Web3 Dream of a Third-Generation, Blockchain-Based Internet Built on NFT Ownership At Risk

4 min read

Much like any legal transaction the wording of a contract of transfer can make the process smooth and seamless or it’s going to be a bonanza for the lawyers.

The ownership rights transferred with many nonfungible token (NFT) collections are so vague and poorly written that the finality of any transaction involving them, along with any certainty about what rights were transferred, is often left in doubt.

This is why it should matter to anyone considering creating, selling, reselling or buying them that the famed venture capital firm Andreessen Horowitz’s crypto-focused a16z division has released a series of NFT-specific licenses.

Along with drafting by lawyers who are experts in copyright law, the “Can’t Be Evil” licenses released under the umbrella of MIT’s Creative Commons project were written by lawyers familiar with blockchain and cryptocurrency technologies.

“There’s currently significant ambiguity and legal risk across the NFT ecosystem, a lack of standardization makes it difficult for NFT purchasers to know what rights they’re getting and creating customized licenses is expensive,” said Miles Jennings, general counsel of a16z and author of the licenses, on Twitter when they were released on Aug. 31. “All of this acts as a drag on the industry.”

They came on the heels of an Aug. 19 report by crypto investment firm Galaxy Digital that said the issue puts a drag on the broader Web3 dream of a third-generation, blockchain-based Internet in which NFT ownership would be a building block.

“Most people talk about purchasing NFTs as ‘buying jpegs,’” the report said. “We reviewed the licenses for all of the top NFT collections, and in all cases, except one, the issuers offer only a usage license to the NFT purchaser, with varying levels of commercial rights ranging from permissive to highly restrictive.”

Until the “pervasive misconceptions” about NFT ownership are resolved, it said, “the promise that NFTs can usher in a new era in digital ownership and property rights remains far off.”

How Big a Problem?

Which is more surprising: That someone paid $69 million at auction for an NFT collage, or that for all that money, the only rights he received were to display it publicly. He can’t sell copies, doesn’t have exclusive display rights, and can’t separately use the 5,000 images in it.

But at least the creator of “EVERYDAYS: The First 5,000 Days,” digital artist Mike “Beeple” Winkelmann, knew how to sell it with an MIT Creative Commons license that made that clear — and the buyer, a well-known NFT collector, presumably read it.

Those “pervasive misconceptions” come with problems anyone considering selling or using NFTs should consider, beginning with an angry customer, growing through the likelihood of chargebacks as more and more NFT marketplaces accept credit cards, and ending in outright litigation.

Read more: What do You Get When You Buy an NFT? Less Than You Think

“Many people buy NFTs to own an avatar, an artwork, or any number of other creative outputs — but the reality is they usually can’t be sure of what they’re getting,” wrote Jennings and a16z general Partner Chis Dixon in announcing the licenses. “When you buy an NFT today, you’re usually purchasing a tokenID (stored on a blockchain), along with metadata that ‘points’ or refers to some other content file (typically stored off-chain, though there are examples of fully on-chain artwork). This fact causes confusion regarding rights of NFT buyers in the vast majority of cases.”

And without a specific detailing of those rights, “the buyer cannot exercise any of the rights,” Jennings and Dixon wrote. You default to “U.S. copyright laws do not automatically grant buyers of artwork (both traditional and digital works) the right to reproduce, adapt, or even publicly display the artwork,” they said. “Without a license or assignment of the copyright from the NFT creator, the buyer cannot exercise any of the rights.”

The six licenses come with a variety of control options that give the NFT owner all rights to personal use rights that give nothing except the right to display it for personal use.

But they also come with a few broad design features aimed at fostering trust NFT market with trust. First of all the licenses are irrevocable by the creators and they “take a permissive approach to modifications and adaptations to encourage the community-created remixes that have come to define NFT projects,” Jennings and Dixon wrote. They also seek to “hold creators — not buyers — responsible if their projects use third-party material without permission.”

Trust the Seller

One high-profile problem came to light when comedian Seth Green’s Bored Ape Yacht Club NFT was stolen in May, well known crypto industry attorney Preston Byrne wrote “BAYC’s terms are horribly drafted, don’t make it clear that the copyright is retained by [developer] Yuga Labs and not assigned, and make no provision for what they will do with the license grant in the event of a theft.”

While Byrne said common law meant the thief or someone who bought it from the thief wouldn’t gain any ownership rights, the ambiguities reportedly led Green to halt production on a TV show he is producing in which his six-figure cartoon ape profile picture (PFP) avatar is set to star. Work resumed after he bought it back, reportedly for the several hundred thousand dollars it would have drawn on the market.

Leaving the theft issue aside, the incident shows another problem with selling and especially reselling media on an NFT: you don’t know what rights the owner or a previous owner has transferred.

And given complaints about the prevalence of artwork for sale on NFT marketplaces by people who simply copy-pasted artwork to burn an NFT, there’s difficulty in knowing the provenance.

While that sounds like a contradiction given that one of blockchain’s biggest benefits in supply chain applications is that anyone can easily trace provenance. This is true, with some expertise and knowledge of the tech tools involved. It’s more difficult for the average consumer dabbling in NFTs.

 

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