What do you get when you buy an NFT and what makes it valuable? Are we paying thousands of dollars worth of ETH for bragging rights to a digital collectible or is there more to it? The rise in popularity of NFTs is also leading to a growing list of questions around how they fit into the broader intellectual property (IP) frameworks.
With the space being so new, the answers are not always clear and are often evolving. Experiments with the underlying IP rights by NFT project founders are pushing the boundaries of traditional legal frameworks.
Owning an NFT is slightly different to owning cryptocurrency. In the latter case, the value is derived from the token itself, meaning that if the token represents 1 bitcoin, you have the right to that bitcoin and that is its value, much like a note with George Washington’s face on it being valuable of itself because it is a dollar.
In the case of an NFT, you get a token that represents a bundle of rights attached to an underlying asset (e.g. digital artwork).The token itself (a piece of code), arguably, does not create the value. The value is derived from the bundle of rights… or so it would seem. And there lies the big debate of what makes an NFT valuable.
What rights you get with an NFT depends on the specific project and is decided by the creators of the project.
There are three layers that are important to consider when thinking about IP in the context of NFTs - ownership of the token (NFT), ownership of the underlying asset (digital artwork) and the copyright associated with the asset (ability to use and reproduce the underlying artwork).
In layman’s terms, there are four potential scenarios when it comes to the IP rights attached to the underlying artwork of an NFT:
No commercial rights - personal use and display only
Some commercial rights
Full commercial rights
Public domain (CC0)
This scenario would grant the purchaser of an NFT a license to use and display the NFT but not to use it for commercial purposes. Generally, the project would retain the copyright of the underlying artwork and hence they would not need the NFT holder’s permission to use it for commercial purposes.
This is no different to buying a physical painting at a gallery - you own the physical painting on a canvas, but you do not have the right to print the image on a 1,000 t-shirts that you would then sell for a profit.
In many projects you may be granted limited commercial use rights (as is the case with You by BFF) where there would be a limit on how much revenue you can earn through commercialization of your NFT. For example, there may be a limit of $100,000 per year in revenue. It remains to be seen how this will be policed by projects in practice and what proportion of holders take advantage of these rights.
Some projects, like the Bored Apes Yacht Club (BAYC), have chosen to grant full ownership of the underlying asset (and hence full commercial rights) to their users, meaning that the owner of the NFT can commercialize the image - for example use it as a logo for a business, use it on physical merchandise or as a character in a movie. Essentially what this means is you own the digital artwork and there is no limit on how much money you can earn by using it for commercial purposes.
For example, Snoop Dogg, who holds a BAYC NFT, announced his plans to open a Bored Ape-themed dessert restaurant called Dr. Bombay’s Sweet Exploration (Dr. Bombay being the name of Snoop’s ape). Because Snoop Dogg holds the rights to the underlying artwork of the ape, he is able to utilize it for commercial purposes (e.g. restaurant logo, merchandise) without any limits on the revenue he can earn.
Recently, more and more NFT projects are being launched where the underlying artwork and all the associated IP is considered public domain. This means any rights associated with the asset have been relinquished and anyone can use the image for commercial use or otherwise, even if you do not own the NFT. CC0 stands for “Creative Commons Zero”, it is not an NFT specific term and is generally used with reference to images and photos that are in public domain.
Some of the most successful NFT projects are CC0, such as Goblintown, Nouns, Loot and most recently Moonbirds, who started off as full commercial rights (similar to BAYC) but later switched to CC0, causing some controversy amongst the holders.
NFTs have smart contracts attached to them, which is essentially a piece of code. The smart contract contains the details of provenance of the NFT and the owner’s wallet address (basically the details of the transaction). In its current form, the most commonly used token standards for NFTs (ERC721 and ERC1155) do not automatically incorporate rules around royalty percentages. These get enforced at the marketplace level. Neither does a smart contract contain the information about the IP rights attached to the underlying artwork. These can normally be found in the Terms & Conditions document or on the project’s website (and generally in an FAQ document on the Discord). If you are planning to use an NFT that you purchase for commercial purposes, it is important to understand what rights are attached to that NFT (and seek legal advice where required).
A big issue that comes out of this disparate nature of rules, is policing and enforcing the various terms attached to the NFTs. This strengthens the argument for CC0, taking away the need for control of IP rights.
There are varying schools of thought around this, where some believe that CC0 is more aligned with the open-source nature of web3 and will help NFT projects reach a level of cultural significance, while others see more value in having the exclusive right to use the IP for commercial purposes. However, having hugely successful projects on both sides of the argument would suggest that IP rights may not be the main driver of value as far as the market is concerned. It is then down to the purchaser to decide what they value more - bragging rights attached to owning a popular CC0 project or the potential commercialisation opportunities derived from owning the copyright.
For more on the IP nuances of NFTs:
Overpriced JPEGs - IP Lawyers Answer Your Questions about NFTs (Part 1)
Overpriced JPEGs - IP Lawyers Answer Your NFT Questions (Part 2)
Liya Dashkina is a VC, contributor to a number of DAOs, web3 consultant, chapter lead at the Australian DeFi Association and an advocate for women in web3.
This is not financial advice. If you don't want to spend money investing in crypto or Web3 — you don’t have to. The intent of this article is to help others educate themselves and learn. This article also does not constitute legal advice.
