Tokenized copyrights: Linking an NFT to a copyright licence

In our last report on the NFT self-experiment "Formulating a smart contract and minting an NFT", we looked at what data is packed in a freshly minted NFT. In principle, it is possible to include an entire data set of an artwork (i.e. in our case the GIF) in an NFT and thus on the blockchain. We also pointed out that in our self-experiment we did not only link to the digital artwork but also attached a limited usage licence to the NFT (in the metadata; because otherwise the buyer of an NFT in general will not own any intellectual property respectively rights of exploitation or use to the artwork connected to the NFT).

In this instalment, we take a closer look at linking the NFT to a copyright licence.

Use case 1 - NFT for a protected work with limited grant of rights

This use case corresponds to our self-experiment:

Here, the NFT is not only provided with a link to the digital artwork. The author also guarantees to the prospective buyer that he will receive a non-exclusive licence limited to certain purposes (in our case for a museum), with the purchase of the NFT. When offering an NFT we consider it advisable to clarify whether a licence to use is granted and, if so, to what extent. A clearly formulated licence increases the value of the NFT and avoids later disputes about whether and for what purposes the buyer of the NFT may use the digital work in question (e.g. by presenting his NFT or NFT collection [and associated artworks] on his website or on social networks).

Use case 2 - NFT for a protected work with full transfer of rights

However, there could also be cases where the acquirer wants to obtain all rights to the copyrighted work. This could be the case, for example, if the NFT is associated with an icon that the acquirer intends to use as a trademark to identify the products of his company. Or if, for example, a design agency offers various logo designs for sale in tokenized form. In continental European copyright systems, such as in Austria, one could encounter a massive restriction of private autonomy: The author is not in a position to transfer his copyright in its entirety. Section 23 of the Austrian Copyright Act stipulates that copyright is inheritable, but cannot be transferred inter vivos. In this case, the only remedy is to formulate a licence that is – in every aspect – as comprehensive as possible (buyout clause).

Use case 3 - NFT for a protected work as crowd funding tool

An NFT can also serve as a tool to allow fans or other people interested to make small investments, for instance, in a music production that is then marketed online. NFTs have captured the music industry’s attention for their promise of fan engagement and a new source of income. It goes without saying that this was and is of particular interest in Covid-19 times, when shows around the world are being cancelled.

Startups like Bluebox and Vezt organise the sale of a split music copyright as an NFT. As, for instance, Bluebox explains here, each song is divided into NFTs representing splits of that song's copyright. A part of those NFTs is sold to the public. The buyer will then receive a respective share of the attached royalty earning. This idea is similar to the idea of buying stock in a company. Thus, Vetz has also referred to an "Initial Song Offering (ISO)".

When fans have previously been limited to buying (electronic) copies of songs, a right to stream them, or to buy merchandise, they are now able to buy a part of a song as such. And while such investment may also be seen as a sponsorship (to finance the record), fans may even gain income by collecting royalties based on the success of a song. In any event, compared to the purchase of stocks, emotions will normally play a greater role.

Obviously, owning only splits in songs does not enable the purchasers to use the works as they like, since there are many splits and the musicians normally retain a certain proportion (e.g. 25 %). Despite the tokenization of their songs, the funding may be structured in a way that musicians continue to retain full control over their works. In such scenario the right of the purchaser is in fact limited to a right in royalties.

However, fractional ownership seems to be rather unrealistic if artists are signed to a label or only hold parts of their copyrights themselves. On the other hand – as mentioned above – many copyright laws do not allow a full copyright transfer (or fractions thereof). In this case the NFT can merely come with a licence.

Use case 4 – NFT for a work with waiver of copyright protection

It would be conceivable that the rights holder would want to waive copyright altogether in order to put the NFT into circulation for free exploitation without any restrictions. This could also fail due to the restriction of private autonomy in copyright law. In Austria, for example, it is not at all clear whether a complete waiver of copyright protection is legally effective. The Copyright Act only regulates the case where a co-author waives his rights. Then his share accrues to the remaining author. Some argue that therefore a waiver by the last remaining co-author would also have to be effective so that the work ultimately becomes free of copyright. Others argue that copyright is indispensable for the protection of the author's personal rights. Against this background, for example, the CC0 licence (a tool for relinquishing copyright and releasing material into the public domain) contains a waiver as far as legally possible under applicable law but, as a fallback position, also acts as a public domain equivalent licence.

Use case 5 – NFT for a work not protected by copyright

But of course, NFTs could also be linked to material that is not copyrighted or to works that are no longer copyright protected. Recently, for example, the media reported that the Uffizi Gallery in Florence turned a painting by Michelangelo into an NFT and sold it for EUR 140,000 (USD 170,000). It is likely that the unique original remains in the collection of the Uffizi. The NFT was apparently linked to a digital twin. The main motive for acquiring such an NFT will probably be the willingness to give financial support to the museum in difficult times, and the NFT is recognition of this. Here, again, it could make sense to upgrade such an NFT with a licence. This licensing, however, cannot be based on the long-expired copyright to the original. But it could, for example, be a licence to the high-resolution facsimile photo of the original image with which the NFT is associated. In principle, such an image will at least enjoy protection as a related (or neighbouring) right. However, the EU Directive on copyright and related rights in the Digital Single Market (2019/790), to be implemented into national law by 7 June 2021, requires Member States to provide that when the term of protection of a work of visual art has expired, any material resulting from an act of reproduction of that work is not subject to copyright or related rights, unless the material resulting from that act of reproduction is original in the sense that it is the author's own intellectual creation (Article 14 of stated directive). A reproduction photograph without individual character will therefore no longer enjoy copyright protection in the future. This means that this basis for granting a licence is also missing.

Conclusion

In general, the artwork that is connected to an NFT is protected by copyright. The mere purchase of the NFT usually does not transfer rights of exploitation or use to the buyer of the NFT (e.g. a right to present it on his own website or on social networks). It is thus advisable to consider inter alia: what copyright/ rights shall be / are included in the NFT?

By endowing an NFT with rights related to the artwork, e.g. by connecting it to a licence that (best) meets both, the intentions of the NFT creator / author of the tokenized work as well as, to the extent possible and desired, of the NFT purchaser, the NFT will benefit in its value. Furthermore, potential later disputes concerning copyright issues and other rights connected to the NFT may – at least to a certain extent – be avoided.

In our self-experiment we linked the NFT to the specific needs of a museum and formulated "a non-exclusive, worldwide licence to use, in particular to reproduce, distribute, publicly perform, broadcast and make available the work of art in unaltered form, as is customary in the museum and exhibition activities of an internationally renowned art museum".

authors: Dominik Hofmarcher and Anna Katharina Tipotsch