Crypto Copyright & How NFT’s are Changing the Value of Data

Not legal advice. Not financial advice. Share your thoughts with me on twitter @tfbgrady.

What is a Copyright?

U.S. copyright law grants protections for original works of authorship, including photographs, paintings, drawings, and computer graphics. Authors of original expressions have the right to make and sell copies of their works, to create derivative works, or to perform and display their works publicly. These exclusive rights are subject to a time limit and generally expire 70 years after the author’s death or 95 years after publication.

The United States Copyright Office handles copyright registration and the recording of copyright transfers. Copyright protection begins the moment you capture an image in tangible form, be it on paper, canvas, or computer file, however you must still register your copyright with the United States to receive full copyright protections.

Registering a copyright gives the author the right to sue a party in federal court for infringement. Attorney fees and statutory damages for copyright infringement are only available to people who have registered their copyright with the United States. Other remedies for copyright infringement include an injunction or restraining order to prevent additional violations, or an award of money damages. Copyright Enforcement, Justia (2018).

You can file an application to register your copyright either online via the United States Copyright Office’s website or by mailing a paper application. Upon granting these protections, the Copyright Office will issue a certificate of registration to the applicant.

Do Copyright Protections Exist on the Blockchain?

Blockchains are open, distributed ledgers that can be accessed from any location by any person with an internet connection. There is no such thing as an international copyright that will automatically protect an author’s writings throughout the world. Protection against unauthorized use in a particular country depends on the national laws of that county.

The United States is a member of many treaties and conventions affecting copyright. The World Intellectual Property Organization (WIPO) administers the Berne Convention for the Protection of Literary and Artistic Works, among other treaties. The Berne Convention introduced the concept that a copyright exists at the moment a work is fixed, rather than requiring registration. It also enforces a requirement that countries recognize copyright laws held by the citizens of all other parties to the convention.

Regarding NFT projects specifically, in the absence of an explicit agreement between the artist and the collector, the artist will generally retain full copyright protections over their work. More often than not, blockchain-based projects will explicitly state whether they are passing copyright protections onto their buyers.

For example, Dapper Labs, the creators of NBA Top Shot, restrict the use of any purchased moment for advertising, marketing or selling of any third-party product or service. CryptoKitties specifically permit the commercial use of the purchased CryptoKitty up to $100k USD per year. Bastard GAN Punks explicitly grants full copyright protections to those who hold the Bastard GAN Punk in their wallet, meaning Bastard GAN Punk owners can do as they please with their NFT.

Larva Labs LLC, a New York based software company, adopted a special CryptoPunk License for it’s holders. This license grants the current CryptoPunk holder a worldwide, non-transferable license to reproduce, display, transmit, and distribute images of their CryptoPunk through all media types. Exclusive rights include the right to print the CryptoPunk onto physical media such as clothing. The license is non-exclusive for the purposes of making non-commercial use of the CryptoPunk and for creating a digital marketplace for CryptoPunks. While NFT’s are still in a legal grey-area, most legal experts agree that Larva Labs largely retains intellectual property protections over CryptoPunks.

Not quite. Larva Labs sparked debate in the NFT space by issuing a Digital Millennium Copyright Act (DMCA) notice and takedown request to a CryptoPhunks, an NFT project accused of copying its intellectual property. A DMCA takedown notice is a tool for copyright holders to get user-uploaded material that infringes on their copyrights taken down off a website or marketplace. DMCA Notice and Takedown Process, Copyright Alliance 2021. As a result of this DMCA notice and takedown, the infringing work was removed from OpenSea and those who purchased a CryptoPhunk were left bag-holding.

Shouldn’t Countries Have Their own Blockchain for This Purpose?

Just recently the Copyright Society of China (CSC), a public, government-tied institution under the National Copyright Administration of China launched the China Copyright Chain. This blockchain was created solely to document proof of digital assets, issue notices to remove piracy products and help courts settle copyright-related claims.

There is currently no such blockchain-based equivalent in the United States.

If Projects Like CryptoPhunks Infringe on Larva Labs IP, why Don’t Projects Like Bastard GAN Punks?

The Fair Use Doctrine provides a potential defense against copyright infringement. Courts weighs several factors in determining whether a particular use qualifies as “fair”. One of these factors is whether or not use of the original material is “transformative”. Transformative use takes the original copyrighted work and transforms it’s appearance or nature to such a high degree that the use no longer qualifies as infringing.

The court will ask two main questions in making a determination under the Fair Use Doctrine. First, has the material taken from the original work been transformed by adding new expression or meaning? Second, was value added to the original by creating new information, new aesthetics, new insights, and understandings?

Courts also rely on the Modicum of Creativity doctrine, which states that in order to be considered an original work the product must be a product of independent creation and exhibit a modicum, or a minimal amount, of creativity.

In the matter of CryptoPhunks, we have a prima facie case of copyright infringement. The only thing CryptoPhunks did to the original CryptoPunks image was flip it horizontally. In weighing the aforementioned questions, the Copyright Office found the work to not be sufficiently transformative, thus issuing the DMCA notice and takedown.

Bastard GAN Punks, on the other hand, were created by training a Generative Adversarial Network (GAN). The process behind training this GAN network is detailed prominently on the Bastard GAN Punks website, and reads as follows:

From left to right: an original CryptoPunk, a CryptoPhunks (a flipped copy of the CryptoPunk and recipient of DMCA notice and takedown from Larva Labs), and a Bastard GAN Punk (protected)

This laborious process was worth it in the end, as the developer’s effort goes above and beyond the current standards, satisfying both the transformative and modicum of creativity tests.

Bastard GAN Punks are further innovating in this space. They recently announced a smart contract titled YOURBASTARDYOURCALL. This smart contract allows holders to write their own license and bake it into the metadata of the their NFT, a process very similar to registering the copyright. Holders can specify in the metadata which person or DAO has permission to use the NFT, for a specified purpose, or that the NFT is public domain. The only way to lock the text forever is to send it to a wallet that nobody owns.

This Bastard GAN Punk owner chose violence. Watch the video here.

These measures ensure transformative projects like Bastard GAN Punks will continue to retain value and thrive in the market.

Why does this matter?

NFT’s are changing the value of data through their participation in decentralized finance. An NFT, at its core, is a unit of data stored on the blockchain that certifies a digital asset as unique and therefore not interchangeable. I have outlined how a basic “collective” can take advantage of decentralized finance protocols on Twitter, seen below.

Aside from simply collateralizing your holdings, projects like Axie Infinity are changing the value of data by creating novel virtual economies based on non-fungible tokens. The NFT-based play-to-earn game built on the Ethereum network introduced a dual-token system that allows players to earn AXS and SLP tokens through breeding, raising, and battling their NFT monsters. The average income generated by a player outpaces the average minimum wage in various countries throughout Asia, where Axie has found strong footing.

Aavegotchi, a DeFi-enabled crypto collectibles game first built on the Ethereum network but since migrated to Layer 2 Polygon, builds of the success of Axie Infinity. A combination of NFT’s and decentralized finance, players stake their NFT’s alongside interest-generating aTokens to earn passive income.

Here, NFT value is determined by rarity level. Players can increase their rarity levels by participating in a variety of activities including games and governance, which drop in-game wearables for players to outfit their NFT’s with. Rare Aavegotchis not only have higher secondary value, but they enable the Aavegotchi to perform better in mini-games, earning the player more reward tokens.

If either of these projects were at risk of being found to be a result of infringement, or in violation of a previously registered copyright, they would cease to hold any real or perceived value on the market. This would be a devastating blow to these newfound sub-economies.

What’s Next?

The intellectual property protections currently offered to artists and holders will be highly scrutinized going forward and must evolve rapidly to fit the Web3 economy.

Business Development, Cannabis and Crypto