Att. İrem Özbay
“Code is new art&code is new money”
It is a recent term rapidly entered in our lives with its arising popularity: NFT. The abbreviation means Non-Fungible Token, in other words, “non-fungible crypto asset”. We may define NFT as unique and single crypto asset that is bounded to an existing crypto money unit’s blockchain. Almost everything including; video and audio clips, tweets, e-books or articles, paintings, statutes, pictures, designs may be converted into an NFT format by a process applied on the blockchain called “minting”, and later sold on the NFT market.
By 2021 NFTs have already gained global recognition and a significant market value. Only the previous week NFT sales were reported to be 292 million dollars, and the total sales volume of NFT in 2021 reached 12 billion dollars.
It is a major discussion how the NFTs will be defined and adopted within legal systems as such as other novelties like crypto money and artificial intelligence. Thus, in the face of such natural uncertainty, NFT specific general information and a brief legal analysis will be provided without delving into controversial arguments under the following headings of this article.
- What are the NFT Specific Features?
In fact, NFTs exist on the blockchain just like crypto money. Yet, with a significant difference: Although, crypto money may be traded for with another crypto money, NFTs are non-alike, non-fungible, unique crypto assets that cannot be traded for each other. The very term of “Non-fungible” points out this feature. For instance, if you have ten thousand bitcoins, you may trade these for 5 thousand other bitcoins in two separate transactions. Yet, you cannot transfer your NFT for a likewise other NFT. It is one and only, like a work of art. As we shall expound hereunder, it would not be inaccurate to conclude, the NFTs considered as art work under the Law of Intellectual Property Rights may be deemed as physical art works’ original and unique copies stored in digital environment.
The most important specific feature of the NFTs, is that its originality can be documented and the transfer information is visible. NFTs are single and original documents produced within digital environments due to their indivisible, non-erasable and unalterable features. Its embedded digital identity provides to understand digital NFT work’s originality, and its owner, even its all preceding owners if it had been subjected to a sale. So that, regardless of the fact, it is easy to alter or copy NFTs within digital environments, it is fairly simple to determine and track whether if an NFT work is original or copy.
This is a quite important development as it is almost impossible to determine originality with such a great comfort regard to the physical art work. According to the 2010 news of the English newspaper “The Independent”, at least the 20% of the paintings presented at the English galleries may be reproduction. Similarly, glimpse into the examples, as such as, understanding famous artist Goya’s painting “Colossus” was actually painted by his apprentice, and, Rembrandt’s two art works of which were kept for years under the suspicion of being fake/reproduction unraveled to be original, show that determining originality in physical art work can be strenuous.
Expedient documentability of original NFTs have resonated so widely, today they are being used in authenticating physical assets. For instance, Breitling, the company involved in watch sales, instead of providing physical documents to its customers for proving its high-priced watches’ originality, forward digital passports primed by the use of NFT technology. Artist Kieren Seymour provide a digital NFT copy of his art work to the buyers along with the original painting.
Given all this, the reason people choose to spend as much on NFTs is transparent since purchasing an NFT means owning a unique and inimitable digital asset that no one has any claim over by any legitimate means.
- Smart Contracts for Regulating NFT Sales (“Smart Contracts”)
Smart contracts enable NFT owners to gain certain shares in NFT sales on digital platforms, and to buyers to easily understand the purchased NFT’s originality. Hence, both parties of the sales agreement carry out a highly trustworthy legal transaction. Smart contract technology can quite possibly overcome majority of potential legal disputes arising from sales procedures in reality.
- Assessment of the NFTs within the scope of Intellectual Property Law
Since the law does not exist in a vacuum abstract from society and technology, it is a sum of rules that have to be changed, renewed, adapted congruously, so that, we are bounded to position technological developments within the legal system as coherently as possible and carry out our legal assessments accordingly. So how can we position NFTs within our legal system?
At the beginning of the article all readers may have doubts as to whether NFTs are qualified as intellectual property. Although, it is related with certain other legal fields, it is more strictly intertwined with Intellectual Property Law.
Intellectual property is stipulated by the Intellectual Property Law numbered 5846 (IPL), as an intellectual and artistic work of science, literature, music, fine art or cinematographic work that carry its owners characteristics. Within this context, we can infer that NFTs shall be protected under the IPL as long as they carry its owner’s characteristics and comply with the other conditions of the IPL.
- Determining the Intellectual Property Owner
At this point we must return to the matter of “determining the intellectual property owner”. Today blockchain technology provide the information of the first person who included the NFT formatted art work to the blockchain, and the transfer background. Similarly to the land registry bearing the records of property and other real rights, we can observe the transfer background including the first owner (the person who had done the minting and added the work to the blockchain) to the last by the use of blockchain’s unalterable feature. In fact, this attribute solves quite many problems faced within the intellectual property law. Thus, this means, when an NFT property is to be copied and distributed in breach of intellectual property rights, the breach may easily be detected and the original property owner can promptly take legal actions against the violating party or parties.
On the other hand, blockchain technology’s feature enabling to record property ownership may give rise to different problems of intellectual property law. For instance, a friend named Vincent paints spectacular view of night sky with stars. Yet, another person named Mark who likes his painting very much creates an NFT version of the work and submits it to the NFT market. The highly esteemed NFT creation brings up a considerable fortune to Mark in a short time. In this situation it would be very difficult for Mark to prove the original painting to be his own creation. Yet, Mark can prove the entitlement of ownership regard to the property as being the person who converted the work to an NFT format with the use unalterable digital records, furthermore, he may even claim Vincent had copied the work. Thus, with the means of NFT documentation, it is easier for Mark to prove his ownership claims compared to Vincent in the face of a potential dispute.
In this example, blockchain technology merely shows the person who first converted the work into the blockchain. Yet, it is not possible to determine who had created it through his/her intellectual endeavor. Although, blockchain technology provides great easements to identify the original property owner, it does not directly unveil the real owner. Ownership rights shall be protected through making new legal regulations on intellectual NFT properties. By that, it shall be strictly audited whether if the persons who converted physical works into NFT format had acquired valid approvals of the actual property owners or whether if they had paid copyright price or not.
- Does Intellectual NFT Property Buyer Acquire the Copyrights?
Intellectual property law specialist Dr. Andres Guadamuz defines NFT as “Cryptographically signed document showing ownership on intellectual property’s unique copy”.
We can find an answer to the question of copyright ownership from this definition. In principal, the purchase of NFT work would only provide ownership entitlement on the NFT, yet it would not cause an entitlement regard to copyrights for the intellectual property of which are represented by the NFT document. For this reason, purchasing an NFT cannot directly provide transfer of the copyrights to the buyer. However, in essence, the copyrights and intellectual property owner’s economic rights can be a subject of the smart contract that oversees the transfer.
- How Economic Rights are Transferred?
In general, only the NFT ownership is being transferred rather than intellectual NFT property’s economic rights. Yet, transferring economic rights of an NFT is a possible option.
According to the Article 52 Intellectual Property Law:
“Contracts and disposals on the economic rights shall be written and their each individual matter of subject shall be shown separately.”
In relation to the NFTs sold via digital environments, a provision on the terms of economic rights transfer need be added to the smart contract. This provision has to specify the terms of which determine the exact economic rights that are to be transferred such as copying, distribution, representation, communication to the public, and whether if these rights are transferred within a certain time limit or not. Although this approach seems viable in theory, it is open to discussion if the smart contract which is fundamentally a software code comply with the IPL’s validity term of being in writing. We are ought to see the legal applications in time in relation to the acceptability of validly transferring the economic rights via the smart contracts and potential expedient applications of the technology that created the smart contracts in the execution of the contract provisions.
- Dispute Resolution
Under the scope of legislation on intellectual property protection, it is breach of property owners’ rights; to convert other works into NFT format and present them on digital platforms without proper permission; to copy NFT works, and publish without permission, to distribute, to print, and sell these copies. It is possible to file law suits for prevention, prohibition, declaration of the breach, and claim monetary compensation in potential legal disputes regard to intellectual NFT properties. However, it may be challenging to execute these court orders. As blockchain is a centerless structure and non-auditable by the governments, new regulations are required for an active execution procedure. Also, the enforceable law and authorized courts are not clear.
Today as the activities shift from physical environments to digital platforms, art and art buyers are follow this trend as they move on to digital context. Although NFTs provide great easements within the means of intellectual property law especially regard to the aspects of “originality” and “determining the intellectual property owner”, it is still important to be able to identify actual right owner and copyright entitlement in respect of the physical assets. Certainly technology will develop in an immensely unpredictable speed, yet, the actual puzzlement revolves around the question “To what extent the law is to keep up with the technology and how is it going to evolve alongside with it?”.
- “NFTs: Art meets crypto-traditional copyright issues in a tokenized World”, Akiv Jhirad, Daniel Anthony, 16 Sep 2021
- “NFT ve Sanal Mülkiyet” Beste Bayrak, Kasım 2021
- “Non-Fungible Token (NFT) ve Telif Hakkı, Duygu Belen Cumhuriyet, Ekrem Can Narin
- “Quels sont les enjeux juridiques des NFTs?”, Henri de la Motte Rouge, 28 Nov 2021