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If code is law, countless NFTs are built on buggy code
A long-running meme at The Verge is that copyright law is the only functional law on the internet — the entire internet is just made of copies, after all, so copyright law has become the go-to mechanism for everything from fighting harassment to stopping leaks. Confusion about how copyright law works is everywhere — and it’s getting even more complicated in the world of Web3. What does “owning” something on a blockchain mean, when that something is still just a bit of code that can be infinitely copied? Courts and lawmakers haven’t settled the question, and many NFT projects have run into immediate, confounding problems as they have conflated owning an NFT with owning a copyright.
To help, we’ve adapted a guide on copyright and the blockchain from three legal scholars from Cornell University and the Initiative for CryptoCurrencies and Contracts (IC3) — James Grimmelmann, Yan Ji, and Tyler Kell. It explains how courts might actually treat NFTs — and why everyone who buys and sells them needs to take copyright law more seriously. – Adi Robertson and Nilay Patel
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Many blockchain projects — like non-fungible tokens (NFTs) and decentralized autonomous organizations (DAOs) — are designed to provide new or more convenient ways to own and sell creative works.
But at the same time, many of these projects have run into copyright trouble due to confusion about how copyright law applies to NFTs. Here are just a few problems they’ve encountered:
Ownership of an NFT can be used to give the owner substantial control over a creative work, but that control is not automatic. Copyright law does not give an NFT owner any rights unless the creator takes affirmative steps to make sure that it does — ideally, by executing a standard, formal copyright license to the work connected to the NFT.
Our survey of some existing NFT projects and their licenses reveals that very few of them take all of the necessary steps needed to make NFT copyrights behave the way that people expect. Thinking through the legal issues should be part of the NFT design process, not an afterthought.
Many blockchain projects are based on the premise of ownership. But what does owning an NFT actually mean? To answer that, we need to recognize the difference between “on-chain” and “off-chain” assets.
It’s common in crypto to hear things like “Alice owns 10 Bitcoins.” Bitcoin is an on-chain asset: something that exists as a self-contained entry on a blockchain. When someone says Alice “owns” a Bitcoin, they typically mean she controls the private key to a blockchain address, either directly or via a cryptocurrency wallet. If she wants, she can choose to transfer that Bitcoin to another address.[1]
NFTs have an on-chain component too, typically a software-based smart contract that whoever controls the key can initiate. But sometimes that blockchain entry represents something that exists off-chain — like a tungsten cube.[2] The Tungsten Cube NFT blockchain entry is not the same as the physical tungsten cube. But according to the project creator TungstenDAO, the Tungsten Cube NFT and the actual tungsten cube are connected.[3]
Here, the rights to an off-chain asset (the physical cube) are linked by an invisible legal connection to an on-chain asset (the NFT). Lawyers sometimes call this connection “tethering” — although some legal scholars are skeptical about whether tethering actually holds up in court.
This means there are actually three (yes, three) different kinds of assets involved in this NFT.
If everything works correctly, the legal right links the on-chain NFT to the off-chain cube. The current owner of the NFT can control the physical cube because they also own the associated legal right.[4]
A tungsten cube is a specific physical object that exists in only one place. (Any other cube, even if it’s identical-looking, is a different cube!) But a creative work can be intangible and take many forms. It can exist in one unique object, like an oil painting on a canvas. It can exist in many copies at once, like when a publisher prints thousands of copies of a book. It can exist in no copies at all, like when one person tells another person a story.
Legally speaking, a creative work is not the same thing as any of its copies — someone can own a copyright but not a specific copy of their work, or vice versa. That’s because a copyright is a limited set of exclusive rights that’s not tied to any specific physical object. Most importantly, owning the copyright to a creative work includes the right to make more copies of the work and prevent anyone else from doing so (that’s why it’s called a “copy” “right.”) It also includes the right to make derivative works like a movie adaptation.
Let’s say Bob writes a book and sells a copy to Alice. Here’s what they each own:
Now let’s say Alice wants to make a movie out of Bob’s novel. She needs Bob’s permission, and she can get it one of two ways: by buying the copyright outright from Bob, or by getting him to give her a license.
Buying the copyright is known as a “transfer of ownership,” and it moves all the rights Bob had into Alice’s possession. She’d have the option to make her movie, and also to authorize other derivative works like a graphic novel or action figures.
A license is more limited. Bob would grant specific rights to Alice, but he’d keep the overall copyright, so the results might look something like this:
The same splits exist for other kinds of creative work. If you buy an oil painting from an artist, for instance, you don’t necessarily receive ownership of the copyright. Yes, you own the original canvas with paint on it, but the artist retains the copyright, and they can sell prints of it if they like. If you want to buy the copyright too, you’d need to get a separate agreement.
This was all much easier before the internet, when making copies required things like printing presses and vinyl-record-stamping plants. Making copies was expensive, so they were scarce: there were only so many copies to go around, making it easy to put a price tag on each copy. Since all of this was expensive, only a handful of people ever really had to think about copyright law.
But the internet made the cost of copying effectively drop to zero. NFTs are in some ways a reaction to that: since there are only so many NFTs in a mint, they create digital scarcity, and they can be priced like the books and CDs of old. But they’re running right into the basic fact of the internet, which is that it’s trivially easy to make copies, and the boundaries of copyright law are pushed by ordinary people every day.
As explained above, NFTs can theoretically be “tethered” to a legal right. But there are two separate rights in play here: the right to possess one copy of the creative work (the way one could possess a tungsten cube), and the right to make copies and create derivatives of the original creative work. These rights could be bundled into one NFT. But they could also be divided — into, as an artist might call them, a “Copy NFT” and a “Copyright NFT.”
To see the difference in practice, let’s look at Spice DAO. The project bought and tokenized ownership of one physical copy of Jodorowsky’s pitch book. So the owners of SPICE tokens can collectively decide to sell or lend that one copy or put it on public display offline. (That’s similar to a “Copy NFT.”) But the copyright to the Dune novel is still held by Frank Herbert’s estate, which licensed film rights to Legendary Entertainment, which produced the 2021 film version. And the copyrights in the artwork in the pitch book are held by the original artists and their estates. In other words, there isn’t a “Copyright NFT.” The Spice DAO can’t make additional copies of the pitch book, or make derivative works from it, like a movie. They just have the book.
When you’re talking about digital copies instead of physical ones, things get more complicated, because the law has an unintuitive definition of “copy.” It includes any “material objects … from which the work can be perceived, reproduced, or otherwise communicated,” including computer hard drives and sometimes even computer memory.[5] Every computer that interacts with the work makes a separate “copy” for copyright purposes; even just browsing to a webpage makes a “copy” of the images on that page for your computer to display to you.
US copyright law explicitly states that transfers of copyrights and transfers of copies are different.[6] This means that for most NFTs, a “Copy NFT” actually needs some kind of “Copyright NFT” element that lets the owner make more copies — or they’ll become an infringer the moment they access the art on their computer.
Actually ensuring that NFT owners have the copyrights they think they do is a subtler problem than it appears. Consider the following passage from the Bored Ape Yacht Club Terms & Conditions:
i. You Own the NFT. Each Bored Ape is an NFT on the Ethereum blockchain. When you purchase an NFT, you own the underlying Bored Ape, the Art, completely.
This looks like it tethers ownership of the copyright to ownership of the NFT — that if a buyer sells the NFT, for instance, they sell the copyright as well. Unfortunately, U.S. copyright law sets a high threshold for what it takes to transfer ownership of a copyright, requiring that transfer be “in writing and signed by the owner.”[7]
The writing part isn’t a problem; the terms on the website count as “writing” under federal law. And under the E-SIGN Act, even a digital signature like a person’s name printed in a script typeface can be a signature[8] Courts have held that clicking “I agree” to a website’s terms when you create an account is enough to show an “intent to sign.” So an NFT maker could satisfy that requirement by modifying the terms to add a signature line.
The real problem crops up when one NFT buyer tries to pass on ownership of their copyright. Let’s imagine Alice buys an NFT from a fictitious company that uses the same terms as BAYC. Alice acquires full ownership of the copyright from that company. (She can display it in her Twitter profile, sue right-clickers for infringement, etc.) Then she sells the NFT to Bob on OpenSea. This should theoretically transfer the copyright too.
But if all Alice has done is execute the smart contract, there’s no signed legal contract transferring the intellectual property rights — so she still owns the copyright even after selling the NFT.
Bob could claim Alice agreed to the terms of service that indicate whoever owns the NFT controls the copyright. She’s applied her cryptographic signature to a smart contract. But the smart contract doesn’t necessarily say anything about copyright or link to the terms. Even if it did, there would be no guarantee that Alice had read or knew about those terms. She would not have attached her cryptographic signature to a transaction in a legally binding sense. And legal contracts typically only bind the people who explicitly agree to them.
Getting from a smart contract to a legally binding contract is a hard and subtle problem. Adding off-chain assets like tungsten cubes and copyrights into the mix makes it even harder. If copyright in an NFT-linked artwork is based on a legal contract, users have a decent argument that nothing in the legal contract applies to them, since they only interacted with a smart contract.
It’s easier to license a copyright than transfer it, because licenses don’t need to be signed. (They don’t even need to be in writing, although for any economically serious transactions, writing down the terms is much safer.) So NFT creators could get around the signed-writing problem by holding onto ownership of the copyright, then granting a license. So if Alice buys an NFT and sells it to Bob and Bob sells it to Carol, none of them own the copyright, but each one gets a license while they own the NFT:
At first glance, it looks more complicated, because now the creator must deal directly with every NFT owner, rather than just with the first owner. But it means Carol doesn’t have to worry about Alice and Bob getting the signed transfers right. She can be confident she’s gotten a license directly and automatically from the creator, spelled out in its terms of service.
There are good precedents for this approach in free and open-source software licensing like the GNU General Public License [9] and the Creative Commons attribution license.[10] Some NFT licenses have also adopted this model, like the RTFKT license.[11]
The point is, NFT creators need to give serious thought to how they structure their terms to ensure that NFT owners actually receive the necessary copyright licenses to NFT-linked artwork. And copyright licensing is far easier to make work than an outright transfer of ownership.
No one can explain why the Bored Apes achieved cultural and economic escape velocity. It will forever be one of the mysteries of the ages. But one factor, at least, is sometimes said to be that the Bored Apes terms allow owners to make things like comics and merchandise — in other words, derivative works.[12] Unlike many NFT projects, the BAYC terms allow unrestricted commercial use of NFT art.[13] But BAYC’s terms actually demonstrate how hard it is to get derivative works right, and how many potential pitfalls there are.
The first problem is that BAYC’s license is inconsistent with its earlier claim that “[w]hen you purchase an NFT, you own the underlying Bored Ape, the Art, completely.” If buyers really do “own” the art “completely,” then Yuga Labs has nothing left to give and the commercial-use license is superfluous. (This is another sign that the statement that Bored Ape NFT owners “own” the artwork, like many other claims about what users actually own when they “buy” content online, cannot be taken at face value.)
The second problem is that these terms don’t play nicely with reselling NFTs. To see why, let’s go back to Alice. Alice owns NFT 12345, whose terms let her grant sublicenses for derivative works based on it. She gives a license to a filmmaker (who we’ll call Fern) to use it in a movie — a derivative work that Fern also holds a separate copyright on. Then, after the movie comes out, Alice sells NFT 12345 to Bob. What should happen to Fern’s license?
One simple answer would be that when Alice sells the NFT, any sublicenses she’s granted are terminated when her ownership ends. But this would be terrible from Fern’s perspective, because without a license, showing their movie could be copyright infringement! It’s also terrible for Alice, because artists wouldn’t want to pay for rights that disappeared every time the NFT changed hands.
Another answer would be that Fern’s license continues in full force, and Bob has no ability to revoke it. Unfortunately, that has problems too. Let’s say Fern had good lawyers who got them an exclusive license on movie rights, so Alice couldn’t let anybody else make a competing film. But when Bob buys the NFT, he gets a copyright license directly from the company. He’s never signed a contract with Fern! So he’s not bound by those terms, and he can license as many competing movies as he wants.
So maybe the licenses ought to “travel” with the NFT itself. This happens all the time with real estate. For instance, someone who owns a parcel of land can grant a telecom company an “easement” to run a fiber-optic cable under it, and when they sell that land, the new buyer inherits the legal obligation to the telecom. In this case, when Bob buys the NFT from Alice, he inherits any existing limitations or obligations — like the exclusive license to Fern.
But this solution means Bob is getting something less than the full rights the original NFT creator granted. He will have to investigate the entire chain of the NFT he’s buying, making sure previous owners like Alice haven’t already given away part of the copyright. This runs contrary to the crypto ethos that as much as possible should be done in public and on-chain.
A fourth possibility is that Fern’s license to create new derivative works terminates, but that they can continue to use existing derivative works they have already created. This is how copyright law deals with some license terminations. But if Fern’s license continues, what should happen to any royalties that Fern has promised to pay Alice? Should they be turned over to Bob too?
At this point, we’ve discussed four different possibilities for what happens when Alice sells the NFT to Bob:
It is possible to imagine a court adopting any of these outcomes. Indeed, there is no clear consensus as to which of these is the best solution in general. But everyone who does a project based on an NFT that does not answer these questions is putting an immense amount of faith in the courts to get things right if the deal goes sour and the parties end up suing each other.
Some popular NFT projects, including the CryptoPunks, have been released with no explicitly written copyright terms. This is legally risky for all concerned.
Without defined terms, someone could approach an NFT series’ creator and buy the underlying copyright to the artwork, then do something like sue NFT purchasers for putting the images in their profile pictures — because there’s no license explicitly granting them the right to do so. This is not the intent of the creators and purchasers, and we hope that courts would not cooperate in a copyright-based attack like this. But the courts are not known for their nuanced understanding of cutting-edge blockchain technologies and community norms.
Following the initial CryptoPunks launch, its creator, Larva Labs, later went back and tried to retroactively add a copyright license. Some legal scholars are skeptical whether this works. Even more recently Yuga Labs acquired the rights to the CryptoPunks and announced its intention to grant commercial rights to token owners. While many CryptoPunks owners will welcome this change, changing license terms after the initial launch and minting is trickier than granting them up front.
Some NFTs create copyright trouble by using artworks stolen from artists, or famous works that the NFT creators have no connection with and no license to use from. Copying these works as part of the NFT marketing (e.g. for OpenSea listings) can itself be copyright infringement. An NFT creator could be engaged in false advertising by implying that NFT owners will receive rights alongside these stolen works. And because copyright infringement is “strict liability,” NFT owners who make copies of stolen art could also be liable for infringement, even if they were misled by the NFT creator into thinking that it was properly licensed.
While straight-up scam artists are unlikely to care about infringement, it is unfortunate that many well-meaning projects — like Andy Williams’ case — also seem to believe that minting an NFT of a work somehow automatically brings with it some copyright interest in the work.
In a Web3 future where absolutely everything is on the blockchain and nothing is possible unless it is approved by a blockchain transaction, it could be technically impossible to post a photograph without an explicit license from the copyright owner. But that world is not the world of today, and a world where speech is impossible without advance permission would be profoundly dystopian. It would run completely against the values of freedom and openness that blockchain is supposed to stand for.
Whatever you think about NFTs, launching them with broken copyright licenses doesn’t do anyone any good. And while some cryptocurrency and Web3 projects are intended to escape the existing legal system, or to replace it entirely, many creative NFT projects are intended to work within the legal system as it currently exists. Responsible NFT creators would not launch a project built atop a smart-contract library that had known unpatched vulnerabilities, and they shouldn’t include legal terms that could prove just as catastrophic.
Despite this, many projects seem to put far less thought into their designs’ legal aspects than their technical and artistic ones. If code is law, then countless NFTs are built on buggy code.
Footnotes:
[1]: In the terms of the current draft revisions to the Uniform Commercial Code, she has “the power to avail [herself] of substantially all the benefit from” those Bitcoins.
[2]: The tungsten cube weighs 2,000 pounds, measures 14.545 inches on a side, and sits in the Willowbrook, Illinois warehouse of Midwest Tungsten Service.
[3]: Description of the Tungsten Cube NFT rights from TungstenDAO on OpenSea, an entry in a smart contract deployed on the Ethereum blockchain using the ERC-1155 standard, paraphrased: “One visit to see/photograph/touch the cube per calendar year.” If Alice sends the NFT to a special address that prevents anyone from ever controlling the NFT again (a process called burning), she is entitled to receive physical possession of the cube “via freight truck.” If she sells the NFT to Bob, then Bob will be entitled to visit the cube once a year, or to burn the NFT and receive the cube.
[4]: You can view the creation of this NFT online on the Etherscan blockchain explorer here.
[5]: U.S. copyright law defines a “copy” as “material objects … in which a work is fixed by any method now known or later developed, and from which the work can be perceived, reproduced, or otherwise communicated, either directly or with the aid of a machine or device.
[6]: From the law: “Transfer of ownership of any material object, including the copy or phonorecord in which the work is first fixed, does not of itself convey any rights in the copyrighted work embodied in the object; nor, in the absence of an agreement, does transfer of ownership of a copyright or of any exclusive rights under a copyright convey property rights in any material object.”
[7]: Section 204(a) of the Copyright Act states: A transfer of copyright ownership, other than by operation of law, is not valid unless an instrument of conveyance, or a note or memorandum of the transfer, is in writing and signed by the owner of the rights conveyed or such owner’s duly authorized agent. (emphasis added)
[8]: An electronic signature involves a “process, attached to or logically associated with a contract or other record and executed or adopted by a person with the intent to sign the record”
[9]: “Each time you convey a covered work, the recipient automatically receives a license from the original licensors, to run, modify and propagate that work, subject to this License. You are not responsible for enforcing compliance by third parties with this License.”
[10]: “Every recipient of the Licensed Material automatically receives an offer from the Licensor to exercise the Licensed Rights under the terms and conditions of this Public License.”
[11]: “Any digital works of authorship or other content made available through the Platform to an owner of a Digital Collectible that is intended as an “Additional Benefit” (as that term is defined in the Digital Collectible Terms) will be identified as such on the Platform or at the time of download. Any such content will be licensed to you for as long as you own the applicable Digital Collectible pursuant to the terms of any license presented at the time of download or, if no such terms are presented, pursuant to the applicable Digital Collectible Terms as Related Content for that particular Digital Collectible.”
[12]: i.e., “a translation, musical arrangement, dramatization, fictionalization, motion picture version, sound recording, art reproduction, abridgment, condensation, or any other form in which a work may be recast, transformed, or adapted.”
[13]: Specifically, “Yuga Labs LLC grants you an unlimited, worldwide license to use, copy, and display the purchased Art for the purpose of creating derivative works based upon the Art.”
