After so many years of contact with blockchain, the outlet of the industry has always been unpredictable. From ICOs, STOs, mines to the current NFT, friends in the circle take a look, always joke about a day in the circle, a year outside the circle. The lag of the law relative to the real world is vividly reflected in this rapidly changing industry, and it is often the forerunners who have gone out of the dark for some distance, and the big stick of supervision has been waved to the ground, giving the previous business model a conclusive conclusion. From the "Announcement on Preventing the Risk of Token Issuance and Financing" (commonly known as the "94 Announcement") to the "Notice on Rectifying the "Mining" Activities of Virtual Currency" (commonly known as the "924 Clearance"), the industry is in a dilemma under supervision, and it is very impressive that a friend in the circle just transformed into education at the beginning of last year because of regulatory risks, and encountered a "double reduction" in the middle of the year.
And in the past 2021, the industry seems to have found an outlet on the NFT. Most people's initial impression of NFTs comes from a Christie's-auctioned NFT artwork, Everydays: The First 5000 Days, where artist Beeple's artistic prowess is subjective, but the $69.3 million sale price objectively detonates the industry that has been dormant for a while. After that, NFTs with blind boxes, collections, exchanges, and other gameplay appeared in an endless stream. As a lawyer, he also participated in the first legal practice related to NFTs as the industry rotated.
It's interesting to see that when you get in touch with a lot of NFT platforms, NFT holders, artists, and IP parties, you find that everyone in the industry has a very different understanding of the NFTs they are participating in, holding, and trading. Sometimes when I participate in customer negotiations, after 5 minutes, I find that although everyone present is talking about the same NFT project, in fact, everyone has their own understanding of the content of the transaction and cooperation. Even the counterparty and his own lawyer are not talking about the same thing.
Some people think that what is being traded is a copy-pasted JPG format image, some people think it is a virtual prop, some people think it is copyright, some people think it is the original work, some people think it is a digital collection, some people think it is a license right, some people think it is a token, some people think it is a unique copy of the original painting... Often in the end, when the business is actually implemented, the parties have not clarified the legal relationship.
Although accurate legal characterization and clear and definite legal guidelines are still on the way, the industry has been bustling on the cusp, from major brands wading in digital collections to traditional Dunhuang art, splash ink landscape paintings and other forms of digital collections into thousands of households. The feast has come, you may wish to share some analysis and thinking on NFT law based on your own legal practice in this gap where the bullets are flying, hoping to help you.
What is an NFT
NFT, the full name non-Fungible Token (generally referred to as "non-homogeneous token"), is usually a cryptographical data unit developed by developers on different chains (such as zhixin chain) according to specific smart contract standards (currently common standards are ERC721 and ERC1155).
NFT is based on blockchain technology development, the chain can be simply understood as a highway, itself is only to carry different functions, data fixation and circulation, and each chain-based development of the application is like a roadside supermarket, restaurant, carrying a certain functionality. The underlying chain is divided into public chains and consortium chains. The public chain is completely decentralized, all participants can read and create information, all participants can also download and obtain complete blockchain data and create and deploy decentralized applications on the chain, and the overseas NFT trading platform Opensea mainly uses the ethereum (ETH) public chain. The alliance chain belongs to the polycentric, by multiple institutions to participate in the management, each organization or agency to manage one or more nodes, to participate in the activities on the chain need to obtain the authorization of the node.
The "non-homogenization" of NFTs, as opposed to FT (Fungible Token, Homogeneous Token), means that each NFT is inseparable and unique, and NFTs cannot be split like homogeneous tokens like Bitcoin, so only a complete NFT can be formed or transferred, but 0.1 NFTs cannot be transferred. Because of this property, NFTs cannot be used as general equivalents, but they can naturally be the unique identifier of the underlying assets (metadata) to which they are mapped.
Artwork, how did it evolve into an NFT artwork?
The NFT is really just an immutable, unique unit of data, and has no specific value in itself. However, NFTs can be used to record information about metadata, such as the owner of the metadata, the Uniform Resource Identifier (URI) of the metadata, the description of the metadata, etc., and can generate a unique NTF ID, equivalent to the unique "identity card" of the metadata. The metadata thus forms a correspondence and binding relationship with the NFT.
Metadata interface code under the ERC721 smart contract standard
Extending to the well-known and unabated field of NFT artwork (often referred to as digital collections, digital artworks, etc.) for compliance requirements, metadata is a digital file of a work of art.
The process of combining artworks with NFTs in a digital way to form NFT artworks is known in the industry as mint. The casting process is crushed and disassembled, which mainly includes the following steps:
First, transform artwork into metadata;
Second, store metadata to a specified location;
Third, the uniform resource identifiers, authorship, descriptions and other information of metadata are recorded through NFT.
In the end, through the casting process, the metadata will form a unique NFT ID on the chain that can be used to verify the authenticity of the metadata on the chain, and the artwork will be baptized by the new technology and become a popular NFT artwork on the streets.
What exactly do we have when we own NFT artwork
Through the casting process, NFTs evolve into NFTs because they are "branded" with artworks. However, although it is called an NFT artwork, in essence, it only contains some metadata information about the artwork and does not necessarily represent the transaction or change of rights and interests of the artwork itself as metadata.
It is precisely because of the limited nature of NFT artworks that a more accurate name for NFT artworks should be "equity record certificate", which is only a digital record of information about the ownership of art metadata, transfer records, uniform resource identifiers and so on.
Seeing this, many holders may have doubts about the NFT artwork in their hands, and no matter what, they cannot associate the various vivid images of the classic IP displayed by the NFT artwork held by them with the tasteless term "equity record certificate".
Of course, there are also some NFT art transactions in the market that include intellectual property rights such as commercial use, such as the "Bored Ape Yacht Club" (yes, the avatar that Curry bought for about $180,000), and the holders of NFT art can enjoy the use, reproduction, display of their NFT content and create derivative works.
For a time, the streets were filled with coats, skateboards, shoes, magazines with the image of the "Boring Ape Yacht Club", and even the Universal Music Group had formed a metaversmic virtual band based on the image of the Boring Ape Yacht Club.
Bored Ape Yacht Club official website
So how did the holders of NFT artworks get these rights?
The answer is simple and traditional, and these rights are obtained through an agreement between the right holder (such as the issuer of an NFT artwork) and the holder. Although the NFT artwork itself may only be a digital record of rights and interests, through special agreements, such as the licensing of the intellectual property rights of the artwork, the transaction of the NFT artwork can be corresponding to the transaction of certain rights and interests of the artwork itself (such as the ownership or use of the intellectual property right).
Therefore, the holder of the NFT artwork needs to find out what rights they actually have, or correspondingly, the issuer of the NFT needs to find out which rights they actually give, which needs to be analyzed through two dimensions, that is, the transfer of the rights and interests of the NFT artwork itself, and other agreements between the two parties on the transfer of rights and interests.
The first dimension: the transfer of rights and interests in the NFT artwork itself
First of all, it must be clear that in the current environment, mainland law has not yet made a final determination of the legal attributes of NFT artworks, and all analysis is only based on the current legal framework.
Since NFT artwork is a "certificate of entitlement record", it is likely to be considered a kind of online virtual property. The legal provisions on online virtual property are in Article 127 of the Civil Code:
"Where the law has provisions on the protection of data and online virtual property, follow those provisions."
In trial practice, in the Unfair Enrichment Dispute of Shanghai No. 1 Intermediate People's Court (2020) Hu 01 Min Zhong No. 12524, the court held that:
The dispute USDT (TETC) is a virtual object based on data, which the right holder can exclusively possess, dominate and use, which itself has the characteristics of exchangeability and has the characteristics of the object of rights.
Although the USDT targeted by the judgment is actually a homogeneous token (FT), since both NFTs and FT are tokens developed based on blockchain technology, it is reasonable to understand NFT artworks as "network virtual property" within the current legal framework. Therefore, on the first level, owning NFT artwork can be considered to be a network virtual property.
(2020) Hu 01 Min Zhong No. 12524 Civil Judgment (Excerpt)
Of course, at present, for Article 127 of the Civil Code on online virtual property, there are no relevant supporting laws and regulations, and compared with traditional virtual property, blockchain-based NFT artworks have many new characteristics, such as the identity of their rights holders, transaction paths, etc. are relatively clear, that is, they can basically achieve exclusive possession, access, control and use, etc. From this point of view, it may be more appropriate to protect them with property rights.
The second dimension: the transfer of other relevant interests agreed upon
In addition to the transaction and transfer of NFT artworks as "online virtual property", the issuer of NFT artworks can also associate other rights and interests related to artworks with the transaction of "online virtual property" through agreements and agreement arrangements.
For example, in the case of the "Bored Ape Yacht Club" mentioned above, users can find the terms and conditions of this NFT project on the official website, which state the rights of the owner of the NFT artwork, the original text is longer, and the excerpt is more interesting:
Commercial Use. Subject to your continued compliance with these Terms, Yuga Labs LLC grants you an unlimited, worldwide license to use, copy, and display the purchased Art for the purpose of creating derivative works based upon the Art (“Commercial Use”). Examples of such Commercial Use would e.g. be the use of the Art to produce and sell merchandise products (T-Shirts etc.) displaying copies of the Art.
The commercial use license in this paragraph means that the holder of the "Boring Ape Yacht Club" NFT artwork has obtained the license to use the intellectual property rights of the artwork itself through the permission of the right holder (distributor), and the term of the license is not limited, and the scope of the license is global. Holders of NFT artworks can thus create derivative works based on licensed intellectual property rights. That is to say, after the project became popular, the streets and alleys were filled with the source of rights for various products printed with the IP pattern of the project. From this point of view, Curry is not "180,000 US dollars to buy an avatar", but spent 180,000 US dollars to obtain a phenomenon-level IP global unlimited part of the intellectual property rights, in fact, the price is not high.
In terms of other related rights and interests, domestic platforms are relatively conservative because of compliance requirements.
For example, the H platform, in the platform "Service Agreement" clearly states:
You understand and agree that the intellectual property rights in the Digital Collection are owned by the issuer or other rights holders. The above rights are not subject to any transfer or sharing as a result of your purchase of the Digital Collection...
The rights of platform B in the User Agreement are relatively broad:
For the Digital Collectibles purchased by you through the Platform in accordance with this Agreement, the RightHolder will grant you a license to collect, use and display the Digital Collectibles purchased by you for personal, non-commercial purposes only within the copyright validity period, non-exclusive, non-exclusive, non-licensable, and exclusively for personal and non-commercial purposes.
……
The above licenses apply only for the time period during which you own the Digital Collection. If you cancel your account or for any reason abandon the Digital Collectibles you have purchased, the license granted above will expire immediately without notice.
In the process of handling actual legal affairs, it was also found that the user agreements of some platforms were not clear about other rights and interests of NFT artworks (digital collections), and there was considerable room for interpretation. For example, many platforms confuse NFT artworks, artworks, and artwork copyrights, resulting in great instability in the rights of NFT artwork (digital collection) holders. It has also been found that when the platform and the artist signed the contract, they promised not to involve the licensing and transfer of the copyright of the artwork, but in the platform user agreement, the user's right to use part of the copyright of the artwork was licensed, in this case, the holder may think that he bought part of the copyright of the artwork, but in fact, the artist does not have the corresponding authorization to the platform, or causes potential disputes.
postscript
The development of blockchain technology has indeed brought unprecedented experience and application to society, and in the foreseeable future, it will serve as the underlying technology for confirming the rights of digital assets, helping the realization and development of the "Metaverse". The grand narrative may be too far away, take this article, when you see this article as a reader, the WORD text has been uploaded to the blockchain notary platform when this article is completed, and it is packaged on the chain with a trusted timestamp for fixing, which to a certain extent proves that I completed the text work at a certain point and obtained the corresponding copyright.
The whole fixation process is very silky and takes less than 10 seconds.
Innovation is indeed visible to the naked eye, but with the mushrooming of NFT platforms, how to accurately define the content of transactions to avoid legal transaction flaws instead of rigidly copying user agreements of other platforms, how to formulate a compliant transaction structure, how to embrace supervision to avoid speculation, how to avoid infringement, etc., are all issues that need to be clarified and considered urgently.
Wen / Lin Yijie Lawyer