This post was first published September 2nd, 2022 at http://mirror.xyz/jeremyg2k.eth.

Recently, some folks in the NFT industry, including Galaxy Digital in a report published on August 19, 2022, have called into question the ownership rights a collector gets when they buy an NFT, even going so far as to suggest that some creators have misled NFT purchasers. These critics got it wrong because they misunderstand two fundamental concepts of IP law:

1/ What it means to own digital art; and

2/ What it means to own intellectual property rights in digital art.

The purpose of this post is to alleviate some of the FUD (fear, uncertainty, doubt) over ownership and IP that has unnecessarily been injected into the NFT ecosystem. Hopefully, this post will clear up once and for all what a buyer gets, and doesn’t get, when they buy an NFT.

As demonstrated below, it is accurate to say that NFT buyers “own” the digital art associated with their tokens. It also is a fact that NFT buyers frequently receive valuable IP rights in their digital art, including through broad exclusive licenses, which provide “all of the protection and remedies accorded to the copyright owner.” [1] To understand why this is right and the critics are wrong, we’ll need to review some principles of IP and property law. LFG!

What is intellectual property?

In the U.S., IP generally encompasses three categories of rights: patent, trademark, and copyright. Patents cover inventions and trademarks cover source identifiers. Neither are relevant here. Content ownership is governed solely by copyright law, which protects “original works of authorship fixed in any tangible medium of expression.” [2]

What does it mean to “own” a copyright? The owner of the copyright in a work holds the exclusive rights to do and to authorize others to reproduce, prepare derivative works based upon, distribute, publicly display, and publicly perform the work. [3] These exclusive rights frequently are analogized to a bundle of sticks that the copyright owner may use, divide, and grant to others as they wish.

Copyright v. Material Object

Copyright law establishes a simple but essential distinction between “ownership of a copyright,” on the one hand, and “ownership of any material object in which the work is embodied,” on the other. [4] As discussed below, the failure to appreciate this important distinction is what helped lead certain critics astray.

Suppose an artist creates a painting on canvas. At that moment, the artist owns both the copyright in the work and the material object (the canvas). If the artist sells the canvas to a collector, the collector will own the material object but the artist will still own the copyright in the work. The copyright and the material object are separate and distinct property rights.

What does it mean to “own” a material object?

Under the common law that governs property rights in the U.S., the material object—the oil on canvas—would be considered a piece of tangible personal property owned by the collector.

As the owner of a lawful copy of the artwork, the collector “is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy.” [5] This is called the “first-sale doctrine.”

The buyer also “is entitled, without the authority of the copyright owner, to display that copy publicly, either directly or by the projection of no more than one image at a time, to viewers present at the place where the copy is located.” [6]

Digital art is a material object that may be owned, sold and displayed.

Classifying an oil on canvas as a “material object” is easy. Classifying digital assets is trickier.

Suppose our artist instead creates a work of digital art, saves it as a JPEG file on a portable USB drive, and sells the drive to a collector. What does the collector own?

The USB drive is simply a piece of tangible personal property, but what about the JPEG file?

The JPEG file is a “material object” under the Copyright Act. Indeed, any object in which a work can be “fixed” is a material object. [7] That includes a digital art file, which courts recognize as a “digital sequence” representing the copyrighted work that is “magnetically encoded on a segment of [a] hard disk (or likewise written on other media.).” [8] Just like the owner of the canvas, the owner of the JPEG file has the right to sell the file, and to publicly display the JPEG “by the projection of no more than one image at a time, to viewers present at the place where the copy is located.” [9] In other words, the first sale doctrine applies to digital art. [10]

Against this established law, Galaxy Digital contends:

Copyright is the only legally cognizable form of ownership in digital content that we have in the United States. Without copyright, a purchaser of digital content does not own that content, but instead “licenses” that content from the copyright holder, on terms dictated by the copyright holder.

This suggestion—that digital art cannot be owned, but only licensed—is flat out wrong. In a landmark case examining ownership of digital assets, the court held it was “undisputed” that one may own a particular copy of a digital file. [11] It is true that the first sale doctrine frequently does not extend to digital works because the first sale doctrine applies only to a “particular copy,” and digital files typically are distributed by reproduction. However, there is no question that one may own a particular copy of a digital work. [12] This is the key principle that allows digital art, including as represented by an NFT, to be “owned” separate and apart from any copyright interest or license from the copyright owner.

NFTs provide a new way to convey ownership of digital art.

The problem is that, in our networked, cloud-based, streaming, digital world, saving JPEGs onto portable media and selling them is not practical. Nor is selling copies of JPEGs online, since digital files are infinitely, effortlessly, and flawlessly reproducible, making it impossible to distinguish between the owner of the “original” JPEG file and the owners of perfect copies of it. These realities have provided an abysmal environment to market and sell digital works, and driven most digital works to be distributed by license not sale.

NFTs solved this problem by creating a revolutionary way to “own” digital objects, opening a new market for owning and selling digital art. Since NFTs are not digital files that are “fixed” on media, but records on a blockchain, they may not themselves be “material objects” under copyright law (though the image files associated with the NFTs are). Nevertheless, when a collector buys an NFT associated with a piece of digital art, the collector receives essentially the same rights and privileges they receive when they buy a piece of physical or digital art: the NFT is an intangible piece of personal property that the collector may buy, sell, and own. The NFT, which the smart contract ties to the digital art file, also likely gives the collector the right to publicly display the art via an implied license.

In a sense, NFTs substitute for the “material object” that digital technology rendered obsolete. Like an oil on canvas, a digital art NFT is personal property representing the artwork with value totally distinct from IP ownership.

Galaxy Digital takes issue with Yuga Labs’ statement in its Bored Ape Yacht Club license that, “[w]hen you purchase an NFT, you own the underlying Bored Ape, the Art, completely.” The report contends this statement falsely “suggests that NFT token holders own the intellectual property that underlies the NFT.” However, the statement is 100% accurate when you understand the fundamental distinction between copyrights and material objects. Stating that a person owns a piece of art, completely, does not in any way suggest that the person owns the copyright in the art. They just own the physical piece. Appreciating this basic difference in ownership rights is paramount.

A Broad Commercial License = Valuable IP Ownership

Licenses are the copyright owner’s vehicle to exploit the bundle of sticks that comprise the copyright. A license may be as limited or as broad as the copyright owner desires. A license also may be exclusive or non-exclusive. If the license is exclusive, that means that the licensee is the only one who may use the copyrighted work within the scope of the license. Holding an exclusive license is functionally equivalent to owning the copyright itself. This concept is baked directly into the Copyright Act, providing that “[t]he owner of any particular exclusive right is entitled, to the extent of that right, to all of the protection and remedies accorded to the copyright owner by this title.” [13]

Arguing that commercial NFT licenses convey zero intellectual property ownership because they grant NFT owners only a license and not the underlying copyright reflects a fundamental misunderstanding of the role and power of licenses. Holding a license, especially an exclusive or “commercial” license, is a form of intellectual property ownership! Since an exclusive licensee is entitled to “all the protection and remedies accorded to the copyright owner,” why does it matter that NFT owners receive a license instead of the underlying copyright? The answer is it doesn’t. A broad commercial/exclusive license is a legitimate and valuable form of IP ownership and overlooking that is a mistake.

Licenses serve the NFT ecosystem far better than full copyright transfers.

In fact, a licensing regime is a far superior way to support the growth, longevity, liquidity, and stability of a Web3/IP infrastructure than a straight transfer of copyright. If the whole copyright is transferred, the initial NFT owner is free to “decouple” the copyright from the token by, for example, transferring the copyright to a third party. In that scenario, when the initial NFT owner sells the token to a new buyer, the new owner won’t receive any IP rights. IMHO, allowing NFT owners to squeeze the IP juice from the lemon by divorcing the IP rights from the NFT is not the way realize the full potential of decentralized IP.

In a licensing system, on the other hand, the copyright owner may give the NFT owner the same rights and privileges of the copyright owner for as long as the NFT owner holds the token but, upon transfer, those rights terminate and begin afresh with the new NFT owner.

A word about CC0…

I’ve also seen a lot of criticism thrown at NFT project creators who have opted to dedicate their artwork to the public domain under a Creative Commons Zero—or CC0—license. “This raises an immediate issue,” Galaxy Digital contends, “with respect to the value prop of a CC0-governed NFT: why would you spend a lot of money on one when neither you nor the NFT project can exclude non-holders from exploiting the art linked to your NFT?”

This sentiment again reveals a failure to appreciate the value that NFTs hold separate and apart from any IP rights that may accompany NFT ownership. Until recently, CryptoPunks granted NFT owners zero IP rights. Yet, they were (and remain) the most valuable NFT project in history. Nouns, one of the more popular CC0 projects, has a floor price that hovers around 100 ETH. Valuing an NFT solely by the IP rights conveyed to its owner disregards both the “token layer” that substitutes for the “material object” (see above), as well as other utility, aside from a commercial license, that frequently accompanies NFT ownership. This is the case with Nouns, where ownership of an NFT gives you governance rights over a 27,000+ ETH ($42M) treasury.

Galaxy Digital points to the lil nouns project as an example of the purported problem with the CC0 framework, arguing that “[n]either the Nouns DAO nor holders of Nouns NFTs are able to enforce any kind of copyright violation claim against Lil Nouns or holders of its NFTs because Nouns are released under CC0.” I found this example amusing because the lil nouns project was launched with the knowledge, participation, and blessing of the Nouns project!

If anything, the lil nouns project illustrates the value that the NFT community places on on-chain-of-title provenance through DAO relationships and smart contract alliances as opposed to off-chain-of title IP licensing. [14]

It’s still early days for the NFT market, but NFT project creators have already begun to revolutionize the ways we think about digital art, intellectual property, and ownership. There are many different IP structures to explore and try out, and plenty of room to evolve and enhance Web3’s IP infrastructure. Different viewpoints in this space are welcome and needed, but only if they are grounded in established principles of law and fact.