The Weak Law of NFTs

Natural law

Notwithstanding an aborted attempt by the Indiana state legislature to dictate through law what the value (or values) of π should be (in 1897) it is generally understood by rational educated people that human laws cannot be used to impose our will on natural laws, that is: the laws of physics and mathematics are not made by legislators.

Code law

Smart contracts on a blockchain are sometimes presented as a form of natural law, rather than a human law. Proponents of this viewpoint, gathering under the slogan “code is law”, propose that smarts contracts are what they are in the same manner that the second law of thermodynamics in physics or the weak law of large numbers in mathematics cannot be circumvented by legislation. The code in the smart contract specifies what is to happen to the “property” recorded on a blockchain in the way that gravity specifies what will happen to an apple when you let go of it.

NFT law

But the funny thing is that almost everything written above is irrelevant when it comes to NFTs, and the reason for this is due to the fact that NFTs are a nebulous ill-understood combination of a record on a blockchain, and some intellectual property in the form of an image (or perhaps a video or piece of music) fixed in a tangible medium of expression, namely a computer data file. The intellectual property in question that is being pointed to is clearly covered by existing copyright law, and so the only relevant question pertaining to the blockchain record part of an NFT is: to what extent does a contract (if there even is one) bind the ownership of the copyright for the underlying art to the blockchain record?

Ape law

The following Twitter thread raises some very interesting questions concerning ownership of NFTs and the assets they point to by discussing the recent theft of Bored Ape #8398 from actor and producer Seth Green:

  • If you “possess” something, it means you have control over it. For example, if I possess the television remote control, I am the one who can choose what channel we watch.
  • If you own something, that means that the courts recognize that you should be able to obtain possession, and hence control over the thing, as and when you desire. To continue the example, if my roommate bought the television and the remote, and I refuse to give the remote to him, he can take me to court to get me to hand it back.
  • And title? That is the combination of all the legal rights you get by both owning and possessing something. For example, by holding title over the television, my roommate has the right to rent out the remote or to sell the television, and I don’t.
  • the record in a ledger instantiated by an ERC721 smart contract on the Ethereum blockchain,
  • the metadata pointed to by the specific record for Bored Ape #8398, and
  • the image of an ape with a halo and a skeleton t-shirt on a dim gray background, pointed to by the metadata.

Copy/paste law

The BAYC smart contract code is licensed under MIT, and substantial portions are drawn from the OpenZeppelin reference ERC721 contract implementation. But the license of the smart contract does not transfer over to intellectual property pointed to by entries in the smart contract, so that’s not relevant.

Coleslaw

After an initial waver in which Yuga Labs disclaims any responsibility for things going wrong on the blockchain, yada yada and so on, there are three sections under the title “Ownership”.

Declaw

It gets worse. The next two sections concern the granting of a license for use of the image (which, bizarrely, are duplicates: once for personal and once for commercial use and could therefore have been folded into one section). They contradict the first section, in that they strongly suggest Yuga Labs believes it continues to own the full copyright for all the Bored Ape images (and the metadata, but no one seems to care about that) despite granting full complete ownership to the purchaser of the NFT.

Flaw

So what is the problem in a nutshell?

  • traditional copyright law (which hardly anyone understands and almost everyone has erroneous preconceptions about), and
  • NFTs (which are also hardly understood by anyone, and about which almost everyone has erroneous assumptions as to what they are and what they mean).

Closing arguments

If you buy a painting, you possess the physical picture. In practice, you won’t own the copyright to the picture though, and so although you can hang it on your wall, you can’t even have it in the background when the Forbes interviewers come round to photograph you for the article they’re writing about your amazing blockchain startup.

About the Author

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Keir Finlow-Bates

Keir Finlow-Bates

CEO and co-founder of Chainfrog Oy, a Finnish startup researching and developing advanced blockchain technologies.