• NSN Law Bulletin

NFTs and Copyright Law

A non-fungible token (“NFT”) is a type of cryptocurrency that has emerged in the wake of the rapid development of digitalization, but questions remain as to how the rights to NFTs are protected under the law. Although NFTs are not new, they have gained popularity recently due to the effects of the pandemic. As a result of the rapid development of the digital world, the rise of cryptocurrencies, and the emergence of NFTs, the legal questions surrounding these matters are very current since there are few if any specific regulations covering cryptocurrency and essentially none covering NFTs. At the same time, NFTs are characteristically unique from other cryptocurrencies as their features touch the core of Intellectual Property and Industrial Rights, which is especially relevant in terms of copyright, which depends on the creation of a work. However, even if NFTs are generally accepted as falling under the category of Intellectual Property, what can be done about enforcing these copyrights against violations surrounding these works?

What is an NFT?

An NFT can be defined as a digital asset in the form of an unchangeable token, which is a data unit stored on a digital data network known as a “blockchain.” Like any token, an NFT is stored on a blockchain, which is used to confirm that the digital asset is immutable and therefore not interchangeable. To put it more simply, it can be thought of as a certificate of ownership. In other words, they are digital records of ownership that securely store information such as artwork, pictures, voices, music, and performances that were created in either the digital world or physical world and digitized as originals possessing unique characteristics (e.g. creator, important events in its history, property history, etc.) by recording them in an unchangeable way upon a blockchain.

A person who purchases an NFT gets a right to purely digital data. This data can be image, sound, video, music, performance, or even a tweet and just as a tweet is publicly accessible, NFTs are publicly accessible as well. While anyone can download a copy of an original file to their computer, this does not reduce the value of the purchased data of an NFT for the purchaser. For example, the Mona Lisa never devalues its original form, which is exhibited in the Louvre Museum, despite having millions of copies. In NFTs, the fact that an NFT is accessible for everyone and millions of copies of it can be created does not detract from the value of that NFT. In fact, the value of the original work comes from the ownership of the NFT.

As mentioned above, NFTs are not limited just to visual artwork. Recently artists in many fields have sold their digital artwork as NFTs, and their numbers are increasing day by day. Due to the processing of copyrighted artworks on NFTs, the issue of whether NFTs are subject to copyright law has come to the fore. In order to answer this question as it pertains to Turkey, the first question is whether NFTs could be considered artwork within the scope of the Turkish Code of Intellectual and Artistic Works No. 5846 (“Code No. 5846”).

Could NFTs be Considered as an Artwork within the Scope of the Code?

According to Code No. 5846, for an intellectual and artistic product to be accepted as work and taken under protection, (i) it must be the product of an intellectual effort, (ii) bear the characteristics of its owner, (iii) be materialized, and (iv) fall into one of the types of works listed in the Code. Therefore, if a work fulfills the above conditions necessary for the protection of the work then both the owner of the work and the work itself can benefit from the copyright protection provided by the Code. Accordingly, it can be said that whether the work has physical existence or is in NFT format is unessential when deciding whether it can be considered as a work under the Code.

A person who purchases an NFT can display the NFT on social media, or if the purchaser chooses, transfer the NFT to someone else through release. As mentioned earlier, the person purchasing the NFT is actually purchasing a certificate of ownership, in other words, a license to display the copyrighted work in a limited capacity. For this reason, the copyright of the work processed as an NFT does not transfer to the buyer; the copyright of the underlying work still belongs to the author of the work, and the author of the copyrighted work retains the legal right to reproduce, adapt, and publish the work. In other words, purchasing the NFT does not necessarily grant a copyright to the work unless it is transferred or licensed under specific terms.

However, within the framework of the freedom of contract and the practice of copyright law, the owner of the work may also decide to transfer the financial rights of the copyrighted work during the sale of the NFT. If the owner of the work has agreed to transfer the financial rights of the work in accordance with the form conditions stipulated in Code 5846, the owner of the work will no longer own the financial rights arising from the work, and the party who purchased the NFT would own both the financial rights on the work and the NFT itself.

What are the Advantages and Disadvantages of NFTs?

An NFT is essentially a matter of the owner of a digital asset transferring ownership to a purchaser. For example, a sports brand has started to produce digital NFTs for limited edition products which are physical assets. This brand could argue that a person owns this physical product through these digital NFTs, since NFTs act as digital certificates. Meanwhile, NFTs are kept in crypto wallets on crypto chains so everyone can see them. Therefore, it is impossible to defraud and it is easy to track. As a result of this transparent structure, the original form of digital work is secured with blockchain technology and anyone can see whether the artwork is authentic or not. This also provides an essential convenience for the tracking of copyrights for the owner of a work. In addition, the owner of an NFT receives a particular share from each sale, which can be used as a monetary incentive for the artist.

However, there are also disadvantages, such as the fact that anyone can create an NFTs they could easily turn a work belonging to someone else into an NFT, which may cause copyright infringement as a result of selling work in this way. Also, another disadvantage is that copyrights can easily be violated within this structure, as the creation of NFTs take place within digital boundaries, and it is challenging to control this process. For example, Corbin Rainbolt is a digital artist who shared his work on Twitter but it was sold as an NFT without his consent. In fact, this is one of the main problems with NFTs, since anyone can create an NFT, someone can create and sell the NFT of a work which has previously been created by the copyright holder, acting as if he or she owns the underlying work. Such conduct may touch ‘copyfraud’ and ‘infringement of copyright and moral rights’ but it would be difficult to verify the identity of the infringer due to the anonymous character of the NFT. This is because people do not need to use their real identities when creating NFTs and they can act anonymously while performing the transactions. Therefore, it can become very complicated to take a legal action against a copyright infringement with an NFT since it is very troublesome to track down the infringer in a digital structure like this.

Although NFTs are gaining popularity, serious questions remain regarding the protection of artists’ rights. The fact that there are currently no specific NFT legal regulations, a main feature of NFTs and the blockchain, in general, is anonymity, and there is no system in NFTs preventing copyright violations, the legal future of NFTs is uncertain for the time being. In the meantime, NFT sales in the digital market are growing due to the practical and cost-effective solutions provided to creators by blockchain technology.

Author: Bilge Derinbay, Hande Ülker Pehlivan