Imagine Nelly is selling, for $1 million, a single-edition “bicycle ticket” that gives the buyer the piece of paper on which the ticket is printed. A buyer gets the ownership of the “bicycle ticket,” plus receives a limited license to post on social media a photograph of Nelly’s actual bicycle, which is associated with the “bicycle ticket.” But the buyer gets no other rights to Nelly’s bicycle, much less the chance to ever ride the bicycle. Raw deal? Perhaps. But, in a free market, we usually let the market decide. If consumers value Nelly’s “bicycle ticket” at $1 million or more, who’s to question the market demand and consumer preferences?
Although the “bicycle ticket” is a seemingly far-fetched, fictitious example—who would buy such a scam?—the sale of NFTs offers a real-world example. The dirty little secret about the sale of NFTs is that it typically operates like the “bicycle ticket” scenario. Hard to believe.
Few buyers of NFTs probably fully understand what they are getting when they buy NFTs. To do so, they’d have to read the fine print of the sales and licensing agreements related to the purchase. In a typical agreement, the seller of the NFT distinguishes between (i) the sale of the NFT, meaning the virtual “token” consisting of data stored on blockchain that authenticates a unique or single item, and (ii) the license to use the underlying digital artwork that is associated with a token or NFT. Just as the “bicycle ticket” is not the bicycle, so too an NFT or token is not the digital artwork or even a copy of the digital artwork.
Under this clever arrangement of combining an NFT sale with a limited license to use the associated artwork, a buyer of an NFT does not necessarily even get to own a copy of the digital artwork. That’s all determined by the sales contract. In a typical contract, the buyer might get the right to resell the NFT and to make limited public displays of the underlying artwork associated with the NFT. But the buyer might not get any rights even to a single copy of the artwork, much less rights to commercialize it in any way. True, some sales of NFTs come with special perks, such as membership to a club or community, or use of virtual gaming accessories or loot. But, even then, the buyer has no right to sell or commercialize the perks other than outright selling the NFT.
Not including any copy as a part of the NFT transaction provides a convenient, if not ingenious way, for the creator of the underlying artwork to avoid the first sale and limited public display rights recognized by the Copyright Act for buyers of lawful copies of copyrighted works. Thus, the controversial legal question of whether the law even recognizes a “digital first sale right”[1]—meaning whether a buyer of a digital copy of a copyrighted work can freely distribute it without permission of the copyright owner—is entirely avoided. Indeed, even in NFT agreements that do license to the buyer the right to make copies of the underlying artwork, such as for the NBA’s “Top Shots” Moments, the license often is limited to the buyer’s own personal, noncommercial copies. As courts have interpreted the first-sale doctrine, it does not apply to a mere license versus a sale.[2]
My suspicion is that many buyers of NFTs have no idea of these legal complexities in their “ownership” of NFTs, let alone the possibility they are getting far less of the actual works associated with NFTs than they probably realize. But I also suspect that, in the end, it doesn’t even matter. The market has created immense value in NFTs themselves—even if the NFTs come with licenses that severely limit the buyer’s rights to use the underlying artwork. In other words, if consumers are willing to pay $1 million or more for a bicycle ticket or NFT, who’s to say it’s a raw deal?
[1] See Capitol Records, LLC v. Redigi Inc., 910 F.3d 649, 656-57 (2d Cir. 2018) (holding that attempt to effectuate digital transfer of a copy went beyond first-sale doctrine because it created additional copies).
[2] See, e.g., Vernor v. Autodesk, Inc., 621 F.3d 1102, 1107-08 (9th Cir. 2010); see also ProCD, Inc. v. Zeidenberg, 86 F.3d 1447, 1454 (7th Cir. 1996).