifying ownership of the NFT, they can sometimes be a double-edged sword in that they are difficult to edit or standardise. This is sometimes disadvantageous to both the parties because the parties cannot always encode the terms and conditions of the sale of the NFT as per their liking. It is a rarity to find any cryptographic licenses in the form of smart contracts for NFTs. However, a common practice that is followed by sellers during the sale of NFTs is to have a list of terms and conditions which are standard for all the prospective buyers of their NFTs. A link to these terms and conditions is provided on the marketplace where the NFTs are being sold and thereby, all the buyers of the sellers’ NFTs which are listed in that marketplace are bound by these terms and conditions.

For example, the NFTs created by the fashion house Givenchy in collaboration with the artist ‘Chito’ are listed for sale on the OpenSea marketplace. A link is provided on the marketplace which leads to a set of terms and conditions for the sale of the NFT. Therefore, every time the NFT is sold to a new buyer, they are bound by these standard terms and conditions.

The difficulty under Indian law is that even if sellers want to assign the copyrights in the underlying Works of an NFT to the buyer via a smart contract, it is not permissible as Section 19(1) of Copyright Act, 1957 clearly states, “No assignment of the copyright in any work shall be valid unless it is in writing signed by the assignor or by his duly authorised agent.” Therefore, in order to transfer the copyright in the underlying Works of an NFT, the parties must have a fully executed assignment or license agreement granting the buyer either the copyright in the Works or certain rights over the NFT. At every stage of transfer or sale of the NFT, unless the buyer has acquired the copyright to the NFT through a written agreement from the seller (assuming the seller owns the copyright to the NFT), the buyer does not acquire the rights to exploit the NFT through any means he wants such as merchandising or exhibiting photos of the NFT for commercial purposes. Typically, buying an NFT may only grant the owner limited rights such as the right to non-commercial uses.[iv] In many cases, the owner of the NFT might be entitled to great benefits such as variable incentives on all future sales but most NFT sales only convey a license.[v]

CONCLUSION

There is no law to specifically regulate the NFT market space and therefore, there exists a lot of uncertainty with regard to the rights enjoyed by NFT owners and the extent to which they can exploit the NFT which they purchase. If there is a way for smart contracts to be easily interpreted by the buyer of the NFT in order to determine the agreements contained in them, then it would greatly reduce the risks of infringing upon another’s copyright by clearly laying down the scope of use of the NFTs. Further, standard terms and conditions must be established to ensure that the terms of use of the NFT are laid out clearly. Under Indian Copyright Law, it is beneficial to both the parties to have pre-determined conditions for the use of NFTs and the underlying Works, in written form, either by way of an assignment agreement or a license agreement, duly signed by both the parties. These written agreements can be in addition to the smart contracts that accompany the sale of the NFT. This will ensure that the rights of the buyer are carved out and the extent to which he can exploit the NFT he has purchased are well defined and will remove the likelihood of copyright infringement.

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