NFT secondary markets: Unlimited royalties or one-time resale rights?

The growing craze around NFTs (non-fungible tokens) and the extraordinary prices they fetch mean that more and more artists are considering selling tokens of ownership of their artworks on the blockchain as collectibles. The hype and the sums involved bring with them interesting innovations when it comes to the scope for visual artists to earn from the resale of their tokens on the blockchain, through the automatic charging of royalties, or rather of the artist’s resale right, by smart contracts.

The artist’s resale right, known in Dutch as the volgrecht, is the EU right that entitles the author of an original work of art to a percentage of the price every time the work is resold with the involvement of an art market professional. Traditionally, charging that right for the original creator of a unique visual work of art has been handled by professional intermediaries. Those come with costly and time-consuming procedures, which have generally only been available to recognised, relatively wealthy artists. Another drawback of that system is that the resale right only kicks in once the sale price passes a fairly high threshold. Finally, the percentage is low: in the Netherlands it is 4% to start with. With each subsequent sale and price increase, the percentage falls, all the way down to 0.5%.

NFTs are different in that respect. Since the dawn of NFTs, earning passive income from royalties on tokens that point to artworks has been available to anyone who mints an NFT, and those royalties are not tied to a specific sale price. Nor does the percentage decrease over subsequent sales.

Most NFT marketplaces are able to charge a fee for the minter of the NFT alongside their own marketplace fee. Those fees generally vary from 2.5% to 10%, and are either fixed by the marketplace or set by the minter. The minter can be the artist or a publishing company.

These marketplaces, such as AtomicHub and OpenSea, use different blockchains as a backbone, such as Wax, Ethereum, Flow, Tron or EOS. On Ethereum marketplaces the fee for the minter can vary, but on AtomicHub, the marketplace for the Wax blockchain, the percentage is set at 4%.

On the Ethereum blockchain in particular, different marketplaces implement the functionality for awarding royalties in their own ways. That means an NFT can be minted on one marketplace and sold there, while the new owner can resell it on the secondary market (another marketplace platform) without honouring the royalties when re-minting the NFT on the new marketplace.

Luckily for artists, a standard has been developed for the Ethereum blockchain which aims to standardise the payment of royalties for NFTs across all NFT marketplaces. Whether it will be widely adopted by all Ethereum marketplaces remains to be seen.

Is avoiding royalties illegal?

An interesting question is whether not honouring the royalties on the secondary market would amount to copyright infringement, since the buyer and subsequent seller would not be acting in accordance with the implied licence under which the NFT was published and sold. The resale right, or the royalties, are established in the smart contract of the original minting on the marketplace on which the NFT was created, and might therefore be regarded as conditions that have to be met to allow the NFT to be published further. One could argue that if a later buyer and seller do not live up to those conditions, further publication and resale would be copyright infringement.

Should NFTs be treated like books, or like unique works of art?

This also touches on important ideas about the exhaustion of copyright. One could argue that the resale of an NFT should be treated like the resale of a tangible work, such as a painting or a book. When it comes to the resale of works of that kind, an artist does not have any rights, apart from the mandatory artist’s resale right, which applies to paintings and other unique works of art resold in the EU, as set out above. NFTs, given their non-fungible, collectible or unique nature, can then be compared to a concrete tangible object, and given that the exhaustion of copyright aims to safeguard the freedom to resell tangible objects, there is surely a case to be made there.

On the other hand, lawmakers introduced the exhaustion principle because they took the view that copyright should not interfere too deeply with ordinary human interactions. You should not need the permission of the copyright owner to give a book to a friend for their birthday, for example. That underlying argument has far less force on the blockchain, where everything is visible and the payment of royalties is, or can be, fully automated.

Given all of this, we favour an approach in which the artist’s resale right (volgrecht) does apply on the blockchain, without the limitations of the offline world. So no exhaustion of royalties would apply. That would surely be a practical and just outcome.

In collaboration with Luis Hernandez.