[Bonus: Free Open Source Copyright License for NFT sales below]
My name is Enrico Schaefer, I am a technology attorney with traverse legal PLC, and today I want to talk about nonfungible tokens or NFTs. You have been reading about them all over the news, they’re the hottest topic in tech right now, especially in the blockchain space. Bitcoin is growing tremendously this year and the other cryptocurrencies follow suit as they appreciate value. Blockchain and blockchain technology is in the spotlight right now. With that in mind, we now have something called non-fungible tokens or NFTs. There’s not a lot of information out there about NFTs, so if you want to sell an NFT, if you’re an artist or creator, you need to know the legal implications of what you’re doing. How do you know if what you’re doing is lawful? How do you know if you’re infringing on someone else’s rights? What are the terms by which you are selling the NFT and licensing your work, the art you put into the platform that’s going to be attached to the NFT? Let’s talk about it.
There’s very little information about these things. It is the wild west. It is anarchy out there in the world or NFTs from the legal perspective. What I will try to do throughout the next couple of weeks is to provide real-world legal insights for those who want to participate in the NFT craze and participate in any NFT marketplace. You can create a digital or non-digital asset and attach that to an NFT. Different platforms exist that are marketplaces similar eBay, where you can buy and sell NFTs. Top marketing places include:
There are different types of NFT sales and auctions. There are open auctions, limited auctions, various flavors of ownership for the NFT, and sales of both digital and non-digital assets. An NFT is a Smart Contract, meaning that it embeds specific basic contract terms in the NFT metadata that goes onto the blockchain.
“Who’s the owner? Was that ownership transferred, and if so, to whom? What kind of private key do you have attached to that ownership? Are there going to be royalties paid upstream to the initial owner if there’s a subsequent sale? These types of basic information are going to be attached to that NFT in the back-end code.”Enrico Schaefer
We want to talk today about what is sold, bought, and licensed in an NFT sale. This concept is one of the most misunderstood aspects of the NFT marketplace. People don’t realize that they’re not purchasing the image or the video or the collectible on the platform. The person who has put that NFT and the associated digital or non-digital asset that will attach to the NFT on a platform, what they’re selling is the NFT. The nonfungible token. They are selling the token, and you are buying the token. That is it. This concept is nuanced and important.
There is the token itself, and then there is the image, the art, the audio file; those are two separate things. The NFT is distinct from the thing that is being attacked, whether it’s a painting, graphic, or video. The NFT will show the ownership of the NFT. Then, it will be placed onto the immutable blockchain, and it’s going to identify whether the owner of the NFT is transferred. Tracking for royalty purposes will be done, and that’s the function of that NFT. That Smart Contract, that token that can have unique data associated with it. In many ways, that’s the easy part. The more complicated part is the licensing piece.
Licensing NFTs is like the “Kings of Leon” or the cryptokitty graphic that is attached to the NFT. You are getting some bundle of limited rights to use, distribute, monetize, or none of the above with the image itself in many instances. Part of the problem is that the platforms like Open Sea and Wearable don’t have many options baked in for this puzzle piece. There is almost nothing baked into the platform itself.
On the platform Open Sea, and NFT marketplace, there’s an NFT for sale that “Kings of Leon” has posted. If you look it up, this page will show you minimal information about the listing. To find out what you’re getting if you had to bid on or purchase this NFT, you’re going to have to look around to find out what it is you’re getting in terms of rights. You know you’re going to buy the NFT, but what part of this “Kings of Leon” NFT are you getting?
There’s a “Detail” section on Open Sea that might offer you some insight. In many of the listings on these platforms, there is little detail about what you’re getting. There is little information about what is being sold and what is being purchased –in addition to the NFT itself–.
Open Sea is a very sophisticated seller, and its website clearly states that with the “Kings of Leon” NFT, you’re getting a digital album download. You’re going to get an mp3, presumably, of this “Kings of Leon” album or song. You’ll also get a limited edition NFT golden eye vinyl, so you’ll get the album itself as part of the sale. Most NFTs are digital, but you can also include and deliver after the fact, non-digital things to the buyer to sweeten the deal. You’re going to get that non-digital vinyl album in this case. You’ll also get digital collectible album artwork. In this instance, you have this cover photo that may or may not be significant, and you have a detail page included if you bid on this. That’s not a lot of information. There’s no factual information on this site about the license terms, so a lot of that will have to be found off-site.
As we’re navigating the “Kings of Leon” NFT on the Open Sea platform, you’re going to see a website link where you can redeem your NFT if you win the auction. Suppose you’re one of the people who purchase the NFT. In that case, you’ll have to take the unique identifier that is your private key, that is attached to this NFT purchase. You will provide the NFT attached to your private key to Kings of Leon to receive your artwork, your album, and your digital download link.
This NFT provides more information than most other NFTs. On the Kings of Leon NFT sale site, you can identify the owner and other due diligence information. This information, however, is still lacking. We found out a bit more, but it is still not a lot of information unless you dig deeply.
“Only by going to the Terms and Conditions section of this off-site website are we able to identify the copyright license language. This is why NFTs are the wild west. Few other sales of assets require you to search to find the contract terms.”Enrico Schaefer
If you are a seller, what are your terms, what are you licensing regarding the artwork? Do the buyers get to sell the work or repurpose it? Can they add it to an advertising campaign? What can they do with that? Do they own the NFT? Do you retain ownership rights? 99% of all NFT sales say nothing about these critical issues. It’s like walking into a high-end shoe store with no salespeople and no instructions, no guidance. That’s what’s going on here.
There should be terms and definitions on these platforms. The platform should describe what you’re getting, and what you’re getting is an NFT, which is an indication of ownership, and if you sell an NFT, you are no longer an owner.
Ownership is a section on this platform that is very instructive because it says, “you acknowledge and agree that as between you and the company, Kings of Leon, the company owns all legal rights title and interest in and to the art and associated merchandise, and all intellectual property rights therein.” They are the owner of everything that they are going to send to you. In this example, they are not selling you ownership. The rights that you have in the art and merchandise are limited to those described in the license.
Here, on the Open Sea platform, we can see the “Kings of Leon” license. This license is detailed because it says you’ll get a worldwide, non-exclusive, royalty-free, non-transferable artwork. You have a license to use, copy and display the art and included merchandise solely to use it, copy it, and display it. That’s it.
Review the copyright license restrictions in this example. You cannot modify the art in any way. Do people realize that when they’re buying this NFT that this will be one of the limitations? Is there going to be a violation of these license terms? You cannot use the art for your purchased NFT or included NFT to advertise, market, or sell any third-party product. You cannot put it on your commercial website as some marketing effort. You cannot use the NFT or associated merchandise connected with anything that could damage their reputation. You also cannot use the art or merchandise in any movies, videos, or media. If you wanted to use the digital graphic that will come with the “Kings of Leon” NFT, for example, you could not make a YouTube video containing that work. Now we can see more clearly how this NFT works.
Let’s now look at the information associated with the NFT that is going to be more complicated. It’s the contract address, which is what exists on the Ethereum blockchain. If you go to this section and look at the ether-scan, you’ll see the metadata embedded. In the Smart Contract, you’ll be able to see how ownership is tracked.
This particular token was sold from someone to another person on this date at this value. That kind of ledger information is detailed here. The ownership of the NFT is tracked, which then allows you to grant those rights that you were given to the next person.
The contract will also include any additional royalties paid on this transaction back to the owner, and it automatically pays the owner their royalties. This technology is what we’re going to continue to see with Smart Contracts in the future. These contracts include complicated code, which details ownership, what happens in a transfer, date and time stamping, whether royalties are paid upstream; these basic things are included in this contract.
Let’s switch gears and look at the Crypto-Kitty store on the Open Sea platform. If you go to the website, you’ll see NFTs that are on auction now. You can buy it, and you can sell it for a fixed price. You also can sell it at auction to the highest price; you can put certain basic limitations around your sale. Let’s see what we’re getting if we place a bid on this CryptoKitty. There’s an NFT that Sunny iRobot owns. It might be an aftermarket sale of a CryptoKitty, and it’s about $41. You can place a bid and see the listing that Sunny iRobot has placed for this CryptoKitty. You can see who has placed an offer, price, and trading history. You have a whole series of people who have bought and sold this NFT, this token.
Do your due diligence to understand what you’re buying with your NFT purchase.
Most NFTs don’t list off-site information. If you’re a seller and don’t describe the different license rights in the “Detail” section and what you are providing, both you and the purchaser are at risk because the rights will be unclear. In this case, you are buying a token, CryptoKitty owns the app, and you are getting a license to the art. This license does allow you to commercially use the CryptoKitty for up to $100,000 in annual revenue. Keep these kinds of terms in mind.
When you go on platforms like Open Sea, see what you’re bidding on, look at the contents of the description, click on every link you can find, and see if you can identify the license rights that go along with the NFT itself.
My name is NFT Attorney Enrico Schaefer, a technology lawyer talking to you today about NFTs. We’ll see you next time.