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NFTs are not a quick fix for all IP rights problems, but they will potentially allow developers more leverage than they have ever had.
Whether you’ve had something to do with digital arts, digital properties, or both in the last few months, you’ve almost certainly heard of how nonfungible tokens, or NFTs, are shifting the game for creative industries. From Kings of Leon releasing their latest album as an NFT to digital artist Beeple closing a Christie’s auction with a jaw-dropping price tag on a piece of his work, the pattern has been happening at a breakneck pace.
Many people agree that NFTs are more than just a flashy new platform for creative work; they are a tool that can create new efficiencies and reshape partnerships between artists, their fans, and traditional marketers and executives in the music and arts industries.
Better management of intellectual property rights and streamlining the distribution of royalties are among the most frequently invoked use cases. Established copyright management bodies, such as the Italian Society of Authors and Publishers, are joining the movement and heading in the direction of blockchain IP registries, while musicians are putting shares of their work up for sale for investors to profit from the records’ subsequent commercial use. How viable are these solutions, and what roadblocks can their champions run into?
The quest for authenticity
One of the most significant challenges that digital content creators face is the ease with which a full digital copy of their work can be created at virtually no expense. Since a digital image or soundtrack may be easily downloaded and transmitted an unlimited amount of times, it is difficult for authors to trace how and by whom their art is used and, therefore, to profit from this use.
The key value proposition of NFTs is that by developing a special, blockchain-backed archive of each unit of artistic output, they can not only encrypt the meaning of its validity and rarity, but also allow artists to lay down and enforce copyright transfer, use, and monetization laws. Co-founder of blockchain content security company Custos Media Technologies G-J van Rooyen told Cointelegraph:
“First, NFTs allow us to securely trace the transfer of rights — in the same way as a Bitcoin payment securely traces the transfer of funds. Second, NFTs can provide perpetual support to creators. For example, an NFT could specify that creators should be rewarded each time an asset is resold at a higher value.”
One significant difference over the conventional world of IP rights security that NFTs have is automated compliance. According to Daniel Daboczy, CEO of technology company Technicorum Holdings, by using the smart contracts at their heart, NFTs will allow artists to share royalties and secure intellectual property without the need for legal action and compliance.
In many cases, however, the relationship between smart contract-powered technology and existing legal frameworks can be less than straightforward.
What do NFT owners really own?
In most cases, ownership of an NFT does not entitle a person to ownership of the underlying work by default. Rather, it can be viewed as a digital certificate attesting that they own a unique, collectible version of it. Burr Eckstut, special counsel at law firm Covington & Burling LLP, further explained to Cointelegraph:
“NFTs are different from digital content in that there can only be one holder of a given NFT at a given time. NFTs do not, however, typically ‘contain’ the digital content and might not be linked to digital rights management technology that would prevent copying the digital content. The link between the NFT and content may even just be conceptual, but it can still have value as long as the NFTs are scarce.”
“There is really no intellectual property rights protection without digital rights management,” Gunther Sonnenfeld, CEO of digital ownership technology company RAIR Technologies, told Cointelegraph. An NFT is simply a serial number of its own, and an additional layer of software must be implemented to enable users to reshare the underlying commodity while ensuring that both the producer and the sharer receive their split.
NFTs’ smart contracts may be designed to monitor various facets of the artistic work’s use. Perhaps the most stringent alternative is to restrict access to the encoded material entirely. Dickinson Wright IP and patent solicitor William Honaker told Cointelegraph:
“If the NFT controls access, then it will enhance copyright protection. If the work is protected against copying and redistribution through the NFT and access is by, for example, a one-use code to view, then it would be protected beyond copyright.”
NFTs can also be used as licenses, whereby those who purchase them acquire the right to use the content for commercial or other purposes, but they do not get the ownership right.
Royalties and fractional ownership
The majority of the value created by digital art in today’s creative industries goes to intermediaries such as record labels and distribution channels. The balance of economic influence in this domain will quickly change in favour of developers, thanks to blockchain technologies.
According to Gaurang Torvekar, CEO and co-founder of blockchain-powered workflow platform Indorse, “along with immutable proof around ownership and provenance of the assets, NFTs also allow buyers to have fractional ownership of them.”
This process has extraordinary versatility in terms of copyright exploitation. Edmund McCormack, the founder and CEO of the crypto-focused education platform Dchained, spoke with Cointelegraph about the issue:
“If a song is created by a group of artists and registered on the blockchain in the form of an NFT, each of them can claim a relevant fraction of this token, be it 90% or 1%. To gain profits for their creation, they can issue licenses as NFTs as well and sell them to interested parties while remaining the owners of the piece. Moreover, they can sell fractions of their rights to their followers and thus gain investments directly.”
Sonnenfeld added that he expects a variety of NFT-based monetization models beyond royalties to emerge as the market matures. These could include licensing, preferred subscriptions and data redistribution through proper identity management.
Relationship with copyright law
Many of the procedures mentioned above remain legally ambiguous, since the implementation of NFT-based systems for IP rights management would have to be reconciled with the safeguards and enforcements provided by existing copyright law.
According to Lokesh Rao, CEO of NFT-based protocol Trace Network, asset ownership must also be settled upon in court, and before NFTs are accepted as equivalent to a paper or digital credential, the extent of application of this definition will be limited to digitally owned and consumed products.
“The biggest bottleneck is that nearly all IP rights are registered rights — meaning that the rights holder needs to register with a government entity,” said D’vorah Graeser, CEO of AI patent search tool KISSPlatform, to Cointelegraph. This establishes a public record in the event of future questions or a disagreement. It would be difficult to establish a comparable situation with NFTs in which all sides — namely, companies with rights and the legal system — could agree.”
Graeser went on to say that such reconciliation is not unlikely, and that in the end, a mixture of NFTs, legal settlements, and court enforcement will be very successful.
Eckstut of Covington & Burling raised a number of other possible legal questions that might arise in the context of protecting copyright interests by NFTs. One is linked to the “first sale doctrine” which traditionally prohibits copyright owners from limiting (and therefore benefiting from) further sales of physical copies of their works — something that NFTs can allow creators to do. Another issue is that, under existing law, copyright in the United States should only be exchanged using a written instrument — a requirement that is impossible to be reached by the conversion of a digital token.
In sum, it’s apparent that incorporation of NFTs into the business of copyright protection on a large scale will require some years of court precedent, as well as modification of codes and statutes that govern intellectual property law.
Although technical solutions for IP rights security have existed in the blockchain space for years, most analysts who spoke with Cointelegraph on the subject agreed that the NFT sector is still in the early stages of its journey towards taking over the creator economy’s copyright arm.
W. Sean Ford, chief executive officer of blockchain platform Algorand, believes that the technologies required to support these assets and the ecosystems that are being developed around them must meet a particular set of requirements, as he outlined for Cointelegraph:
“Simple tooling to create and launch NFTs, strong smart contracts to leverage NFTs for more complex applications, immunity to forking to ensure the original creation can not be replicated, low transaction fees for healthy participation, scalability to support billions of creative assets, and a low carbon footprint for sustainability of the communities these assets serve.”
The fractured ecosystem of NFT systems intended to offer copyright fees to artists is currently a major problem. According to McCormack, in many situations, royalty fees are only available to transactions made on each individual website. Nonetheless, he noted that flexible protocols are already emerging: “EIP-2981 could enable content creators to incorporate smart contracts, which automate the royalty payment process, directly into the NFT.” As a result, musicians will be able to collect royalties regardless of whether the buyer purchased the NFT.”
There is no doubt that nonfungible tokens have the ability to disrupt the current models of intellectual property rights management in the creative industries. However, it is also clear that the integration would be neither smooth nor immediate, since various tensions between the old systems and the NFTs must be overcome.