NFT Hypothetical

Investment Analysis Clubs Macro Economic Trends and Risks
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As an illustration of the (admittedly) abstract legal concepts discussed on the other thread, here’s a little hypothetical showing how little value NFT’s can hold - even if the “denoted” work is very valuable.

Imagine an artist has developed a set of characters, which he calls Altered Adolescent Pirate Pangolins (AAPPs). They feature mostly as an independent comic. The artwork is quite good, and he’s been investing a lot of time in building up an audience. Early on, he decided to make some money minting a limited edition run of NFT’s associated with digital portraits of the characters - 100 units. He made a moderate amount of money from them, and most of them have changed hands to other buyers over the years. Since then, though, he’s mostly been earning a living on the comics and other IRL artwork he creates.

The AAPP’s get very popular - become a big hit, first underground and then a bit into the mainstream. A major studio approaches the artist and wants to buy the exclusive rights to the AAPP’s. The artist delightedly agrees, and the studio starts generating lots of AAPP’s content - movies, a TV show, toys, games, etc.

At first the NFT owners are also delighted, as the characters that they use for their online avatars and home screens are now super popular and valuable. However, all of the NFT owners that didn’t buy directly from the artist soon get a rather unpleasant surprise. They all receive cease and desist letters from the studio, advising them that they can no longer use any imagery, likeness, or illustration of the AAPP’s in any context whatsoever, even for private personal use - and warning of big financial penalties.

The NFT owners are livid. They bought and paid for these AAPP NFT’s! They have rights! So one of them actually challenges the cease and desist letter in court. And they’re flabbergasted with the court agrees with major studio, and enters a judgment not only enjoining the NFT owner from using the image that the NFT was minted on in any public context, but also requiring them to delete that image from their home phone and computer.

What happened? Again, when they bought the NFT, they didn’t buy the digital image the NFT was minted against - in any way. They didn’t just fail to acquire the copyright or intellectual property; they failed to acquire the right to even a single use of a single copy of that image. They didn’t get anything that could hold up in a court of law, other than (arguably) the token itself. And possibly not even that.

The first lawsuit relating to NFT rights certainly won’t look exactly like that, but it will rhyme with it. There will be a conflict between someone who owns and NFT and the person who really owns the digital artwork, and the NFT owner will lose. And that will likely destroy most of the value of the NFT markets.

Albaby

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Al,

The NFT contract usually allows for use of the image in some aspects, ie avatars. That is not changed by selling the copyrights because the avatar is not being sold.

Copyright infringement is mostly about another party commercially profiting of the copyright holder’s property.

In my case I register all my work with the USCO.

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The NFT contract usually allows for use of the image in some aspects, ie avatars.

Does it? Every discussion of NFT’s that I’ve seen describes the actual NFT - the token - as providing only the information outlined in the token protocol. They don’t contain actual contract terms.

That’s why in my hypothetical I didn’t include people who bought directly from the artist, who might have (theoretically) entered into an “off-chain” contract, either explicitly or implicitly, that granted them some rights beyond what the NFT provided. For example, BAYC has an off-chain agreement with direct purchasers that purports to convey a lot of rights beyond the NFT (though it’s poorly draft, AIUI). That contract would protect the initial - but only them, not downstream purchasers of the NFT.

I’ve never heard of an NFT that has, in the token itself, a provision that purports to do what you’re describing. Would you might pointing me to an example?

Albaby

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The NFT contract usually allows for use of the image in some aspects, ie avatars.

Does it?

Al,

Just following up with some sussing it out in google searches. It works differently than I expected.

People who buy a bored ape NFT take it upon themselves to use the ape as an avatar on Twitter.

If you are not using the ape to profit there really is no infringement case.

Anyone can use that ape on social media. The DMCA allows for the free transmission of images and other content on the major platforms. Selling the images is another matter.

The only claim the owner of the ape showing it as an avatar or showing it to friends has is ownership of the denoted token.

Yes hairs can be spliced endlessly.

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People who buy a bored ape NFT take it upon themselves to use the ape as an avatar on Twitter.

If you are not using the ape to profit there really is no infringement case.

Yes, there is.*

If I find a random image on the internet and decide to use it as my avatar, I’m violating the copyright of the image holder by so using it. The DCMA isn’t really relevant, as that only governs the liability of the host of whatever service the avatar is being used on. I, as the user, am still liable for copyright infringement by using that image as my avatar, on my phone, on my computer screen, etc.

If you don’t obtain the rights to the image, you don’t have a legal right to use it. NFT’s don’t convey the rights to the image - not even a single instance of it for the personal use of the person who bought the NFT.

Albaby

  • BAYC is not your typical NFT, because unlike most NFT’s the purchase of a Bored Ape from Yuga Labs typically comes with a contract (off-chain) that purports to also convey all copyright and IP in the image to the purchaser. That’s why Seth Green is able to develop derivative content (a television series) based on his Bored Ape. That would include the right to use that specific group of NFT’s as an avatar. But it’s also why people who buy NFT’s on the secondary market won’t be able to exercise any of those rights, because the contract that assigns those rights isn’t part of the NFT, but an off-chain agreement between Yuga and the original purchaser that doesn’t run with the NFT. So if Seth Green (for example) sells his NFT to another purchaser, Seth Green will still have the legal rights to use that specific Bored Ape as his avatar, but the purchaser will not. Unless, of course, Seth Green and the other purchaser enter into an off-chain contract as well. But once you start doing things like that, the chain stops adding any value to the transaction - the actual contract is happening off-chain, and the blockchain is just an inefficient payment processing mechanism.
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