Buying and Selling NFTs via Blockchain: Ownership Rights, IP Concerns, First Sale Doctrine

Description

NFTs are issued on a distributed ledger such as a blockchain. Structuring an NFT properly can be complex and requires an understanding of blockchain technology. Many people assume that a blockchain could act as a delivery device to easily move digital assets like cryptocurrency. Blockchains are great as ledgers for tracking transactions but terrible as a storage or distribution system for larger digital assets like digital media included in NFTs.

For digital media assets, the file itself--whether an artwork, a photo, a video, an eBook, or anything else--exists elsewhere. But the creator of an NFT must also ensure they create a permanent, secured record of the digital media asset. That record can be "tied" cryptographically to the asset wherever it lives off-chain, but they do not reside together. This can create issues when the underlying digital asset is deleted or changed on the platform on which it is hosted.

An NFT gives the owner "the right to claim ownership of the NFT itself and the right to exclude others from claiming ownership of the NFT." An NFT is an intangible or incorporeal personal property, an item that cannot be touched or held but has some level of value assigned to it. Like other personal property, NFTs can be bought, sold, gifted, used as collateral, and levied (theoretically). However, what a purchaser does not own, absent terms stating otherwise, is the digital media asset, for example, the underlying artwork. Ownership of an NFT also does not, by default, grant the owner any rights to the intellectual property of the underlying asset.

There are also ownership questions. An individual who independently creates a piece of digital artwork or music is the author and owner. The answer becomes less simple when dealing with scenarios, such as works created through the contributions of multiple authors, created by employees or commissioned artists, derived from other works, created with the assistance of artificial intelligence, or via technology developed by others.

Although physical objects are not fungible, digital media assets theoretically can be reproduced infinitely and not vary in any meaningful way. Copyright has the well-established "first sale" doctrine, which says that a copy of a work that has been embodied in a physical object (a book, a baseball trading card, a limited-edition print of a painting) can be bought and sold in a secondary market without the original author retaining any control over the secondary sales.

Because digital files can be so readily reproduced, U.S. courts have generally not recognized a "digital-first sale" doctrine. Under copyright law, there is no such thing as a unique digital media asset that can be bought and sold on a secondary market because media files have essentially been treated as fungible to date. Do NFTs change this legal landscape?

Listen as our expert panel discusses structuring NFT transactions, the risks associated with these transactions, and the best practices to protect authors and rights holders and provide consumers with a transferrable asset.