Ask Dr. Copyright

Dear Doc:

What the heck is an NFT and what does it have to do with copyrights?

Dazed and Confused

Dear D&C:

That is a very good question. Which is why the Doc will provide you with an answer, and also offer you the chance to purchase a unique and priceless version of the answer, in digital form, for the low, low price of SIXTY MILLION DOLLARS.

You see, when a work of authorship is created, the Copyright Act (17 U.S.C. §101 et seq.) gives the author certain “exclusive rights”. These are set forth in §106 of the Act, and they include the rights:

(1) to reproduce the copyrighted work in copies or phonorecords;
(2) to prepare derivative works based upon the copyrighted work;
(3) to distribute copies or phonorecords of the copyrighted work to the public by sale or other transfer of ownership, or by rental, lease, or lending;
(4) in the case of literary, musical, dramatic, and choreographic works,  pantomimes, and motion pictures and other audiovisual works, to perform the copyrighted work publicly; 
(5) in the case of literary, musical, dramatic, and choreographic works, pantomimes, and pictorial, graphic, or sculptural works, including the individual images of a motion picture or other audiovisual work, to display the copy- righted work publicly; and 
(6) in the case of sound recordings, to perform the copyrighted work publicly by means of a digital audio transmission.

The author is the only person (or corporation, which may be an author if it employs the creator) who may authorize the making of copies, distribution of copies, and so on. The author may choose to make only one work, and to keep that work as the only existing copy. Works of fine art are usually unique (but there may be authorized limited editions, such as for a lithograph.) It’s the uniqueness, among other factors, that may make a work valuable. In the past, uniqueness was often proven using certificates of authenticity, and these have recently featured additional tokens such as holograms that are difficult to counterfeit.

But what if the work of authorship is not embodied in a physical item? What if it is a digital work of art, recording, or the like? Digital files are easily copied and every copy is a perfect replica of the first. How may an author make it unique (and thus worth a lot of money)?

Here is where we get to NFTs…

In the past few months, people have paid: 

$590,000 for a computer animation of a cat shooting a rainbow out of its hind end; 
$1.5 million for a pixelated drawing of a so-called “CryptoPunk”;
$3.6 million for a custom-written song by the DJ 3LAU;
$6.6 million for a 10-second video clip by the artist “Beeple”.

In each case, what was purchased was a “non-fungible token” (or NFT), which is a digital document proving ownership of a one-of-a-kind digital asset. A non-fungible asset is something unique that isn’t readily interchangeable. So a rare baseball card, an antique car, and a piece of land are all non-fungible. (Unlike cash, where almost every $5 bill is worth $5). A token is a type of virtual currency that is recorded on a “blockchain” which is a type of digital ledger that is very secure. In this case, the token represents a specific asset, such as a digital artwork. So an NFT is documentation of ownership of a one-of-a-kind digital asset. The NFT isn’t actually the artwork itself, any more than a certificate of authenticity is a collectible baseball card; the NFT is an entry on a digital ledger that points to where the artwork is stored — usually on a server somewhere.

So why does it seem that NFT came out of nowhere? It’s just that we have not been paying attention. In 2017 CryptoKitties, a game in which online users breed and trade digital cats, used NFTs. In 2018, platforms were created to buy, sell, and create NFTs (these had names like SuperRare, OpenSea, Rarible, and Nifty Gateway.) By 2019, big brands like Formula 1 and Nike entered the NFT market. Then, during the pandemic, the market for NFTs tripled in size, to over $250 million. In February 2021, the 10 most popular NFT collectibles saw a 400% price spike. Major institutions (like Christie’s auction house) have now given NFTs credibility and prestige by auctioning NFTs. (Non-fungible items often gain value during times of turmoil. Rare coins became more valuable during the Great Depression, the stock market collapse of 1987, and the 2008 Great recession.)

But the question of “value” remains, and it is just like the question of what a copyright may be worth.

Jesse Schwarz, a 32-year-old entrepreneur, recently spent $208,000 on a video clip of LeBron James dunking. Schwarz doesn’t own the broadcast rights to the video. He doesn’t own a physical copy of it. He doesn’t own the copyright. He just owns an NFT. Is he crazy? 

An original 1960s Mattel Hot Wheels car is a bit of cheap metal and plastic, but it might sell for $50,000 on eBay. A painting made from some canvas and pigment may sell for many millions of dollars. Economists tell us that value depends on other factors such as authenticity, scarcity, transferability, immutability, and utility. NFTs represent those qualities. Simply put, however, an NFT is worth only what someone else will pay for it.

“A lot of people tell me, ‘I can watch the same clip on YouTube for free,’” Schwarz said “Anyone can watch it. But there’s only one original verified by the blockchain, and that scarcity is what makes it valuable in the long-term.” Schwarz’s expensive NFT is one of only 49 video clips in the “Cosmic” set, and it’s the only LeBron James clip. According to Schwarz, “It’s my Mona Lisa.”

Have you created your own Mona Lisa? Or NFT? Give the attorneys at LW&H a call. Each of them is non-fungible, and will be pleased to help you to secure the value of your own intellectual property.

Until next month,

The “Doc”

— Lawrence Husick, Esq.