A new problem: NFT and Legal
NFTs: Disruption or Speculation? Since the first half of 2021 at the latest, NFTs with a total value of more than USD 2.5 billion have been traded and numerous participants – including startups, large companies, artists as well as sports teams and leagues – have entered the extremely dynamically developing market legal classification of NFTs. Therefore, this overview is intended to introduce the topic and explain legal fundamentals with a special focus on copyright issues. We also discuss NFT and legal issues in Turkey
Background
Tokenization of assets on a blockchain
Specifically, NFTs are character strings that are stored on a blockchain . A blockchain is a continuously expandable list of cryptographically linked data records that functions as a decentralized register – something like a decentralized land register that can be viewed by everyone. An added value of NFTs lies in the transparent and forgery-proof identification of an in particular digital object (the reference object ) as a specific individual item and the assignment of this reference object to an owner.
On the one hand, this is based on the property of many blockchains to store data records in a decentralized manner and with almost no manipulation. On the other hand enable certain block chains such as so-called Cardan Ethereum and programming. Smart Contracts (executed on the blockchain code) that NFTs can be generated as (so-called. Minting or embossing ). For this purpose, certain software (usually on a trading platform such as OpenSea, which comes with a wallet of the user) is used and a fee is paid to generate an NFT. After the reference object and NFT have been embossed and linked, the specific character string on a blockchain – i.e. the NFT – clearly represents a certain asset, such as a digital work of art. This process is also known as ” tokenizing” (the asset).
Benefits and Commercial Uses
The NFT can be used to certify ownership or other rights to a reference object. Otherwise digital goods that can be copied almost free of charge are artificially reduced. A commercial use case that is particularly relevant in terms of copyright law is the markets for digital art, collectibles and other digital goods, which have grown particularly strongly since the beginning of 2021. Examples are the trading of digital works of art such as the so-called CryptoPunks and musical samples and the sale of so-called collectibles as part of computer games (e.g. virtual Formula 1 racing cars). In addition, FC Bayern has also issued digital trading cards for its players and the NBA has sold short video clips (so-called moments). In this context, large companies such as TikTok,
NFTs and asset tokenization offer many other commercial uses. In addition to digital objects, analog objects can also be referenced with the help of NFTs. For example, Noerr has already advised 360X AG (whose main shareholders are Deutsche Börse and Commerzbank), which is developing new marketplaces and ecosystems for analog but less liquid assets such as analog works of art and real estate on a blockchain basis. In addition, by way of fractionalization only shares of such assets are traded, which increases their liquidity and makes the respective markets accessible to the general public.
Legal Basis
In the context of NFTs, many new legal questions arise that call for innovative answers. Under civil law, NFTs could at least enjoy tortious protection as “other right” in accordance with Turkish Intellectual Property Law, but – at least according to the prevailing view – they do not represent absolute rights and, due to a lack of physicality, are not things within the meaning of this law. The concrete legal significance of individual NFTs is therefore primarily left to the contractual design by the parties involved.
For the legal relationships between the buyer and seller of an NFT as well as the rights associated with the NFT and related to the reference object, it is primarily a question of (i) which absolute rights exist to the reference object under the respective legal system and (ii) what the The parties agree on the transfer of rights. In the context of the currently particularly active (digital) art market, the absolute rights are primarily copyrights and the transferred rights are copyright usage rights (licenses). However, this requires further clarification in individual cases.
Copyright Issue
This allows the legal relationships of the parties involved to be mapped in terms of (copyright) law, but NFTs also raise new, practice-relevant copyright issues. The most important of these questions are presented below.
First of all, it is still unclear whether the embossing itself is relevant in terms of copyright and whether it can interfere with a right holder’s right of use. It should be noted that the embossing of an NFT does not represent the digital asset itself, but rather a token is generated on the blockchain that is linked to metadata of the work. This includes information necessary to identify the token, the work of art and the token owner – including a link to the work. In practice, questions arise primarily on two points: On the one hand, the right to coining, as an unknown form of use, could already be the subject of existing license agreements. In particular with the comprehensive granting of rights of use, the right to embossing would then no longer belong to the author, but to the purchaser. As a result, only the purchaser would be entitled to mint an NFT and offer it for sale. On the other hand, the illegal formation of an NFT would enable the right holder to assert omission and, if necessary, compensation for damages . The question is therefore particularly relevant in practice and needs to be clarified quickly by case law.
Formulation of license conditions
Acquirers and sellers can agree that certain rights of use to the reference object (e.g. to a copyrighted work of art such as a picture) are transferred when an NFT is transacted. Particular attention must be paid to the wording of the license conditions. After all, licenses in copyright contract law can be designed in a highly individual manner. In particular, local and temporal restrictions on the right of use or the restrictions on certain types of use are possible. The distinction between simple and far-reaching exclusive ones is of particular importance rights of use that convey exclusivity to their purchaser. The remuneration also requires specific regulations.
Monitoring and Abuse
Blockchain technology offers the possibility of seamless tracking (e.g. using on-chain analytics), but rights holders also have to face the risk of abuse. Finally, third parties can also create NFTs for a reference object (e.g. a work of art), although they are not authorized to do so. In addition, an artist, for example, can also generate several NFTs for a reference object. Buyers of an NFT should counteract this by contract. In order to prevent misuse by third parties, transparent processes are required in practice, from which it can be seen which NFT is to be assigned to a reference object.
In addition, there are practical difficulties in enforcing law. Although NFT retail chains can be traced via the blockchain, their owners cannot usually be identified via the wallet addresses. In some cases, NFT trading platforms therefore provide identification processes for the creation of wallets (using the KYC procedure). The international dimension of NFT trade will also create enforcement problems.
Automated license payments
Certain blockchains also make it possible for artists as creators to participate in the commercialization of an NFT by means of smart contracts, even beyond the sale of an NFT. In practice, it could be agreed in the code of a tamper-proof smart contract that an author would have a certain share in a resale by the purchaser at a certain price. There is also the option to define that participation in every further transaction takes place. In these cases, no further human act of implementation is required. Using special technical interfaces, certain automated decisions can also be made on the basis of external sources (e.g. on the basis of trustworthy databases). All of this requires careful and forward-looking contracts.
Outlook: On-chain NFTs and Metaverse
The reference objects are (still) almost exclusively digital or analog objects that are not themselves stored on a blockchain. However, this may change in the future due to new technological developments. This applies, for example, to so-called on-chain NFTs , which enable data to be stored on the blockchain independently of trading platforms. In addition to their use in the tradability of conventional digital and analog assets, NFTs could also provide a basis for the so-called metaverse, which may develop into a multi-billion dollar market (see, for example, the most recent reports in the media) – i.e. the collective virtual space that is being created. In the Metaverse, users interact with each other, exchange services and transfer assets such as virtual properties and other objects. NFTs are developing into a central infrastructure for this, which makes solving the open legal questions all the more important.
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