NFTs

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As discussed in Part I of this series, Ordinals are a pioneering new method of utilizing the Bitcoin blockchain that will usher in new and innovative use cases on Bitcoin. As promised, in Part II we will discuss the implications for creators and owners.

Implications of Ordinal NFTs for Creators and Owners

As with most crypto innovation, capable users quickly flocked to the shiny new object. Copies of popular Ethereum NFT projects began appearing on the Bitcoin blockchain after the Ordinals launch. For example, a clone of CryptoPunks, named Ordinal Punks, popped up and is reportedly gaining traction. Further, the owner of Bored Ape Yacht Club (“BAYC”) #1626 permanently removed the NFT from its spot as one of the most valuable in the space by “burning” it, then inscribing the NFT on Bitcoin using Ordinals.  While the owner of BAYC #1626 effectively deleted – or symbolically transferred – the NFT, it appears that some NFT creators are not purists and are willing to experiment on Bitcoin. For example, Yuga Labs, the creator behind the Bored Ape Yacht Club Ethereum-based NFT phenomenon, announced that it would release a NFT project called TwelveFold on the Bitcoin blockchain.

In our December article we asked: what do hard forks mean for my NFTs? In this article we ask a similar question: how does a copy of an NFT on completely different chain (Bitcoin, not Ethereum), affect value and licenses?

A number of questions arise. Does the holder of the copycat Ordinal on Bitcoin require a license corresponding to the Ethereum NFT? What happens to the Ethereum NFT purchaser’s rights granted to it under the license, which may or may not include a commercial right to exploit and sublicense? Does an Ordinal inscription of an Ethereum NFT fall under a purchaser’s general non-commercial use and public display rights that are generally given to purchasers on NFT marketplaces? Does the original Ethereum NFT holder hold one set of rights and the holder of the copycat on Ordinals possess any rights that may be in conflict with the original NFT holder’s? Generally speaking, would the value of the NFT be affected if two identical copies exist on two different blockchains? Does the NFT owner or project have a say in which blockchain to recognize? Has any IP infringement occurred?

In late October, a New York district court refused to dismiss the Department of Justice’s (DOJ) indictment against defendant Nathaniel Chastain, who was charged with wire fraud and money laundering relating to his using insider knowledge to purchase non-fungible tokens (NFTs) prior to them being featured on OpenSea, an online NFT marketplace, and later selling them at a profit. (U.S. v. Chastain, No. 22-cr-305 (S.D.N.Y. Oct. 21, 2022)). Despite the headlines and the fact that the DOJ’s press release labeled this enforcement as charges brought in “the first ever digital asset insider trading scheme,” the Chastain indictment was not actually based on the typical insider trading statutes involving securities law violations, but instead the federal wire fraud statute.  Indeed, despite having an insider trading flavor, the word “security” does not appear in the indictment and the court, in refusing to dismiss the DOJ’s wire fraud claim, ruled that the Government’s wire fraud claim does not require the presence of a “security.”

With the enduring popularity of certain NFTs and the promise of their use in the Metaverse and beyond, the hype around the new technology has been accompanied by rising concerns over NFTs being the centerpiece of traditional financial crimes like money laundering and wire fraud.  For example, on June 30th, 2022 the Justice Department indicted six individuals in four separate cryptocurrency fraud cases, which altogether involved over $130 million of investors’ funds. These indictments include allegations of a global Ponzi scheme selling unregistered crypto securities, a fraudulent initial coin offering involving phony associations with top companies, a fraudulent investment fund that purportedly traded on cryptocurrency exchanges, and the largest-known Non-Fungible Token (NFT) money laundering scheme to date.

UPDATE: On July 8, 2022,  the USPTO and the Copyright Office responded to the Senators’ letter and indicated that they would conduct a joint study on the current and potential future applications of NFTs and their respective IP-related challenges.

With a market capitalization forecast of over $35 billion for 2022, there is no question that non-fungible tokens (NFTs) are hugely popular. Despite this, the intellectual property rubric underlying these NFT offerings are inconsistent, confusing, and in many cases in conflict with applicable law. These issues apparently came to the attention of Senator Thom Tillis of North Carolina and Senator Patrick Leahy of Vermont, who, in a June 9, 2022 letter (as per their roles as the Ranking Member and Chairman of the Judiciary Subcommittee on Intellectual Property), requested that the USPTO and the Copyright Office undertake a joint study that addresses a number of IP legal issues around NFTs. Citing those roles and their broader interest in the “continued development and use of emerging technologies,” the Senators requested that the study address the following non-exclusive list of questions:

Last month, our post about art NFTs and the DMCA highlighted the distinction between non-fungible tokens and the copyrighted works they represent. In the context of copyright, this dichotomy is generally uncontroversial: In most cases, an NFT merely points to an underlying work but does not contain a copy of the work it represents, and so it is conceptually and legally separate from that work for copyright purposes. But NFTs can be used to signify ownership of products beyond digital artworks—and where those products involve trademarks, new legal issues arise.

Enter Nike: On February 3, the apparel and footwear giant sued StockX, an online resale marketplace for sneakers and other collectibles, in the US District Court for the Southern District of New York, alleging trademark infringement in connection with StockX’s issuance of NFTs featuring Nike sneakers. In the complaint, Nike asserts that these Nike-branded “Vault NFTs”—which StockX’s website says merely track ownership of a physical pair of sneakers in the company’s possession, like a virtual claims ticket or receipt—are in fact “new virtual products.” (Nike v. StockX LLC, No. 22-00983 (S.D.N.Y. filed Feb. 3, 2022)). In their March 31 answer, StockX reasserts their website’s position and insists that “Vault NFTs are absolutely not ‘virtual products’ or digital sneakers” (emphasis in original). StockX instead claims that the Vault NFTs are merely a convenient use of new technology that allows buyers to track ownership without having to possess the physical sneaker, such that the “owner can make a future trade without incurring transaction costs, delay, or risk of damage or loss associated with shipping physical sneakers to StockX and then to the ultimate recipients.”

So you bought an NFT. You now own what is effectively an immutable electronic deed meant to record ownership of an asset, often a digital artwork. You probably paid for the NFT upfront—and if the artist is popular, you may have paid a substantial sum. This is one factor that has made the NFT market so attractive for artists working in digital mediums, many of whom struggle to effectively monetize their work. Like traditional art gallery sales, NFT sales allow creators to reap substantial profits from one-time instantaneous transactions, offering a lucrative alternative to gradually generating revenue through licensing, merchandizing, or streaming (though many NFTs also allow an artist to reap a percentage of future downstream sales, too).

But while NFTs have created a new outlet for many artists, the technology has also been a boon to digital content thieves. Pirates can mint knockoff NFTs with nothing more than a digital file and some cryptocurrency, then sell those knockoffs to unsuspecting collectors. Forged art is as old as art itself, but because they feature exact copies of their stolen works, knockoff NFTs are often indistinguishable from their genuine counterparts. Moreover, unlike other online infringers (think purveyors of illegal streams or unauthorized t-shirts), an NFT pirate only needs one unwitting buyer to take the “one-of-a-kind” virtual bait before disappearing with the oft-substantial payment into anonymity, meaning the entire scam can happen in hours or even minutes. Amidst the resulting piracy boom, it falls to creators to protect both their fans and their IP by scanning platforms for infringing NFT sale listings and issue takedown requests. But even when they succeed in getting a sale listing removed, the knockoff NFT itself remains immutably on its blockchain and the infringing content usually remains elsewhere on the web.

Undoubtedly, digital creators will fight to protect their work. The question is, are current copyright protection procedures—specifically, those under the DMCA—up to the task?