NFTs for Content Creators, Licensees and Copyright Holders

By: Kenneth J. Falcon, Esq. and Moish E. Peltz, Esq.

By this point in time, just about everyone with an internet connection or access to cable news has heard about NFTs.  From Beeple’s historic $69,000,000 sale to digitized alien “CryptoPunks” selling for millions to NBA Top Shot collectors—the news is everywhere. There’s even an SNL skit.  If you’re a content creator, you want to cash in on the craze.  If you’re an advisor to content creators, you’ve been fielding a raft of questions regarding them.   

Fluency in the field of cryptocurrency, blockchain technology and NFTs is now a necessity to the savvy intellectual property owner or advisor.

Overview of Blockchain, Cryptocurrency and NFTs

A blockchain is effectively a list of transactions embodied in computer code.  The code is run on a series of computers and the list is stored in “blocks” of data, which are also transferrable “rewards” for those who run the computers that back the network. A decentralized blockchain, like Bitcoin’s, is run in such a way that no single person, company or central authority is in total control.  Decentralized blockchains operate in a peer-to-peer setting. Each subsequent block of data contains a history of all prior blocks and transactions.  This allows the entire history of the blockchain, or the “ledger,” to be visible, secure and resistant to tampering or double-spending. 

In additional to transfers of digital currency, some blockchains are designed to enable ‘smart contracts’ – a type of automatically executable computer program – to be executed on the blockchain. This enables a set of instructions to effectively self-execute on a public blockchain, instead of a private computer. In turn, this allows the creation of both fungible and non-fungible tokens (NFTs).

NFTs are ‘Non-fungible’ because they can represent unique specific items of property, including content which would be subject to intellectual property protections. The creator of the NFT is entirely in control as to whether that intellectual property is a one-of-one original, or a limited (or relatively unlimited) set. NFTs can represent almost any real or intangible property, including digital artwork, physical artwork, music, videos, collectibles, trading cards, video game virtual items, contract rights or even a debt or real estate. In sum, an NFT is the digital version of a certificate of authenticity, embodied in the blockchain.

By contrast, “Fungible” tokens (including Bitcoin or other payment-type cryptocurrencies), may be theoretically unique, but are interchangeable. Fungible tokens are like a dollar bill.  If someone owes another person one dollar, they can pay with any dollar bill, or any four quarters.  The dollar bill has a unique serial number, and in that sense the dollar bill is unique but the dollar is “fungible” — any equivalent amount of currency will settle the debt.

Creating NFTs

NFTs can be created on any number of blockchains.  The most popular blockchain for NFT creation is Ethereum.  Other popular options include Binance Smart Chain, and Flow by Dapper Labs. 

Once you select a blockchain, most users would select a platform that operates on that blockchain to help create an NFT on that blockchain.  Rarible is an example of a platform that operates on the Ethereum blockchain.  In order to create an NFT, users deposit Ethereum to pay for the creation of the NFT as a smart contract on the Ethereum blockchain, accept the platform terms of service, and “mint” the NFT.

Depending on the platform and nature of the work sold, creating your NFT can include uploading an image, video, or music file, adding a name and description, and deciding whether to collect royalties for future sales of the NFT, theoretically including all future resales. Various options exist on different platforms, and undoubtedly, additional options will be developed in the future.

NFTs and Copyright Law

Copyright can be thought of as a ‘bundle’ of rights.  Owners of a copyright possess the exclusive right to: (1) reproduce the work; (2) prepare derivative works based upon the original work; (3) distribute copies of the work to the public by sale, rental, lease, or lending; (4) perform the work publicly; (5) display the work publicly; and (6) in the case of sound recordings, to perform the work publicly. 17 U.S. Code § 106.

If an author chooses to sell their original work to a buyer, the author, by default, remains as the copyright holder and retails to original copyright in the work, even upon sale to a buyer; unless there is some deviation from the general rule. The buyer will own the physical copy and the related limited right to display that physical copy.  However, the buyer does not necessarily have the right to make additional copies or make further commercial use of the underlying work. This right is generally retained exclusively by the copyright holder. 

How do NFTs change this landscape?  Potentially, significantly.

First of all, the minting of an NFT is effectively done subject to the terms and conditions of the NFT platform and the intent of the NFT creator.  That platform’s terms may grant a total transfer of copyright to the buyer of an NFT, or may only convey a limited right of display.  They may include a promise to limit production to a set number of NFTs, or may set no limit at all.  The content creators themselves may promise to convey the NFT plus an original physical artwork, an NFT plus copyright ownership, an NFT plus a portion of ongoing royalties, an NFT plus a ticket to a live event, or just about anything else.  The potential combinations are virtually limitless. 

Even more significant is the ability to program ongoing royalties into the sale or transfer of the NFT itself.  When creating an NFT, a content creator can require that a percentage of future sales must be paid back to the content creator’s designated wallet via a smart contract.  The content creator thus gets around the “first sale” problem that movie studios couldn’t avoid back in the analog days of Blockbuster.

NFTs can effectively serve not only as a digital collectible, but as a certificate of authenticity.  If a work comes with an attendant NFT, you can always evaluate whether that work is genuine by whether the owner of the work can demonstrate the ability to transact on the cryptocurrency wallet that holds the NFT that entitled them to that work.  If you want to ensure your work is sourced from the content creator themselves, what better way than to buy it through a verified, imperturbable ledger?

It is this flexibility and degree of control that is so exciting.  It is also what subjects content creators, owners and licensors to significant risk. 

What rights are given when an NFT is minted on a platform with no terms and conditions or not on a platform?  What happens when an NFT is sold without a platform at all?  What happens when a content creator purports to assign its underlying copyright or royalties, but fails to record that assignment with the national bodies that track and regulate such assignments?  What happens when a single creator of a joint work directs all proceeds to their individual wallet?  What happens when unauthorized persons create an NFT of copyrighted work they don’t own? Can the purchaser of an NFT duplicate an NFT they’ve purchased to skirt royalty payments to the original creator? To take a darker turn, what happens if a terrorist acquires an NFT entitling the holder to royalty payments from all purchasers of certain songs or artworks?  When anyone who can transact on a public and distributed blockchain can buy an NFT, almost anything is possible. 

The market seems destined to split into smaller players and larger players who may be able to solve these optimistic risks, and also these potential risks, including AML/KYC (or “anti-money laundering” and “know your customer”) questions via differing means.

Licensing and NFTs

NFTs are undoubtably the next frontier in the “new media” landscape and IP license agreement.  Licensees (or Licensors) who rely on older agreements to outline their permitted uses of a particular work are unlikely to have contemplated the ability to create a digital representation of the copyrighted work as a portion of a distributed financial ecosystem.  On a going forward basis, any copyright attorney who drafts an intellectual property license agreement without contemplating the use of this technology is likely doing their clients a disservice.

Licensing agreements geared towards the NFT and cryptocurrency space must specify particular details about platform selection, blockchain selection, promotions and marketing, limitations, special rights, royalty payments, dispute resolution and more.

NFT, Blockchain and Cryptocurrency Risks

The NFT, blockchain and cryptocurrency ecosystem exists in a regulatory environment that has remained fundamentally the same since banks kept hand-drawn ledgers.  The relatively simple NFT implicates the potential regulatory jurisdiction of dozens of government agencies including the SEC, FTC, IRS and FinCEN.  The area is replete with promise and fraught with risk. 

There are substantial security concerns in dealing with property that is inherently novel and high tech.  Many players in the space are fly-by-night, pseudonymous and international.  The potential for profit has attracted more than a few outright reported criminal schemes (see e.g. Mt. Gox, Cryptsy, and more).   Hackers have significant financial incentives to figure out ways to part the non-tech-savvy collector or investor from their hard-earned digital assets.

The cryptocurrency space is also highly unpredictable and irreverent.  A cryptocurrency based on a joke with a shiba-inu mascot is currently in vogue with billionaire technocrats and rock stars.  That “joke” of a cryptocurrency now has a market capitalization of over Seven Billion Dollars – more than Hanes brands, ADT, or Jetblue Airways.  One Doge will always equal one Doge.

The rule of thumb in cryptocurrency, and now in NFTs is “never risk anything that you aren’t prepared to lose.”

Conclusion

NFTs provide potentially the largest new market opportunity for copyright holders, licensors and licensees in recent memory.  Any intellectual property owner would be well advised to closely monitor developments in the field and consider their best path forward.

Kenneth J. Falcon, Esq. is the Managing Partner of Falcon Rappaport & Berkman LLP.  He co-chairs the firm’s Digital Assets Practice Group with Moish E. Peltz, and chairs the firm’s Real Estate Practice Group.  Ken’s practice encompasses both transactional and litigation matters, including Federal practice in Copyright disputes.  Ken has been advising cryptocurrency related businesses since 2014.

Moish E. Peltz, Esq. is a Partner at Falcon Rappaport & Berkman LLP.  He co-chairs the firm’s Digital Assets Practice Group with Kenneth J. Falcon, and chairs the firm’s Intellectual Property Practice Group.  Moish’s practice encompasses both transactional and litigation matters, including drafting and litigating IP licenses.  Moish has been advising cryptocurrency related businesses since 2014.

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DISCLAIMER: This summary is not legal advice and does not create any attorney-client relationship. This summary does not provide a definitive legal opinion for any factual situation. Before the firm can provide legal advice or opinion to any person or entity, the specific facts at issue must be reviewed by the firm. Before an attorney-client relationship is formed, the firm must have a signed engagement letter with a client setting forth the Firm’s scope and terms of representation. The information contained herein is based upon the law at the time of publication.