Section 109 of the Copyright Action provides an exception to the exclusive distribution right of a copyright owner, often referred to as the first sale doctrine.
“Notwithstanding the provisions of section 106(3), the owner of a particular copy or phonorecord lawfully made under this title, or any person authorized by such owner, is entitled, without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord.” [1]
ERC 721 standard (one of the most popular NFT standards) was initially set up as a smart contract to identify and track the ownership of a distinguishable asset. “There are many proposed uses of Ethereum smart contracts that depend on tracking distinguishable assets” (section “Rationale”), “’NFT’ was satisfactory to nearly everyone surveyed and is widely applicable to a broad universe of distinguishable digital assets (section “‘NFT’ Word Choice”), “[e]very NFT is identified by a unique uint256 ID inside the ERC-721 smart contract. This identifying number SHALL NOT change for the life of the contract. The pair (contract address, uint256 tokenId) will then be a globally unique and fully-qualified identifier for a specific asset on an Ethereum chain” (section “NFT Identifiers”).[2]
Due to the limitation of Ethereum mainnet, most of the assets, if not all, are not stored on the mainnet but stored off chain. There does not seem to be a technical breakthrough to store most digital assets online, as Ethereum or most blockchain technologies are designed to record transactions but not for storage. The huge amount of data needing to be recorded on the mainnet would also bring skyrocketing gas fees.
Third party storage services come into play. IPFS (InterPlanetary File System) for example provides a solution using content addressing, every data added to IPFS is given a unique and permanent content identifier (CID) that’s directly derived from the data itself. NFT data stored can be accessed from the decentralized IPFS network from any peer that has the content using the CID. Because the CID is based on the data’s content, any change to a data element will necessarily change the CID.
Now, if an asset is stored off chain, an NFT now involves two properties, one is the token itself, in essence, it is a series of computer code generated according to a specific smart contract defined by a platform, which complies with an NFT standard, for example ERC721, the other is the asset stored off chain.
The question often asked by NFT enthusiasts is that, when you buy an NFT, are you buying the token itself (i.e., the computer code), or along with the digital asset that is cryptographically linked to the token?
Some people say that you are only buying the token itself, but not the digital asset, the final transaction though may come with some rights associated with the digital asset, often defined by the terms of various NFT platforms, which we will not discuss in details here. According to this view, you are not buying a $5M JPEG, but a $5M computer code[3].
From a different perspective, when a user creates an NFT, she or he will need to upload the underlying asset first to the platform that runs the smart contract, the NFT token is then generated based on the uploaded content, this is a process called “minting,” as in minting a coin. Some may say that the non-fungibility nature of the NFT makes transfer of the NFT closer to a tangible property rather than “traditional” digital asset, creating “a particular copy” lawfully made under the Copyright Act. In this sense, the asset is being “carried” by this non-fungible token. The ownership of this “particular copy” can be verified through the Immutable transaction recorded in the blockchain. In other words, if you just try to create and sell a token only, you probably do not need the artwork which otherwise would just become a guise of the token. This is like printing your transcript on paper to make a book, once it is printed, you have created a particular copy of a non-fungible book carrying your transcript. This aspect of NFTs may be further boosted if encrypted NFT or two-factor authentication is adopted.
With all this being said, NFT is still in its early stage with a lot of undefined territories. With this industry growing and expanding with mainstream adoption, we expect the issue involving copyright will come up sooner or later.
[1] https://www.law.cornell.edu/uscode/text/17/109
[2] William Entriken, Dieter Shirley, Jacob Evans, Nastassia Sachs, “EIP-721: Non-Fungible Token Standard,” Ethereum Improvement Proposals, no. 721, January 2018. [Online serial]. Available: https://eips.ethereum.org/EIPS/eip-721
[3] https://news.artnet.com/market/updated-most-expensive-nfts-1980942
