The era of digital abundance has seen non-fungible token (NFT) transactions growing from USD62.8 million in 2019 to a whopping USD250.8 million in 2020. But this growth has also created unsettled legal issues regarding ownership and IP, writes Patrick Tan

Blockchains are immutable, decentralised digital ledgers of transactions of the sort that underpin well-known cryptocurrencies like Bitcoin and Ether. The cryptocurrency and blockchain are characterised by an open-source ethos and culture of experimental development that have led to the speed and progress of advancement that are emblematic of the space.

NFTs
Patrick Tan
CEO and General Counsel
Novum Alpha

The same ideology has also made possible rampant abuse and misuse, and forced lawmakers and regulators to pay closer attention to the nascent sector. In this regard, NFTs have opened up a Pandora’s box with respect to the enforcement of IP rights, where the value ascribed to an NFT as a whole is greater than the sum of its parts.

It would be fair to say that, for a vast majority of NFTs, the digital asset that underlies the NFT is often of dubious value – a simple inspection of CryptoPunk #7610, which was purchased by payment services giant Visa for an estimated USD250,000 worth of Ether, provides one such example.

What are NFTs?

The idea of creating NFTs on the blockchain is not new. Soon after Bitcoin was created, the idea of so-called “coloured coins”, or specially marked Bitcoin, was floated with the idea that these coins could be tied to property ownership or manage real-world assets. While Bitcoin’s coloured coins never really took off, Ethereum’s NFTs did. Because NFTs are units of data stored on the blockchain that can be sold and traded, smart contracts on Ethereum made it possible for self-executing sale-and-purchase agreements that were tied to NFTs.

A purchaser would simply transfer cryptocurrency into a smart contract to purchase an NFT, and the smart contract would automatically update the blockchain that the NFT would now be tied to a different digital wallet address. Beyond smart contracts, NFTs could be associated with digital and physical assets, including such licences to use the asset for a specified purpose.

NFTs residing on the blockchain also provide a natural provenance, with a string of records of cryptographic hash, a set of characters identifying datasets and previous records, creating an unbroken chain of identifiable data blocks. (Hash functions are mathematical functions that transform a set of data into a bit string of fixed size). With the unique identity and ownership of an NFT verifiable via the blockchain ledger, NFTs have become a way for artists and content creators to monetise digital art, photos, videos, audio and other digital files by selling NFTs, which are analogous to certificates of authenticity.

Although NFTs are typically associated with a licence to use the underlying digital asset, it generally does not confer the copyright in that production to the buyer. Some agreements only grant the NFT buyer a licence for personal, non-commercial use of the underlying digital asset, while other licences also allow commercial use.

Because the bulk of legal issues with respect to NFTs are likely to revolve around IP, it is helpful to analyse NFTs in the context of copyright law, which will turn on the related issues of subsistence and infringement.

This analysis poses three questions in sequence: First, whether copyright subsists in a work, in this case, the NFT; second, whether the copyright has prima facie been infringed; and third, whether any defences apply.

Do NFTs confer copyright?

Because it isn’t immediately apparent that ownership of an NFT grants copyright to whatever digital asset the token represents, the creator may sell an NFT representing their work, and isn’t precluded from creating more NFTs of that same work. From that perspective, an NFT is merely a proof of ownership that is separate from copyright, unless the copyright in the underlying work has been explicitly transferred. In that case, any licensing of the copyright in the underlying digital asset would need to be orchestrated separately.

There is an established precedent that finds copyright doesn’t protect facts, data or ideas. Still, an argument could be made that where a digital asset’s creation process is intertwined with an NFT, the NFT itself forms an integral part of the expression, and therefore embodies the copyright.

For instance, where a digital artwork had no prior existence up to the point that it was minted as an NFT, an argument could be made that the artist intended the NFT to embody the copyright in that creation, and the sale and transfer of that NFT would constitute a transfer of ownership in the copyright.

Even if the minting of the NFT was not inextricably linked to the creation of a digital asset, a case could still be made that a creator, by minting an NFT linked to the artwork, intended to confer the copyright in the digital asset onto the NFT.

Existing Singapore copyright law arguably provides for such a possible interpretation. In the Copyright Act, sections 4, 7A and 27 make it clear that copyright subsists in an original published work, which includes a compilation that, “by reason of the selection or arrangement of its contents, constitutes an intellectual creation”.

In Feist Publications v Rural Telephone Service Company (1991), the US Supreme Court noted that a compilation of facts, specifically a selection or arrangement of the facts, was original and could, as such, conceivably be eligible for copyright protection, although the justices in that case found that the copyright conferred in such a case would be “thin”.

It could reasonably be argued that a digital creation, encapsulated and tagged to an NFT, could be viewed as a compilation that is sufficiently novel as to confer copyright on the NFT itself.

Copyright infringement in an NFT

If an NFT does embody copyright, whether explicitly or implicitly, the next question is how and whether such copyright could be infringed. Singapore’s Copyright Act provides for various circumstances where certain acts constitute primary infringements, including the reproduction, performance, communication or copy of the work, in which case, and given how often things are copied and circulated on the internet, the digital asset underlying an NFT has the potential to be reproduced and circulated ad infinitum.

Separating the digital asset from its NFT token arguably alters the nature of the work that is being reproduced and copied without permission from its copyright holder, whoever that is determined to be. There is again sufficient precedent to confirm the view that although copyright may subsist in a work as a whole, there would be no infringement of such copyright unless one copies the work as a whole, which attracts copyright protection in the first place.

This point was made in a decision of the High Court of Australia, in IceTV and another v Nine Network Australia (2009), which found that copyright subsists in a compilation by virtue of its thematic arrangement, and even though the same underlying material might have been copied, the arrangement in which copyright was found to subsist was not.

Because the reproduction, performance, communication or copy of the underlying digital asset of an NFT would not arguably constitute a primary infringement of the whole, any claim for such infringement would be the prerogative of the creator, for whom the digital asset may have existed independent of the NFT, and therefore constitute an entirely separate and distinct body of work.

Where an NFT owner may attempt redress for primary infringement is if the NFT itself were reproduced, performed, communicated or copied, which simply isn’t possible. Because each NFT has an immutable existence codified on the blockchain, short of an attack on the entire blockchain itself – where fraudulent transactions such as creating a copy of an NFT (otherwise known as a “double spend”) are executed – it isn’t technically possible to perform a primary infringement based on existing copyright law.

Given this interpretation, an NFT attracts copyright protection only when viewed as a whole and in its entirety, in which case the digital asset and the NFT as a contiguous unit attract copyright protection. But the copyright of the underlying digital asset – whether it is a photo, artwork or audio recording – in and of itself, and independent of the NFT, ought not to inure to the benefit of the owner of the NFT.

This is why there has been no shortage of legal scholars who postulate that the ownership of an NFT is nothing more than the possession of a proof of authenticity, which, given the nature of blockchain technology, isn’t capable of primary infringement.

Defending NFTs

Because copyright refers to that bundle of negative rights intended to prevent copying, and because NFTs by nature are copy-proof, if the copyright is interpreted as applying solely to the entirety of an NFT, including the underlying digital asset, traditional defences to copyright abuses are probably not relevant. Nonetheless, and for the purpose of completeness, it is worth exploring whether any defences do exist with respect to NFTs.

Copyright law is intended to promote creativity and innovation by granting exclusive rights to copyright holders, and there is equally a “public interest in not allowing copyright law to hinder creativity and innovation”, as was articulated in RecordTV v Mediacorp TV Singapore and others (2011). A commonly used shield against claims of copyright infringement has been the “fair dealing” defence.

In determining whether a copy constitutes a primary infringement, the court needs to compare the purposes of the allegedly infringing work with the original, and assess whether the dealing was fair. In Global Yellow Pages v Promedia Directories and another matter (2017), the Singapore Court of Appeal noted that there would be no infringement of such copyright by copying a work, save to the extent that one copied the work as a whole.

Given that minting an NFT is a relatively superficial software exercise, it is hard to imagine a court determining the act of minting alone as sufficient to constitute a significant portion of the whole of the copyright. If nothing else, the court may determine that the aggrieved owner of the NFT does not have sufficient locus standi (a party’s right to be heard by the court) to bring an action for copyright infringement. Instead, it is the creator of the digital asset who should file suit. Finally, whether the prospective infringer can avail themselves of the fair dealing defence hinges heavily on how the alleged infringement harms the market.

In Harper & Row Publishers v Nation Enterprises (1985), the US Supreme Court found that for the fair dealing defence to be inapplicable it must consider “not only the extent of market harm caused by” the alleged infringer’s action, but also whether the defendant’s conduct, if “unrestricted and widespread”, would “result in a substantially adverse impact on the potential market” for the original.

If the NFT markets are anything to go by, the copying of the underlying digital asset tied to an NFT, far from devaluing an NFT, can instead enhance its celebrity and increase the value and demand for that NFT.

Because blockchain technology itself provides for the protection of the core value proposition of an NFT – proof of authenticity and ownership – existing copyright laws are of questionable application because they were designed to protect the underlying digital asset, for which the cryptocurrency ecosystem has demonstrated that independently it does not command significant value.

Patrick Tan is the CEO and general counsel at digital asset management firm Novum Alpha in Singapore, which manages the Novum Alpha Global Opportunity Digital Asset Fund