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Non-Fungible Tokens and Intellectual Property Rights

By Derek Wong

NFTs or Non-Fungible Tokens, are a digitised asset that cannot be readily interchanged due to their ‘individualised values’ and through their unique and artistic nature. [1] In other words, NFTs are forms of digitalised artwork that are traded in a similar manner to actual artworks. However, as NFTs are digitalised, a buyer of an NFT would be purchasing the link to the actual digital artwork, rather than the artwork itself. NFTs are therefore designed with an ownership history, which acts as an indicator of the transaction history.


This could be said to be the equivalent of property records and title deeds.[2] NFTs are only created through the creation of code on a blockchain network such as Bitcoin or Ethereum but contain a unique ID and additional fields for ownership details.[3] It could therefore be said that NFTs are the ‘digital answer to collectables.’[4] With the increase in popularity of digitised assets such as NFTs, it is therefore necessary to understand how the rules of copyright apply.


This article will therefore explore the question of whether the creation of an NFT could lead to copyright infringement. However, before answering whether or not the creation of NFTs could lead to copyright infringement, it is important to understand the elements of copyright protection.


According to the Copyright Act 1956, those who qualify for copyright protection within the UK must either be a UK resident or a corporation incorporated within UK jurisdiction.[5] In the case of artistic works, which would apply to the creation of most NFTs, the copyright prevents the reproduction, the publishing and the advertising of the work by anyone without the qualified person or entity’s authorisation.[6] Theoretically, the copyright owner should therefore be the only person able to transform an original work to an NFT.[7]


Another way to view the purchase of an NFT would be to view it as purchasing a work of art. As stated by Eziefula, Hopton and Wilson, the purchase of an NFT does not grant the right to ‘licence, commercially exploit, reproduce, distribute, prepare derivative works, publicly perform or publicly display’ the code itself, nor the art or work therein.[8] Applying this principle to the creation of NFTs, it would therefore be logical to assume that a recreation of one’s art or music in the form of an NFT would not be permitted, as this could be viewed as a derivative work. This is unless the creator of the NFT is also the copyright owner or has the permission of the copyright owner to do so.


Nevertheless, with improving technology and the increased ability to reproduce works of art, enforcing copyright protection has become more difficult, as illustrated in the case of Nintendo co ltd v British Telecommunications Plc, EE ltd, Plusnet Plc, Sky UK Ltd, Talk Talk Teleco Ltd, Virgin Media Ltd, where an injunction was sought to protect Nintendo’s videogames from internet piracy.[9]


Furthermore, as stated in the case Perrin v Drennan, in order to succeed in a claim for copyright, the plaintiff must show that ‘he is the owner of the copyright’ and that ‘the defendant has without his consent reproduced or authorised the reproduction’ of his work.[10] However, producers of NFTs would be able to avoid this issue by either adding their own edits to the original image. This would be analogous to cases of “appropriation art”, such as in the works of Andy Warhol, or the use of “memes”, which is usually already edited.


Looking at the former example of appropriation, in the case of The Andy Warhol Foundation Inc v Lynn Goldsmith, 4 factors were observed in order to determine whether copyright was committed.[11] The 4 factors observed were the extent to which the secondary work was transformative, the nature of the primary work itself, the substantial use of the primary work, and the effect of the use on the market for the primary work. Relating to the first fair use factor, as stated, the secondary work must ‘comprise something more than the imposition of another artist’s style on the primary work’ such that it is ‘both recognizably deriving from, and retaining the essential elements of, its source material’.[12]


Applying this to the present case, it seems that any NFT reproduction of a work of art by someone without the authorisation of the artwork’s copyright owner would have to show that the reproduction contains a ‘fundamentally different and new’ artistic purpose and character.[13] For example, in the case of a ‘meme’, it would be infringing on copyright to simply add a couple edits to the image itself, but rather, the edited image must essentially have an element which adds a sense of uniqueness to the meme itself.


Relating to the second fair use point, it must be considered whether the work of art was ‘expressive or creative’ or rather ‘factual and informational’. There would be a greater claim for fair use for ‘factual or informational work’.[14] In the case of NFTs, it would therefore be easier to claim fair use for, let’s say, this picture displayed below, rather than a design such as Bored Ape.

As for the third fair use claim, NFT artists must watch out for both ‘how much of the original work was used’, and the quality and importance of such works.[15] In relation to the creation of NFT artworks, it would therefore be a valid claim if only parts of an original artwork were used or if a whole collage of different artworks were used to convey a whole different meaning.


Finally, the court must also consider whether the widespread use of the secondary work would ‘adversely affect the potential market’ for the primary work.[16] Applying this to the creation of NFTs, it must be considered whether or not the NFT would act as a substitution of the original piece. While the nature of the NFT being digitalised, the NFT would still need to undergo artistic changes in order to be ‘less likely to serve as a satisfactory substitute for the original’, as stated in Campbell v Acuff-Rose Music.[17] Even though the NFT is already digitalised, due to societal focus on technology and digitalisation, it could be contended that any digital version of an artwork could serve as a ‘satisfactory substitute’ for original pieces.



To conclude, the creation of NFTs could potentially lead to copyright infringement if it is created by those who do not own a copyright for the original artwork it relates to. However, this could potentially be avoided through the fair use claims, such as those applied in original artworks.


With an increased demand and the creation of a new market for these blockchain tokens, it is necessary to consider the copyright implications such technology would have, in order to be able to deal in this type of digital art in a fair and regulated manner. Furthermore, due to the fact that this technology is new, it is inevitable that the law is not as developed in this subject matter. Therefore, it will be fascinating to observe how the law changes and adapts in the future to NFT technology.



 

[1] G Chinlund & K Gordon, ‘What are the copyright implications of NFTs?’ (Reuters, 29 October 2021) < https://www.reuters.com/legal/transactional/what-are-copyright-implications-nfts-2021-10-29/ > Accessed 30 December 2021 [2] ibid (n1) [3] ibid (n1) [4] BBC News, ‘What are NFTs and why are some worth millions?’ (BBC, 23 September 2021) < https://www.bbc.co.uk/news/technology-56371912 > Accessed 30 December 2021 [5] Copyright Act 1956, s1(5) [6] Copyright Act 1956, s3(5) [7] ibid (n1) [8] N Eziefula, P Hopton & Andrew Wilson, ‘Newly Minted: NFTs in the entertainment industries’ [2022] 44(1) EIPR 33, 34 [9] Nintendo co ltd v British Telecommunications Plc, EE ltd, Plusnet Plc, Sky UK Ltd, Talk Talk Teleco Ltd, Virgin Media Ltd [2021] EWHC 3488 (IPEC) [10] Perrin v Drennan [1991] FSR 81 [11] The Andy Warhol Foundation for the Visual Arts Inc v Lynn Goldsmith et al, United States Court of Appeals, 2d Circuit, Docket No. 19-2420-cv, 2021 [12] ibid (n11) at p.28 [13] ibid (n11) at p.28 [14] ibid (n11) at p.35 [15] ibid (n11) p.37 [16] ibid (n11) p.44 [17] Campbell v Acuff-Rose Music Inc, 510 US 569, at 591



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