Most NFTs carry ‘zero’ IP rights, says report
Issuers “misleading” owners over IP rights | More legal documents setting out ownership terms are needed | More than $118 bn-worth of NFTs were traded over Etherium in a 12-month period.
The vast majority of non-fungible tokens (NFTs) convey “zero” intellectual property ownership, with many issuers appearing to have misled NFT purchasers as to the IP rights for the content they sell, according to a new report.
“A Survey of NFT Licenses: Facts & Fictions”, published by blockchain investment company Galaxy Digital on August 19, uncovers what report authors call the “reality” of licensing among the biggest NFT collections—including Yuga Labs and Moonbirds.
Galaxy examined the top NFT collections ranked by implied market capitalisation, and found that their respective NFT licence agreements fell into four categories: commercial rights, limited commercial rights, personal use only, and Creative Commons.
“All of these licences, regardless of the level of permissiveness, hail from the era of Web2,” said the report’s authors. Consequently, “...the promise of Web3, that users will actually own digital property as opposed to leasing it, remains elusive”.
The report claims that disparities exist between issuer marketing materials and legal terms of service, which in some cases are “vast and misleading”.
It points out that ownership of an NFT is not enough to grant rights to the token owner; indeed token holders must demand ownership rights over their NFTs or seek increased issuer transparency at a minimum, for the “Web3 dream of NFTs to become a reality”.
“The mere fact that an NFT ‘points to’ a certain image does not, by itself, give the owner of that NFT any rights to the image, any more than minting an NFT of the Mona Lisa gives the minter rights to the Mona Lisa,” the report explained.
“Something more is required, and that ‘something’ is a legal agreement between the owner of the image—known as the ‘copyright holder’—and the NFT holder specifying what rights the NFT holder has with respect to the image.”
With that in mind, for the “vast majority of NFT projects, owning the NFT does not mean you own the corresponding digital content that is displayed when you sync your wallet to OpenSea,” explained the report.
“That content, as it turns out, is owned and retained by the owner of the copyright associated with that digital content, typically the NFT project.”
DVD versus NFTs comparison
The report uses the distinction between owning NFTs and owning a tangible asset such as a DVD to illustrate the point that this buys a copy of a film, not the exclusive rights to the film. In other words, it is not a unique collectible item that grants exclusive access to that content.
NFTs, on the other hand, are different since “NFT projects purport to sell unique, one-of-one digital collectibles that no one else can own...No one thinks they are buying a copy of an NFT with a super rare trait. They [believe they are] buying the ‘rarity trait’ themselves.”
But this is misleading, according to the report. “...someone else does own the rarity trait—not the purchaser of the NFT, but the issuer of the NFT (the NFT project)”.
“What you own is the token that points to an image containing the rare trait. In this sense, an NFT purchaser is, at most, renting the rarity trait from the true owner of the trait—Yuga Labs, in the case of Bored Ape Yacht Club, CryptoPunks and MeeBits; Proof, in the case of Moonbirds; Chiru Labs in the case of Azuki, etc.—who owns the copyright to the art.”
After reviewing the most-used licence agreements for NFT projects, NFT standards and smart contracts apparently do not recognise off-chain law, said the report.
In recent weeks, both Yuga Labs and Moonbirds altered the usage licences “substantially” for their NFT collections. Yuga Labs—“by far the largest NFT issuer, owning more than 63% of the market value of the top 100 NFT collections”—released new licence agreements for CryptoPunks and Meebits, two of the oldest NFT collections.
This followed a move by Moonbirds—the eighth most valuable NFT collection based on implied market value—to change its licence to Creative Commons (CC0) “after months of falsely stating on their website that token holders ‘own the IP’.”
World of Women: Novel copyright transfer agreement
There was one exception among the NFT projects studied, which was the World of Women (WoW) NFT collection. WoW differentiates itself among all the other top 25 NFT projects by being the only one to attempt to transfer full IP rights to NFT holders via the provision of a novel copyright assignment agreement, conceded the report.
But this “noble effort” is flawed, since it is “unclear whether the IP assignment agreement continues to govern downstream sales to secondary purchasers”.
The report concluded that NFT arrangements remain misleading and restrictive.
“Contrary to the ethos of Web3, NFTs today convey exactly zero ownership rights for the underlying artwork to their token holders. Instead, the arrangements between NFT issuers and token holders resemble a distinctly Web2 maze of opaque, misleading, complex, and restrictive licensing agreements, and popular secondary markets like OpenSea provide no material disclosures regarding these arrangements to purchasers.”
NFTs representing artwork have seen the most adoption, according to the report, with more than $118 billion in value traded over a trailing 365-day period on Ethereum alone between August 2021 and August 2022.
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