IP Is For JPEGs, NFTs Are Property

When you own an NFT, there is an NFT token in a blockchain wallet to which you hold the private key

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When they are first exposed to NFTs, most people have a hard time wrapping their minds around the following set of related questions: What exactly do NFTs give you? What the hell are these tokens? What are these memes? How do they work together? When you buy an NFT, what do you own?

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This issue is especially confusing for lawyers like us. While we have both been in the crypto space for years, we were N00Bs in the world of NFTs until relatively recently, when we started doing some deep diving in the past few months. In this article, we will first try to give some clarity on the current legal debates around NFT licenses and copyright. However, we think that while these discussions are interesting and important for those currently engaged in the world of NFTs, there are deeper and more fundamental issues that require a lot more analysis and thought if NFTs are going to help us all make it.

What we are dealing with here is actually the creation of a new form of property. It is different than physical, real-world property, and different from intellectual property. Since it is new, and has unique features, the old systems of property rights won't exactly fit. This realization should open up a whole new set of questions about how this new type of property will be conceptualized and designed.

Before getting meta, back to the NFT basics. The issue is basically as follows. When you own an NFT, there is an NFT token in a blockchain wallet to which you hold the private key. The NFT's code includes a UNI – which is a reference, usually a URL link, to a certain piece of art. We'll call this art the JPG or JPEG, in the parlance of NFT twitter.

But the connection between the token and the JPG is unclear – the NFT token is obviously taken to represent the JPG and be connected to it somehow. Holding the token gives the NFT holder some sort of ownership claim on the JPG. Exactly how this representation occurs, what the exact connection is and the nature of the ownership claim, all seems murky.

Let's try to figure this out.

Intellectual Property and the Copyright Wars

As lawyers (apologies), our first instinct is to look at the body of existing law that governs the question of who owns intangible creations – the broader area of Intellectual Property. Within that field, copyright is the most relevant category for NFTs.

Copyright, put simply, is dedicated to protecting works of authorship. The covered works of authorship can be expressed in physical objects, but an object is not the same as the work it expresses. Classic examples are an image, which can be expressed in a painting, or a song, which in the ancient past used to be expressed on a record or CD.

Copyright gives the creator of a work certain rights – primarily, the right to control the ability to make copies of their work (hence the name). They can enforce these rights against anyone in the world who might try to use the work. This right isn't absolute. This reflects an underlying philosophy that holds that, as a default, information should be free. But in order to incentivize people to create works, we give limited exclusivity over commercial uses. This is why there are limitations - fair use (i.e., different types of non-commercial use) is permitted, and copyright typically runs out after a certain period of time.

But even with these limitations copyright is a strong power that is granted by the state to those who create original works.

So even when they sell an object expressing the work of authorship to someone else, the holder of a copyright can limit the activities of the buyer. The author has the legal right to stop others, including the buyer, from reproducing the work, making copies of it, distributing those copies, making money from these copies or displaying the work publicly. The default rule in most legal systems is that the creator keeps the copyright unless they assign or transfer it to the buyer of an object in a legal writing. If the copyright is assigned or transferred, the new owner takes ownership of the copyright and has essentially all of the rights that the original copyright holder had.

The copyright holder can also license the work, allowing the buyer or someone else to make copies or otherwise use the work, subject to whatever restrictions are contained in the license. In these situations, the copyright holder still owns the copyright and the licensee is only able to act because they have been given permission to do so through the license.

One way to think about NFTs is to apply this framework and compare the relationship between the NFT and the JPG and the more standard relationship between a painting and the image it contains. Just as the painting expresses the image, but does not automatically give the owner the copyright over it, an NFT represents or expresses the JPG, but holding it does not as a default give the owner copyright over it.

Obviously, there is some difference between an NFT and a painting – in the case of a painting, the underlying image is physically present in the object. In the NFT, all we have is a URL that points to it somewhere on the internet. But, as @punk6125 persuasively argues in several of his megathreads (see here for example), social consensus is a powerful and important thing. If we have a large community of people who agree that an NFT token is considered to instantiate or represent the JPG referenced in its UNI, then this can become a social fact that is just as real to the participants as other social constructions like the state, the community or the family are to most of us now. So, we can assume for the purposes of this analysis that the NFT does express the JPG in some way.

If this is the case, the right of the NFT holder to do anything with the JPG other than hold the NFT token would seem to depend on what the JPG's creator decides to do with their copyright. In existing NFT projects, there is a serious debate going on about what should be done.

In one camp, we have NFT projects where the creator retains the copyright over the underlying art and gives a license to the NFT project to use the art for certain purposes.

This is famously the case with the "NFT License" promulgated by Dapper Labs (creator of Crypto Kitties, among other projects) and also adopted by Larva Labs with respect to the Crypto Punks. This license is relatively restrictive – the creator maintains full ownership rights over the art. The NFT holder is granted a license to copy and display the art for personal use. They can also reproduce or display the NFT as part of a platform for trading NFTs (such as OpenSea) or on a platform that allows people to use or involve their NFTs. However, these platforms are required to cryptographically verify the right of the NFT holders to display the art and to remove the art when the NFT owner stops participating. If a platform doesn't have these features, then you don't have the license to display your NFT there (except possibly for personal use). Most controversially, the NFT License allows the holder to copy, use or display the NFT for commercial purposes, but only if those activities don't earn the holder more than $100k per year. So there is a clear limit, imposed by the NFT issuer, on how much value the holder is allowed to extract from the use of "their" NFT's JPG (resale value aside).

The Bored Ape Yacht Club is often considered to be taking a different stance. However, the differences are of the scope of license and not in the conceptual legal approach. The BAYC terms also involve the granting of a license, although it is true the language is a little bit more ambiguous and the license granted is far broader. The BAYC terms do say "you own the underlying Bored Ape, the Art, completely." But this claim is contradicted by the rest of the document, which says that Yuga Labs LLC grants the user various licenses. These licenses are subject to the holder's continuing compliance with the terms. If Yuga is granting a license (which could theoretically be revoked if the holder violates the terms), it follows that this entity remains the owner of the copyright to the underlying Apes. The holder is only a licensee.

The difference between this and the NFT License is of course the scope of the license. The BAYC terms give the Ape holder the much broader right to use, copy or display the NFT for any personal or commercial use, without a restriction on revenues. So the holder of a BAYC has a greater degree of freedom to use the JPG than the holder of a Crypto Punk. However, the license is still not completely free. The BAYC terms, like the NFT License, only allows you to display or otherwise post the art on a marketplace or third party application that cryptographically verifies the Ape's owners right to display the art. If you violate these terms, you theoretically lose the license to display your Ape. While this constraint is reasonable, as it seems intended to maintain the link between the NFT and the art, it still highlights the legal fact that the copyright remains with Yuga Labs and the NFT holder remains a license holder.

In contrast to this approach, a second camp of NFT enthusiasts argues that NFT creators should release the underlying JPG under the Creative Commons' "CC0" License. Unlike the NFT and BAYC licenses, where the creator reserves their copyright and provides a license to the NFT holder, under the CC0 the creator gives up all of their rights in the JPG and grants permission to the entire world to use the JPG however they want. The text of the CC0 license acknowledges that the work created by the author is protected by the laws of many jurisdictions and that the author has a variety of rights, including copyright and other similar rights. The license goes on to announce that the creator waives all of these rights and grants every affected person the broadest possible license to use and copy the work, for any reason, personal or commercial. This license is unconditional and irrevocable.

This approach has some advantages over the licensing model. It incentivizes the creation of cool new public art on the internet. The artist is paid through the sale of the NFT, and the rest of the world gets the benefit of viewing it. The NFT holder is able to use the JPG, free and clear of any interference from the creator. The disadvantage, of course, is that the NFT holder is not different from anyone else in this regard. Anyone in the world can just as easily copy and use your JPG for their own commercial purposes, and the NFT owner can't do much about it.

Within the "license" approach, the BAYC model seems clearly preferable to the cap on earnings imposed by the NFT License, which seems unnecessary and the freedom and openness advocated by the larger NFT community. But overall, we don't have a strong position on this debate between the license approach (in the version advocated in BAYC) and the CC0 approach. There are pros and cons to both models. In our view, the most important thing is that terms are disclosed and people understand what they are getting for their NFT purchase. In any case, as will be discussed in more detail below, the most interesting and important features of NFTs currently doesn't come from the license (or lack thereof), but from a combination of technology and social norms.

What is more important for our purposes is to notice that this whole debate doesn't shed a lot of light on the nature of NFTs. Whichever model you use, the NFT holder does not hold the direct copyright to the underlying JPG (we aren't aware of any major projects in which the copyright to the JPG is actually assigned in full to the NFT holder).

And in either case, the fact is that as a matter of law the NFT holder's rights come from the license granted by the JPG creator. It is true that the license is granted to the holder of the NFT, but it is the license, and not the NFT itself, that is doing the work of allocating rights and/or restrictions. This is true whether the author is reserving some rights or waiving them – it is the choice of the author that does the work. At most, from an IP law point of view, the NFT serves as a more technologically advanced way to evidence who currently holds the license. Current IP laws primarily recognize the license and not the NFT.

Real Property and Despotic Dominion

Despite the situation described above, the NFT world continues to speak and act as if NFTs give their holders an ownership right. Is there a coherent way that this can be justified and explained?

Having not found what we were looking for in the world of intellectual property, lets consider a second analogy, this time to physical property and not specifically to art. Unlike intellectual property, where the copyright is almost a purely legal construct, in regular property we have a combination of physical facts and legal concepts. Property starts and usually overlaps with physical possession, but is not the same thing. You can own something even if someone else is holding onto it right now, and someone can physically hold something that is not their property (for example if they steal it or borrow it). Property occurs not just when a person decides to, say, claim a certain piece of land and build a fence around it to stop others from coming in. This type of physical action turns into property when their society and the law recognize this as legitimate and support their right to exclude others. In more developed property systems, the owner is issued a deed or certificate by some central authority that evidences their rights to hold the property. The central authority also typically maintains a record of who has title to which resources. Of course, a functioning legal system that respects property rights will also sometimes send men with guns to help the recognized owner secure their rights.

If we want to use this model as an analogy for NFTs, then the JPG is comparable to the land. This analogy is laid out compellingly by @punk6529 (our favorite NFT philosopher, as you might be able to tell) in this thread. The basic concept is that the JPG is comparable to land or other physical object, and the NFT is compared to the deed. The deed doesn't create any new physical or material reality, but rather evidences the fact that the people in a given society have decided to agree that this asset belongs to this person. Similarly, the relevant online communities have agreed that whoever owns the NFT is also the "owner" of the JPG, regardless of whether they have the copyright.

This analogy can be true as far as it goes, but it breaks down a little bit when you start considering the details. The problem is that the classic type of real property ownership gives the owner certain rights and powers. They have broad rights to use their property as they please and no one can interfere or tell them what to do with it. Typically these rights are not absolute, but can be very extensive. They can legitimately engage in certain physical actions to secure their ownership – building fences, physical removal of trespassers, and even acts of violence against those who invade their property (under certain circumstances). In classic Anglo-American law, Blackstone (somewhat exaggeratedly) describes the right to property as "that sole and despotic dominion which one man claims and exercises over the external things of the world, in total exclusion of the right of any other individual in the universe." Ownership rights over NFT JPGs, whatever they are, are not this.

What rights does an NFT give its holder over the JPG? It isn't the legal right to copy the image or stop others from doing so. As discussed above, as currently structured these rights are governed by IP and licenses, which are granted by the NFT creators. They are only connected to the NFT by the operation of standard copyright law, not directly by ownership of the NFT.

Right now, what an NFT owner can really do with their ownership right is fairly limited. The main thing they are able to do is flex online. They can be recognized by other community members as the owner of a JPG that is considered cool, and therefore gain social clout and respect. The legal scholar Bryan Frye has referred to this clout-based ownership right as "pwnership". We are not minimizing this – social clout can be a very valuable and lucrative thing to have. It is one of the main reasons traditional art collectors are willing to pay so much to own original works. However, as important as "pwnership" and the clout and power to flex are within the current NFT world, they are very far from the absolute dominion described by Blackstone.

The Real Questions

Given all of the above, what we see is that as things stand today, NFTs are a combination of technology and social construction. The idea that the token represents or expresses the underlying JPG is not a physical or even a technological fact – we need a community of people who agree that including a JPG's URL in a piece of code in a token is considered an expression of the JPG within the token. The clout in JPGs that is provided by NFT "pwnership" is also primarily a social construct and its value depends on the size and enthusiasm of the community that shares the relevant beliefs.

Skeptics could draw the conclusion that the whole NFT phenomenon is fake. We disagree – as noted above, communities can create social facts that have real power and importance. At the same time, while acknowledging the reality that has already been created, there is some room to question whether the current landscape is enough for NFTs to meet their full potential.

There are at least two things that NFTs are supposed to do, according to their advocates. The first mission, at which they are succeeding for the time being, is creating an interesting new market structure for digital art. As long as the social consensus that backs NFTs holds up and continues to grow, artists will be able to benefit by selling their art and make a profit. NFT holders will get to enjoy the clout and ability to flex that the community grants them as a result of their pwnership (or profit from selling this clout). And because the JPGs are available on the internet for all to see, the wider community will get to enjoy the art that is produced as a result. According to Frye, pwnership could serve as a substitute for copyright itself and make it obsolete. For this purpose, the current situation might be fine.

But there is a second, more important potential mission for NFTs. NFTs represent an attempt to create and define ownership of digital objects in a new way. In a world where tech megacorps are increasingly powerful, this issue is already important. If and when we do move most of our lives to the Metaverse, it will become existential.

While it is exciting in many ways, the future Metaverse holds massive threats that could potentially turn our lives into the Matrix. The threats currently posed by big data, the use of addictive dopamine traps, predatory algorithms, centralized control of online resources by bad (or potentially bad) actors, and all of the rest of the threats, will only be compounded when we are living inside the internet and not just using it. And it seems likely that there are new dangers that we haven't even imagined yet.

The current clout/pwnage model of NFTs creates something real, but it is highly questionable whether this form of ownership is something that can protect us from all of the threats we face. Clout is nice, but in order to fight back against the dystopian possibilities of the Metaverse, digital ownership is going to need to come with a higher degree of power and control.

NFTs are therefore only a first step, one experiment in constructing a system of digital ownership. Moving forward on this path is going to be crucially important. The difference between a digital world where participants have the ability to own and control things, and one in which they don't, is massive. Even if the ability to own digital things is granted, how this ownership is conceptualized and enacted will make a huge difference.

Existing law won't help much with this. Current real property rights don't apply to the Metaverse in a straightforward way, and they are probably not optimized to get the results we want. Copyright and the rest of intellectual property law is probably not the answer either – right now, it protects interests that are intangible and theoretical. Copyright also only stops others from using works for commercial purposes (hence the fair use exception), but this wouldn't help protect ownership in other ways that could be important.

With the advent of a Metaversal future, the line between physical reality and the world of ideas/intangibles is going to blur. In this future, which we are only beginning to imagine, we will live our lives in a digital world to an even greater extent than we do now.

What we will need is a new system of property, a new way of allocating things (digital objects, infrastructure, resources) to different owners, that is created for and optimized to the new digital reality of the Metaverse.

NFTs are a good start. But they are at an early stage, analogous to early forms of ownership. We suggest that this concept of ownership needs to be built out, and it will be important that the future technological infrastructure and platforms that make up the Metaverse (or Metaverses) are compatible with this concept and are built to respect digital ownership rights.

To accomplish this, there are a lot of questions that need to be clarified. Some of the biggest issues include:

  • What is the purpose that we are trying to achieve by creating a system of Metaverse ownership?
  • What rights and powers do owners need to have in order to achieve these purposes?
  • What do we need to do in order to give owners these rights/powers?
  • How will this digital property system be structured (e.g. do we want to focus only on private property or is there room for new types of public property as well)?
  • How should this new form of digital property be distributed fairly among individuals and groups?

Different theories of property will give us different answers to all of these. To fully answer these questions, the community will need to look at a variety of options and ideas, and create new ones. Some problems may be solved by engineering and built into the code of the future Metaverse platforms. Others may be solved by social consensus among the community, or by competition on free markets. There also might be a need to use more centralized means – creating new laws and legal principles that protect property rights in the Metaverse, especially by imposing regulations enforced by states that limit potential abuses by the tech megacorps.

It is also going to be important to look at the history of the different systems of property rights that have been created in the past, see what worked and what didn't work, and apply the lessons learned. This is a chance to get things right, even where society has failed before.

Either way, within a variety of fields – including engineering/code, law, markets and community – there are going to be interesting discussions that need to happen and hard choices that need to be made.

We need to take a closer look at some of these questions and try to map out some of the ideas and possibilities that can help us think through them, and ultimately act to save the world. We hope others will join us.