NFTs took over the cryptocurrency world earlier this year and they show no signs of slowing down. The three-letter acronym, NFT, stands for “Non-Fungible Token”. NFTs made their presence known by non-crypto enthusiasts through extraordinary news coverage and developments such as digital artworks selling for $69 million,[1] a $532 million pixelated character (that never really “sold”),[2] and using NFTs in video games.[3] However, not all NFTs are created equally and risk being illegal due to copyright laws. To understand how an NFT may not be legal, a basic understanding of NFTs is first required.
What is an NFT?
An NFT is a digital asset (token) that is non-fungible, meaning it is unique and cannot be replaced with something else. NFTs digitally represent anything you want, from traditional arts (such as pictures, videos, and music), tweets, and sports moments, to functional items such as digital real estate and characters in crypto gaming.
NFTs are created through a process called minting. Simply put, minting is the execution of code via a “smart contract” in order to deploy an uploaded file (for example, a pixelated drawing of an ape wearing a blue bandana) onto the blockchain for a fee. The minting process assigns authentication and ownership on the blockchain, and enables the newly minted NFT to be transferred and tracked on digital marketplaces with complete accuracy.
NFT Ownership
Buying an NFT from a digital marketplace confers ownership of the underlying NFT to the buyer, giving the buyer the right to trade, sell, or give away the NFT.
However, the terms governing an NFT’s ownership are not the same and changes what a buyer can do with the NFT and its underlying asset. Often, the buyer does not own the copyright or any rights to the intellectual property underlying the NFT. Most agreements grant a licence to use, copy, and display the digital asset solely for personal, non-commercial use;[4] whereas other licenses allow an NFT owner to use, copy, and display the digital asset for commercializing merchandise up to $100,000 in gross revenue each year.[5]
Furthermore, the terms governing the NFT may also determine the author’s moral rights. Canadian copyright law protects an author’s moral right to attribution, integrity and association of a work.[6] However, moral rights cannot be assigned but can be waived in whole or in part.[7]
The extent of a buyer’s rights is imperative to understanding how a buyer can use an NFT and its underlying asset. This is particularly important because using the NFT’s underlying asset contrary to its terms may expose the user to copyright infringement lawsuits and damage awards.
Copyright Owner
NFT copyright ownership is often held by the one who mints the NFT, assuming they own the copyright to the underlying asset. Copyright ownership is important because NFTs receive the same protection as physical artistic works. Therefore, the owner retains the right to the NFT’s underlying asset and is free to transfer the copyright, grant a licence for certain uses, or even limit the asset’s use. Additionally, the copyright owner can use the underlying asset in whatever context they want, which includes minting the same asset again. NFTs minted by the copyright owner are legal.
However, NFTs become illegal when the underlying asset is minted by a non-copyright owner. Without full and complete copyright ownership, a minter may be infringing on another’s right. This situation has occurred with social media tweets[8] and a famous album.[9]
Illegal NFTs are problematic for copyright owners and NFT buyers. Copyright owners have their asset used or altered without their permission and do not receive any profit. The copyright owner is faced with having to pursue legal action against the infringer and notify the marketplace about the copyrighted NFT. Meanwhile, the copyrighted NFT is worthless and is traded on the marketplace by unsuspecting buyers. Not only is the copyrighted NFT worthless, but it also risks being removed from the marketplace and leaving the last-to-purchase empty handed.
Takeaway
In a rapidly growing and unregulated market, NFTs pose legal issues to everyone in the process from creators and minters, to sellers and buyers. If broad legal issues, such a copyright ownership, are not understood and taken seriously, your NFT might actually be worthless. Illegal NFTs may land you in lawsuits, leaving you holding not-fun tokens.
[6] Copyright Act, RSC 1985, c C-42, s 14.1(1), 14.2.
[7] Copyright Act, RSC 1985, c C-42, s 14.1(2).
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