What does ownership of an NFT mean?

You may have noticed that NFTs have been popping up in the news. Digital artist Mike Winkelmann, known as Beeple, sold a collage of his works for a whopping $69.3 million worth of Ether, a cryptocurrency. Quite the sum for a JPEG file. Everybody seems to be jumping on the NFT bandwagon lately: Taco Bell has made NFT tacos to keep in your digital wallet, tweets are being sold for millions, and collectibles and art have seen dramatic price increases.

We have discussed what NFTs actually are in a previous blog, so now let us look more closely at the rights. How are NFTs protected? Does the legal reality match what sellers and buyers expect?

A quick recap. NFT stands for non-fungible token. It is a crypto asset that is connected to an object. In that sense, it is rather like a certificate of authenticity. It is nothing more, and nothing less, than a position on the decentralised database that is blockchain, connected to an object. Such a position can be connected to real objects, such as a house or a watch, or to a digital object like a digital artwork, a baseball card or an album.

NFTs can be purchased with any currency. A sale is completed when the position of the seller on the blockchain is transferred to the buyer’s account. NFTs are similar to cryptocurrency in the sense that they both use blockchain technology to record ownership (the position in the database) and validate authenticity. Unlike cryptocurrencies, however, every NFT is unique, because it cannot be divided into anything smaller and therefore remains identifiable. That is what the “non-fungible” in NFT means. The most spectacular result of this technology is that it changes digital files from non-identifiable bulk into identifiable copies, introducing something very similar to identifiable physical objects.

One important point is that an NFT does not mean ownership of the connected object. The NFT of the Beeple collage that was sold, for example, does not mean that the collage itself now belongs to the buyer. It is just the position on the blockchain connected to that collage. In fact, the image is still available online in non-identifiable copies. The artist has not granted the buyer of the NFT an exclusive copyright licence in the Beeple collage, for instance, that could be used to control that online circulation. The buyer just has a unique position in relation to the collage, and therefore something similar to a physical copy of it. Collectibles, such as baseball cards, are another example. The picture on those cards may be widely available in all sorts of forms, while a specific card may be extremely rare and therefore very expensive.

What, then, is actually being bought with these NFTs? What is an NFT’s relationship with good old property rights?

In Dutch property law, ownership is limited to tangible objects. In addition, one can be entitled to so-called “goods”. Such goods are also rights. Such a right may be a right to receive money from someone. Or the right to use a piece of land. Or the rights in a domain name. As “intangible” as an NFT, in a way. Such an entitlement is in many ways comparable to good old ownership of tangible objects. So can one, under Dutch law, at least be a rightholder in respect of an NFT?

For simplicity’s sake, and to keep with the current trend, let us take digital artworks as a guide. With an NFT, you are entitled to the NFT itself, not to the underlying asset nor to the corresponding copyright. So that would mean that NFTs themselves cannot be considered ‘goods’. They are not rights. They are nothing more than factual control over the position on the blockchain. Such factual control is pretty similar in a philosophical sense to “possession” of a tangible object, or even ownership, but it is not a “right” under Dutch law. The blockchain ensures immutability and strict transfer rules. But it does not grant rights.

Property law would consequently not apply. That feels counter-intuitive, as there is lively trade going on and the owner of the NFT does have exclusive control. So there are voices in the Netherlands advocating that the old-fashioned “ownership” articles be extended to digital assets. In quite a few cases, judges have also attributed typical “ownership” elements to digital assets. Digital assets can be stolen, for example, and a standard software licence can be traded just like a physical carrier of that software. I am very much in favour of such an extension. The law should follow economic reality. And the current reality is that, in an economic sense, an NFT is very similar to a tangible object.

As mentioned, finally “owning” a much-desired NFT does not always mean holding the associated copyright (or other IP rights) in the object the NFT refers to. That is rarely the case, in fact. So if I buy a Mutant Warrior NFT (brought to market by R2 Collectibles and EOS Amsterdam, a company I own shares in), what can I do with that picture, given that I do not hold the copyright? Can I make another NFT out of it? Can I offer and sell my NFT? What are my options?

This is my NFT (it genuinely is):

If the seller or issuer has not clarified any of the above, which is usually the case, there is a way of looking at the issue that is similar to how the law looked at online publications in the early days of the internet. We lawyers call it an “implied licence”.

The idea is that a licence is implied if it can be argued that the parties would have created one, because the agreement would not make much sense otherwise. It can be argued that by allowing an NFT to be created for their work, a copyright holder implicitly also allowed that NFT and its picture to be sold, shown, shared and so on. Without such an implied licence an NFT does not make much sense, because the “owner” of an NFT could make no use of it.

Another solution could be digital “exhaustion”. Exhaustion is used in respect of tangible goods and certain software licences. It means that once a specific product (a book, say) or a software licence (on a carrier such as a USB drive, for instance) has entered the market, the purchaser is allowed to resell it and to market it so as to enable that sale. There is nothing the rightholder can do to prevent this. Applied to an NFT, this would mean that once an NFT has been sold on the market, the purchaser would be allowed to resell and market it (in order to resell) without the consent of the copyright holder. As the proud owner of the Slimy Simon NFT, I could resell that NFT on the basis of the exhaustion rule.

At the moment, it is not apparent how a court would rule on exhaustion. It depends on whether an NFT would be regarded as “software”. If so, it is very likely that the exhaustion principle would be applied. If not, it is not yet clear. To me, it is obvious that a court should apply the exhaustion rules, given the economic reality an NFT represents. A ruling could go either way, however.

In conclusion, we are legally in no man’s land. Which is exciting to lawyers like myself, but less so for those in business and compliance. When the time inevitably comes, I am confident that the courts will use their common sense when ruling on these cases and, in doing so, add legal certainty to an economic reality.

More to come: what happens when an artwork is tokenised without permission? Are NFTs software? Which rights does the copyright holder have and which belong to the buyer? How can you draft exclusive agreements in respect of NFTs? All of this and much more, only time will tell. In the meantime, we can enjoy all the trends, developments and legal speculation.

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In cooperation with Saar Hoek