Buyer Beware: What if the NFT Seller Doesn't Include A License To The Digital Art?

My name is Enrico Schaefer. I'm a technology attorney with Traverse Legal PLC, and today I want to talk about non-fungible tokens, NFTs. You have been reading about them all over the news. They're the hottest thing going in tech right now, and of course we With blockchain, there's a lot going on right now. Bitcoin is up tremendously this year from down in the $3,000 range up to $50,000. All the other cryptocurrencies are following suit as they appreciate in value. So the blockchain and blockchain technology is really in the tech spotlight right now. With that in mind, we now have something called non-fungible tokens or NFTs, and There's not a lot of information out there about NFTs, so if you want to sell an NFT, if you're an artist or creator, you want to sell an NFT, sure, you can go learn how to navigate the Rarible or the OpenSea platform, but what are the legal implications of what you're doing? How do you know if what you are doing is lawful? How do you know if you're infringing someone else's rights? What are the terms by which you are selling the NFT and licensing your work, the art that you put into the platform that's going to be attached to that NFT? There's very little information about these things. It is the Wild West. It is anarchy out there in the world of NFTs from the legal perspective. So what I'm going to try and do over the course of the next couple of weeks is provide some real-world legal insights for those who want to participate in the NFT craze and participate in, in any NFT marketplace. So there's, there's just a lot of information out there. You know, you can create a digital or a non-digital asset, asset, and attach that to an NFT. There are different platforms that are marketplaces like eBay where you can go sell NFTs and buy NFTs. You have different types of NFT sales and auctions. You have open editions, limited editions, ownerships, different flavors of ownership for the NFT, and you've got both digital, non-digital assets that can be included in an NFT sale. The NFT is a smart contract, meaning that there are certain really basic contract terms that are embedded in the NFT metadata, which goes on to the block. So who's the owner, right? Was that ownership transferred? If so, to whom? What kind of private key do you have that's going to be attached to ownership? Are there going to be royalties that are paid upstream to the initial owner if there's a subsequent sale? These types of basic information is going to be attached to that NFT in the backend code. So we want to talk today about what is being sold, what is being bought, and what is being licensed in an NFT sale. This is probably one of the most misunderstood aspects of the NFT marketplace. People don't realize in many instances that they're not actually purchasing the image or the video or the collectible that is being uploaded into the platform, the person who has put that, that NFT, that, and, and the associated, uh, digital or non-digital asset that's going to attach that NFT, what they're selling is the NFT, the non-fungible token. They are selling a token. You are buying a token. That is it, right? And so That's a really important concept. There, there is the token itself, and then there is the image, the piece of the art, the audio file. Those are 2 separate things. The NFT is distinct from the, the thing that is being attached, whether or not it's a, it's a painting or a graphic or a video or what have you. They're 2 separate things. So the NFT is going to show the ownership of that NFT, which is going to be put onto the immutable blockchain. It's going to identify whether or not the ownership of that NFT is, is transferred. It's going to do some tracking for royalty purposes. And that's the function of that NFT, that smart contract, that token that can have very unique data associated with it. That's in many ways the easy part. The harder part is the licensing piece. It is the, the Kings of Leon or the CryptoKitty graphic that is attached to the NFT. In many instances, you are not buying that graphic. You are getting some bundle of limited rights to use, potentially to distribute, potentially to monetize, or potentially to not be able to do any of those things with, with the image itself. And part of the big problem is that the, the platforms like OpenSea and Rarible, they don't have a lot of options baked in for this piece of the puzzle, for the licensing piece. There's almost nothing baked into the platform. So let's go ahead and take a look at these platforms, and I'm going to show you, I'm going to show you what, what I mean. So this is the platform OpenSea, which is one of the marketplaces for NFTs. This right now is showing this NFT is, is, is being offered by Kings of Leon. You're familiar with Kings of Leon, the famous band, right? They've got an NFT for sale, the token for sale. And what this page is going to show you is, is very limited information about the listing. And in order to actually find out what you're getting, if you happen to bid on this NFT or purchase this NFT, you're going to have to look around to find out what it is you're getting in terms of rights. You know you're going to buy the NFT, but what about this Kings of Leon? What is it you're getting? There's a detail section down in here that is going to be one place that might offer you some insight. I will tell you, in many of the listings that are on these platforms, there's almost no details about what it is you're getting. what it is being sold and what it is being purchased beyond the NFT itself. In this case, we've got a fairly sophisticated seller, and so let's see what they have to say. Hey, they're actually going to tell us what comes with the NFT. You're going to get a digital album download. All right, so you're going to get an MP3, presumably, of this Kings of Leon album or song, you're going to get a limited edition NFT GoldenEye vinyl. So you're going to actually get the album itself as part of the sale. So remember I told you an NFT can be digital, most of them are. You can also include and deliver after the fact non-digital things to the, to the buyer in order to sweeten the deal. So you're going to get that digital, your non-digital limited edition vinyl album in this case. You're also going to get a digital collectible album artwork. All right, now sometimes that is all part of this page and you can see like the artwork is what it is you're purchasing and you can see it right on this page. Perhaps this is the digital artwork, perhaps there's more to it, but in this instance you really just have this cover photo that's that's— that may or may not be important. And then you've got this detail page which is telling you what it is that is going to— going to be included if you bid on this. That's not a lot of information right here. It's going to tell you a little bit about what happens to the, the NFTs that aren't purchased. There's gonna be a limited number of them, but they don't even tell you how many here. But there's gonna be a limited number. The ones that don't get purchased are gonna be burned, meaning they— those NFTs will go away. So if there's 100 available and 50 sell, there's only gonna be 50 out there ever in the world. You're gonna learn a little bit about the proceeds, but then you have some hyperlinks which you as a seller can embed into the details if you know the correct programming language to create a hyperlink. You'll be able to put a hyperlink in this area, in this details area. This is critical because since there's not any real information here about What are the license terms? A lot of this is going to be found offsite. In order to know what license rights you're getting, you have to go offsite. So let's go ahead and click around on this, right? So before we leave the site, you're going to see a little bit of information about Kings of Leon. It's a collection, digital art techniques, not a whole lot of information here. There is a website link so you can go to that. Here you can go to the link where you're going to be able to redeem. So if you actually— I think this is an auction— if you win the auction, if you're one of those people that actually purchases, then you're going to have to take that unique identifier, your key, that's going to be attached onto the block to this purchase that'll tell you you are an owner, give that to Kings of Leon, and then they will do fulfillment. They'll give you your artwork. They'll give you your— Album. They'll give you your digital download link so you can redeem here. So let's just go ahead and take a look at this. What is this going to show us? And this is way more than most of these NFTs, right? There's usually no independent website for the NFT. But you can see here, this is how you're going to— you're going to connect to the wallet, which is going to identify you, which is going to identify you as an owner, which is going to allow them to do fulfillment. And so here's where you're going to redeem. Here are the contract address addresses on the Ethereum blockchain where you can go search for those and you can see all the backend contract information such as owner in that particular address. But still not a lot of information here. There is a Discord server which is just a bulletin board that I guess is kind of interesting. You can go find out as part of your due diligence what it is you might be able to learn on the bulletin board. And you'll, you'll see if you go to the bulletin board that there is a little bit more information, but not much about what you're getting. And so poke around and you'll see that there, there are some announcements about fulfillment that'll be on this Discord bulletin board. So we won't spend a whole lot of time for that, but you can see how this works if you go to announcements. There's going to be some information about gas fees, which are one of the technical aspects of this. Oh, and here's some more information about what you are getting. Vinyl redemption will begin on March 18th. Whoever holds the token when the vinyl becomes available will be able to redeem it, redeem it for the vinyl. So this is how you get your vinyl album and this is how you get your digital album. Okay, so that's good. Found out a little bit more, but still not a lot of information. So if you happen to click on the website for Kings of Leon, now it's going to take you to a website which has got a little bit of information about the team and contacting, but not a whole lot of information unless you dig, dig, dig, dig, dig. Good thing I'm an attorney and go to terms and conditions. Now we're going to get to the license language. This is crazy, right? This is why NFT is the Wild West. If you are a seller, what are your terms? What are you licensing with regard to the works, the artwork? For instance, do they get to resell it? Can they repurpose it? Can they add it to an advertising campaign? What can they do with that? Do they become the owner of it? Do you retain ownership rights? Probably 99% of all the NFT sales say nothing about these critical issues. It's like walking into a, a high-end shoe store with no salespeople and no instruction and a little money thing on the counter and deciding how much you're going to put in and then understanding, do you get to take it? Can you try it on? Who knows, right? That's what's going on here. So I actually took this, this, this PDF and, and downloaded it as the, as, as a PDF so we could take a look at it, right? So this is important. Most NFTs don't have these kind of terms, but you should. Definitions: own means with respect to an NFT that you have purchased or otherwise rightfully acquired from a legitimate source. The NFT, not the Kings of Leon album, not the MP3, not the associated artwork. you're getting the NFT, which is an indication of ownership. And if you sell that NFT, you are no longer an owner, right? So ownership, uh, is a section here that is one that is very instructive because it says you acknowledge and agree that as between you and the company Kings of Leon, the company owns all legal rights, title, and interest in and to the art and associated merchandise and all intellectual property rights therein. They're the owner of everything that they are going to send to you. They're not selling you ownership. The rights that you have in the art and merchandise are limited to those described in the license. Good thing we poked around, right? So here we have the license, and you're gonna see this is a fairly detailed license which says you're gonna get a worldwide, non-exclusive, non-transferable— well, that's interesting. You can't transfer the actual artwork, right? You can transfer apparently the token, but royalty-free. I don't know if this makes sense or doesn't make sense. Royalty-free license, meaning you don't have to pay any additional license fees, but you actually did pay a fee to get the NFT. How does all this work in the NFT space? How does this licensing language even apply in the NFT space? We're only going to find out over the coming years as court cases go through the system. You have a license to use, copy, and display the art and included merchandise solely for the following purposes: 1, 2, and 3. Non-commercial use, meaning for your pleasure. As part of a marketplace that permits the sale, meaning you can go and put it into another marketplace. Right? That's it. You get to use it, you get to copy it, you get to display it. And copying is interesting because I'm not quite sure exactly where that line might be, but it certainly is any copying of the digital assets that you do, right? You can perhaps put on Facebook, you can, you can put it onto Instagram, which is going to create copies, so you have to have the right to copy because it's going to happen automatically when you put it onto social media. But you cannot do that for any sort of commercial use. Now, not only is this very limiting, look at the restrictions on your license. You cannot modify the art in any way, including with shapes, designs, drawings, attributes, or colors. So you can actually upload that to Facebook, but you cannot put it into an editor and make any any modifications to the digital art. Wow, right? Do people really realize when they purchase this NFT that this is going to be one of the limitations? Is there going to be violation of these license terms? Like crazy. You cannot use the art for your purchased NFT or included merchandise to advertise, market, or sell any third-party products. So you can't put it on your commercial website as some sort of marketing effort. You can't use the NFT or associated merchandise in connection with anything that's going to be— that's going to impugn their reputation: hatred, violence, intolerance, etc. You can't use— can't even use the art, okay, or merchandise in any movies, videos, or other forms of media. So if you wanted to use that digital graphic that's going to come along with the Kings of Leon, maybe the album cover or whatever. You can't make a YouTube video and put it in there, and you cannot sell this tribute for any commercial gain, and on and on and on and on, right? And oh, by the way, your limited license, that little slice of rights that you're getting with all the huge limitations that come with it, only exists to the extent that you own the NFT. So now you can kind of see how this NFT works, right? It is indication of ownership, and you can pass ownership of the NFT in order to pass rights down the line. So pretty dramatic for a lot of folks to be able to get this far into the NFT world and realize there is so much more. Let's take a look at some of the information that is associated with, with the NFT here that is going to be a little bit more complicated, and it's the contract address. It's the, it's the, it's the, you know, it's really what exists on the Ethereum blockchain. And if you go here and you take a look at— this is Etherscan, which allows you to see the metadata embedded in this smart contract— you're going to see that here's all the transactions. So this is how we track ownership, right? This particular token was sold from someone to someone on this date at this value. So here's your ledger information, which tracks the ownership of the NFT, which then allows you to track and grant those rights that you were granted to the next person. And also, if there's going to be additional royalties paid on this transaction back to the owner it automatically takes a piece of that transaction and sends it to the original owner's wallet. So it's pretty amazing stuff in terms of smart contracts. This is the beginning of what we're going to see with smart contracts in the future. The contract itself and the metadata is actually right here, and this is some relatively complicated code, right? Which is going to include things such as ownership, such as what happens in a transfer, such as date stamping and timestamping, such as whether or not royalties are paid upstream. These basic things are included in, in this contract. All right, pretty crazy, right? So let's, let's go ahead and take a look at CryptoKitties, which you've probably heard about. This is, this is the CryptoKitties store on OpenSea where CryptoKitties is selling NFTs. So go ahead and do a Google search on CryptoKitty sales and you'll see it's pretty crazy, right? So here are some ones that are on auction right now. Hour left in this auction. So you can buy it, you can, you can sell it for a fixed price, you can sell it at auction to a highest price. There's certain basic limitations you could put around your sale. Let's take a look at this particular CryptoKitty and see what we can learn. What are we getting? What are we getting if we, if we actually place a bid on this CryptoKitty? All right, so this is one that's actually owned by Sunny Robot, so this might be an aftermarket sale of a CryptoKitty, and it's about $41. You can place a bid, you can see the, you know, the, the listing that has been placed by Sunny iRobot for this CryptoKitty. No offers yet. You've got a price history on it and you've got trading history. We can go all the way back to see that, um, you know, Crypto Century, Crypto— so you've got a whole series of people who have bought and sold this particular NFT, this token. And now the current owner is trying to maximize value and probably sell it for more than they bought it for, right? Details. All right, let's go to this all-important details page. And you're going to see something similar on Rarible and others to try and identify what it is you're getting. All right, I'm, I'm kitty number whatever. That doesn't tell me much. Hmm, what kind of properties? Well, let's see, I've got a simple eye shape, but that's not telling me what my license rights are. Man, how do I even know what I'm getting here? So in this instance, your due diligence— do your due diligence if you're buying or selling You're going to have to take a look at the CryptoKitties website. Okay, in order to understand what you're getting, you got to go to the link, you got to go to the website. From this website, you're going to have to do more digging to be able to find out what the terms are. And so if you go all the way to the bottom of the website and you get to the terms of use, you're going to find out that the terms of use are where your license rights are. All right, well, there's an app that is associated here, so it talks about that. There's the kitties, talks about the smart contract. And now we get into ownership, license, and restrictions. Same kind of language. Now again, most NFTs, none of the— there's no off-site information. What, you know, if you're a seller and you don't either put in the description all the different license rights in this detailed section about what it is that you are providing, both you and the, and the purchaser are at risk because it'll be unclear. If we go to the terms, you're going to see there's definition sections. Again, that own term ownership— if you own the NFT Not the Crypto Kitty, not the digital art. You are buying a token. They own the app, and you are getting a license to the art. So this is important, right? Let's see if we scroll down here and see if these— a license for general use worldwide, non-exclusive, non-transferable, royalty-free license to use, copy, and display the art you purchased for the following purposes: non-commercial use, part of a marketplace. This is kind of some standard language that was actually developed by CryptoKitties, which is being used by other companies out there as, as one form of license. This is not a one-size-fits-all. You don't want to just copy this license. That may not be applicable to you. Okay, this particular license does allow you some commercial use up to $100,000 in annual revenue, you can monetize this CryptoKitty with certain limitations. Earnings, revenue, any of the foregoing in excess of $100,000 a year, you're going to have to go back to CryptoKitty. So again, big restrictions section. This is where you find the license. So you go to OpenSea, take a look at what, what it is you're bidding at on in OpenSea. Take a look at what is in the description, click on every link that you can find, and see if you can identify the license rights that go along with the NFT itself. All right, my name is NFT attorney Enrico Schaefer. I'm a technology lawyer talking today about NFTs. We'll see you next time.