What is blockchain?
In order to discuss NFTs, you first need to consider what exactly ‘blockchain’ is. This is because NFTs are stored on a blockchain.
Blockchain is a comprehensive, up-to-date, digital ledger system that can record financial transactions and ownership of assets. Every record is encrypted and time-stamped. What makes blockchain so useful is its immutability, transparency and decentralisation. The data stored cannot be changed or deleted.
What are NFTs?
‘NFT’ stands for ‘non-fungible token’. To fully understand what an NFT is, you need to consider what it means to be ‘non-fungible’ and what a ‘token’ is.
If something is ‘fungible’ it can be interchanged or replaced by another object (or item) as if they were identical. An example of this is coins and banknotes. On the other hand, if something is ‘non-fungible’, it cannot be mutually interchanged with another object because it is original and, therefore, irreplaceable and unique. Examples of this are famous paintings, like Da Vinci’s Mona Lisa, or one-of-a-kind trading cards.
A ‘token’ is essentially a container with attributes that change depending on what is placed within it. The token is the part that is stored on the blockchain and represents a (digital) unit of value.
Putting these explanations together, an NFT is a piece of digital content linking its owner to a unique intangible, digital asset (eg digital art, a song or even a tweet).
NFTs can be bought and sold online using cryptocurrency. This means that the buyer of an NFT is not necessarily the owner of the entire original digital artwork. Instead, the copyright (and other associated creative rights) in the artwork remains with the creator (or owner). The NFT buyer simply receives a record (in the form of a token) that is linked to the artwork. We will explain this ownership model more below.
Who owns an NFT?
Ownership rights are one of the tricky issues raised by NFTs. Technically, anyone can claim ownership over digital artwork (such as a drawing or photograph) by attaching a token to it (ie by making it an NFT). This is the case even if they did not create the artwork.
While blockchain (on which NFTs are stored) is generally an unchangeable digital ledger, allowing all transactions to be tracked, it doesn’t require that people attach their identities to such transactions. In practice, this means that it can be difficult to track who the actual owner of an artwork is and provides little recourse for those whose artwork has been taken and turned into an NFT without their permission.
Does the tort of conversion help?
The tort of conversion deals with situations where someone interferes with the personal property of another (eg by taking it or withholding it without lawful justification). For example, Person A takes Person B’s furniture and sells it, without Person B’s consent.
Under the tort of conversion, a person who buys stolen goods does not acquire a legal title to those stolen goods, regardless of whether the buyer knew the goods were stolen. Further, the original owner of the goods can take action against the current owner and regain possession of their stolen goods.
Unfortunately, the tort of conversion only applies to tangible assets and not to intangible assets (such as NFTs). As a result, the tort of conversion offers little recourse for artwork owners whose artwork has been turned into an NFT without their consent.
How about copyright law?
Copyright is a legal protection for creators of original tangible creative works including literary works (like novels, song lyrics, plays, newspapers and computer programs), artistic works (like drawings, paintings, sculptures and photographs) and musical compositions. As soon as an idea is written down or recorded in some tangible form, copyright protection applies automatically without any need to register it.
Copyright stops others from copying or adapting works or making them available to others without the owner’s permission (apart from in limited circumstances, such as for research purposes or reviews).
This means that, in most cases, the creator of an artwork is also the copyright owner who can use, copy, perform or communicate that work in public. Anyone who wants to use a copyrighted piece of work requires the permission of the copyright owner. This generally involves the copyright owner granting the other party a licence allowing them to use the copyrighted work in such a way.
With regard to NFTs this means that, generally, the person who created the artwork an NFT is based on is the copyright owner of the art itself. On the other hand, the person who buys the NFT that is linked to that artwork owns a token and the right to use that NFT for personal use (unless a contract states otherwise). In other words, unless a contract states otherwise, the person who creates the artwork the NFT links to will generally retain the copyright (and associated moral rights) in that artwork, while the NFT owner has acquired the right to personally use the NFT.
It is therefore crucial that everyone involved in an NFT transaction understands intellectual property and specifically copyright law, as a subsequent attempt to profit from an NFT (eg by commercialising it) may result in intellectual property infringement and a breach of copyright law.
NFTs and royalties
Another question that NFTs raise relates to payment, especially with regards to royalties. Royalties are payments made by one party to another party (ie the party that owns a particular asset, such as an NFT), for the right to use that asset.
In terms of NFTs, royalties allow an artist to be paid for their artwork (ie when it is used to make an NFT) when they first sell it and then get additional royalties every time their NFT is resold to another party. The problem is that, currently, automated royalty payments only properly work if an NFT is resold through the same NFT platform. In other words, if an NFT is purchased on Marketplace 1 and later resold on Marketplace 2, the NFT creator will not receive automated royalty payments.
While resale rights (ie the right for authors of original works of art to receive a royalty each time one of their works is resold through an art market professional) exist, which could potentially provide recourse for unpaid resale royalties, the UK does not currently recognise them for NFTs.
NFTs and data protection
With data protection rights becoming more and more important, people are more concerned than ever before about who collects and processes (eg records, stores or organises) their personal data (ie information relating to individuals who can be personally identified from that data, including names, addresses and dates of birth) and what they use it for.
Data protection laws (eg the General Data Protection Regulation (GDPR) and the Data Protection Act 2018) aim to protect fundamental privacy rights and to give individuals (often known as ‘data subjects’) more rights and control over their data. For example, data subjects can make data protection requests to find out what information an organisation holds about them (ie ‘subject access requests’) or to object to the use of their data. This means that GDPR compliance must be ensured whenever personal data is processed in a structured way. This applies to a blockchain whenever personal data is processed via it.
Here, the problem is that the GDPR is based on the underlying assumption that, where personal data is being processed, there is at least one natural person (ie a person) or legal person (ie a non-human entity, such as a company) against whom a data subject can enforce their privacy rights (eg the right to have their personal data deleted or corrected). However, a blockchain doesn’t require that people disclose their identities and can therefore make it hard for data subjects to exercise their rights.
Another issue is that the blockchain is an immutable and unchangeable ledger, meaning that it is technically impossible to erase personal data stored on the blockchain. The fact that it is impossible to erase personal data actually breaches the GDPR and means that NFTS containing certain personal data may violate some data protection principles.
What lies ahead for NFTs?
The UK Law Commission consulted on reforms to ensure that the law can accommodate digital assets (such as NFTs) and provide remedies similar to those available with regard to tangible assets.
The Commission’s report was published in June 2023. Its recommendations for ‘reform and development of the law aim to provide a comprehensive legal foundation for digital assets’.
The consultation involved the government appointing a panel of industry experts to provide guidance on technical and legal issues relating to digital assets (like NFTs). The aim here is to enable judges to make informed decisions about the complex area that is digital assets and their control. The report also called for legislation to provide clarity on the existence of digital assets (and how they behave), to remove any uncertainty.
The Commission’s report and recommendations now lie with the government. While reforms like those proposed by the Law Commission may solve some of the issues relating to NFTs, they still need to be put in place and great care needs to be taken when dealing with NFTs.
If you have any questions or concerns about this complex area of the law, do not hesitate to Ask a lawyer.
