The Weak Law of NFTs

11 min readJul 19, 2022

Yuga Labs finally transferred ownership of the Bored Apes Yacht Club NFT contract to the zero address, closing the loophole that allowed them to mint as many apes as they wanted to, and finally returning balance and sanity to the world. They really did: you can check out the new owner by querying the contract at Etherscan — item 11.

Balance and sanity? If only it were that simple. Time to move on to the Bored Apes Yacht Club terms and conditions, via what is hopefully an amusing and informative digression into some philosophy of law.

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.

On the other hand, when it comes to the way that human beings interact and transact with each other, and in particular the abstract concept of property, it is in this space that human laws find their place. Property is a societal concept, not a natural phenomenon emerging from the fabric of the universe, and so as a society we get to make the rules.

Those rules have changed over time, from a simple “might is right” approach through to a sophisticated set of laws and legal apparatuses, ultimately backed by the power of the state in whose jurisdiction they apply. The gavel has replaced the sword (kind of — the sword is still there, lurking in the background).

What’s more, we now recognize abstract or non-tangible property, in the form of intellectual constructs such as works of art, literature, music, trademarks, and inventions. The idea that someone can “own” a tune may seem a bit odd when you think about it too long, but presumably the law provides for such ownership because you can make money off songs. And thanks to the law you can get money from people who make money off your songs.

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.

Although this is the case in one sense — smart contracts are deterministic and once a transaction has been received and processed the actions prescribed by the smart contract and the blockchain protocols will ensure that “what will be will be” — in many cases transactions can for all practical purposes be “reversed”. Tokens in a traditional ERC20 contract, or an NFT in an ERC721 or ERC1155 contract, can be returned if the recipient so chooses (unless they were “burnt”, namely, sent to a null address, in which case there is no real recipient).

As such, if the recipient can be located, they can be compelled through law to return the items, or suffer financial penalties or even imprisonment. Provided, of course, that the relevant law is already in the books, or existing laws can be interpreted to cover digital assets. And the perpetrators of phishing scams and smart contract bugs know this. That is why they hide behind anonymity and use mixers or exchanges that turn a blind eye to their conduct.

So smart contracts fall in a grey area between human law and natural law. In some instances restitution can be made for transactions that are viewed as illegal or immoral, and in other instances it can’t. But just because we can’t raise the dead, that doesn’t put murder beyond the reach of the law, and the same goes for blockchain transactions.

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?

For a overview of how things are currently conducted in the NFT world we need look no further than the Bored Ape Yacht Club collection, and in particular a recent incident that made the news last month.

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:

https://twitter.com/grimmelm/status/1529462029416902658

But don’t go wandering off quite yet: I’ll provide a summary, and then you can go back and read it.

In the tweet, James Grimmelmann starts by rightly drawing the distinction between “title”, “ownership” and “possession”. The following is a simple explanation of the difference between these three concepts:

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.

But that’s enough about my imaginary roommate’s television. In the case in question, namely the theft of Seth Green’s Bored Ape #8398, we need to start by distinguishing between three different components of NFTs:

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.

Other than providing the link between the record in the smart contract and the image, the metadata is of little interest, as it does not contain any contractual language. Lawyers rarely get excited by short JSON text files.

The Bored Apes images were generated from template artwork commissioned by Yuga Labs from an artist known as Seneca, thus qualifying as “work for hire”, with copyright of the images therefore initially held by Yuga Labs, the commissioning company.

Finally, the BAYC website contains a brief page of terms and conditions applying to the intellectual property.

Unfortunately, despite the millions and millions of dollars that the Bored Apes have raised for Yuga Labs, the terms and conditions provided by Yuga Labs on the Bored Ape Yacht Club website are, to be frank, a mess. They look like they were drafted on a napkin in a bar one Friday night, and then augmented with a bit of copy/pasting the next day while hung over.

I’m not kidding.

Let’s have a closer look at those terms and conditions.

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”.

The first section states that “You Own the NFT” and that “Each Bored Ape is an NFT on the Ethereum blockchain”.

For starters, the concept of what defines an “NFT” is not clear. Is it just the record in the smart contract? Remember, that’s the data structure in which the Ethereum address, derived from a private key, is recorded against an index number, and which can only be altered by using the private key to sign a suitable transaction with the NFT contract.

Or does it include the metadata and the image? After all, it is only the record that is “owned” in any independent decentralized sense — that’s the thing that only the owner can control: they can decide to hold on to control of the record, or transfer control to the address of a new, different owner. Ownership of the image it points to (via the metadata) is not decentralized, and falls under the domain of copyright law.

Oh, good — they clarify it in the sentences that follow, which state that the image is also “owned” by the controller of the record. To quote: “When you purchase an NFT, you own the underlying Bored Ape, the Art, completely” — but there are some problems with this.

What does “complete ownership” mean in this context? Is the copyright for the image transferred to the NFT owner? If the NFT is gifted to someone, or stolen from someone without an exchange of value then a purchase has not taken place. Does that mean that the copyright remains with the original purchaser in such cases? If the underlying Bored Ape, the Art, is owned completely, does that not mean that the first owner of a bored ape NFT to think of it can impose their own terms and conditions that override those of Yuga Labs?

Take a moment if you like to think of other ways in which those few short sentences can be interpreted in all sorts of bizarre ways.

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.

How can Yuga Labs license something to someone when they already own it?

Furthermore, the license is not exclusive. Does that mean that Yuga Labs can still do what they like with the artwork?

If Yuga Labs still owns the copyright for the bored apes, they could simply issue Seth Green with a special one-time “unlimited, wordwide license to use, copy, and display the purchased Art for the purpose of creating derivative works based upon the Art (‘Commercial Use’)” just like the one in the terms and conditions.

Of course, this would also probably increase the value of the NFT for the ape, and Seth Green wouldn’t see a penny of that profit. Which would make his animated show an advertisement for someone else’s ape. I suspect it is this, rather than any question of copyright, that is the main concern of Seth and his production team, and is probably why we haven’t seen a court case in which Seth & co. argue that they still own the image. They want that NFT back — selling it later may be the biggest earner of all.

Flaw

So what is the problem in a nutshell?

I would argue that what we are looking at is a combination of:

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).

What do people instinctively expect from an NFT? They expect to own the whole shebang, completely, just as stated in the first ownership section of the BAYC terms and conditions.

Except, they don’t know what an NFT really is, what the differences are between the different components of the NFT, and to top it off, they don’t really know what “owning” something means in relation to intellectual property.

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.

If you buy an NFT, you don’t own the underlying art, unless there is a clear legal contract that associates title to the underlying art with possession of the record in the NFT contract. Very few NFT collections currently come with such clear legal contracts.

It doesn’t matter what you want it to be. It is what it is.

Back to the first section of this article: the universe doesn’t care what you expect it to do, or how you want the laws that underlie it to function.

Blockchains are like the universe in that respect. They do what they do, and if you’ve allowed someone to scam you out of your pointer to a picture of a monkey, it is no longer in your possession or under your control. You can’t force the blockchain to give it back.

And … the legal system and the courts are the same. They are also not under your control.

Although at least you can argue with them before they dismiss your misconceptions. And if you play your cards right, they just might be able to get you your monkey back.