Tao Qian｜On The Legal Implications Of Non-fungible Tokenized Transactions Of Digital Works

Tao Qian's original theme included in Shanghai Law Society's "Eastern Jurisprudence" #东法学135# Original first release 842 #法学759# Core journal 702

Tao Qian

Associate Professor, Law School, China University of Political Science and Law, Doctor of Laws

main purpose

1. Non-homogeneous equity tokens and digital works

2. Legal nature of NFT digital works and irreplaceable tokenized transactions

3. Copyright issues in non-fungible tokenized transactions of digital works

In summary

Non-fungible tokens (NFTs) are metadata on the blockchain used to mark specific digital content. The emergence of the non-homogeneous tokenized transaction model for digital works has changed the traditional dissemination and utilization ecology of online works. At the same time, it also brings confusion about rights ownership and copyright infringement. The same digital content has the dual attributes of digital works and digital commodities in the circulation field. From the perspective of digital commodities, the irreplaceable tokenized transaction model allows property rights to be transferred like physical commodities, and real-time changes in ownership information on the blockchain play a public role. From the perspective of digital works, although the irreplaceable tokenized transaction of the work will not result in the transfer of copyright, it does involve the copying, distribution and information network dissemination of the work. Tokenizing other people's works without permission constitutes copyright infringement, except for digital works that are first tokenized and traded with the copyright owner or his authorization. When certain conditions are met, the principle of exhaustion of rights can be extended to apply to digital works trading scenarios.

Since 2021, the art world and industry have rapidly paid attention to NFT. The full English name of NFT is "Non-Token", which is translated as non-fungible equity certificate, non-fungible token or non-fungible certificate. Trading specific transaction content in the form of NFT is called non-fungible tokenization or non-fungible tokenization, also known as "minting" in the industry. For the convenience of discussion, this article calls this emerging transaction model "tokenized transaction". The first transaction of an NFT is called "issuance", and the original minter of the NFT is also called the issuer, creator, or generator.

NFT is popular in online games, art collections, fan economy and other fields, fully demonstrating the power of technology in art trading and commercial utilization of digital content. In March 2021, a digital artwork sold by artist Mike in the form of NFT was sold for US$60.25 million. At the 2021 Tokyo Olympics, the International Olympic Organizing Committee issued digital commemorative badges in the form of NFT. Domestically, companies such as Tencent, Alibaba, and NetEase have launched NFT trading platforms, relying on their respective blockchain technologies to provide users with services to access, share, and purchase NFT digital works through websites or mobile applications. In existing industry practice, the subject matter of transactions in the form of tokenization includes physical paintings, photos, vinyl records, digital art images, animations, short videos, video game character images, virtual avatars, digital music albums, 3D Models etc. , which includes both physical items with physical carriers and content in digital form. When the transaction objects are physical items, NFT transactions are no different from the ordinary "online payment, offline delivery" e-commerce model, so they are not within the scope of this article. This article only takes the tokenized transaction of digital works as the research object.

The emergence of tokenized transactions has brought positive impacts to the creation, dissemination and trading of works, but it has also brought many legal confusions to the industry. This article first introduces the tokenized transaction process of digital works in detail from the technical principles to clarify the relationship between NFT and digital works; then, it analyzes the advantages of tokenized transactions and proposes that it brings unclear transaction nature, copyright . Then, from the perspective of distinguishing digital works and digital commodities, the legal effect and nature of tokenized transactions are analyzed; Finally, under the framework of copyright law, issues such as copyright ownership, infringement and secondary transactions in tokenized transactions are analyzed .

1. Non-homogeneous equity tokens and digital works

The relationship between NFT and digital works

NFT is an emerging application scenario under blockchain technology. Blockchain, also known as a distributed ledger, is essentially a shared database that stores information. Due to its non-tamperable, traceable, open and transparent characteristics, applying it to the custody of digital asset transactions can solve concerns about the lack of trust and security among transaction entities. "In digital copyright trading activities at home and abroad, it has played a major role in effectively solving the problem of rights confirmation and realizing decentralized transactions." NFT represents a set of time-stamped metadata on the blockchain and has a unique And the eternal nature points to a digital file stored somewhere on the network. This metadata appears as a specific URL link or a set of hash values ​​that stores specific digital content. Specific stored digital content can be accessed by clicking on a link or executing a web-. Use hashes for broad searches.

NFT is essentially an equity certificate pointing to a specific object with transaction value. The certificate is tied to a smart contract on the blockchain that records information about the original issuer, the date of issuance, and every future transfer of a specific object. Every NFT is unique. An NFT cannot be exchanged with another NFT, and an NFT cannot be divided into multiple sub-units. This is the connotation of "non-fungibility" of NFT. In contrast, fungible tokens such as Bitcoin and Ethereum are easily exchangeable and divisible and function like monetary instruments. Although NFT has the word token in its English name, it is not essentially a digital currency, but a "tool" designed to create scarcity of tradable digital content and create object liquidity in actual transactions. The credit foundation of digital currency “is social credit built on decentralized, tamper-proof blockchain technology.” However, “because it lacks an anchor with actual value, once people no longer believe in it, it is just a string of numbers existing on the Internet.” Although NFT is also built on the blockchain, its value relies on its uniqueness It refers to specific knowledge products, rights and other objects with exchange value. Therefore, it has strong stability.

According to the nature of the transaction objects that NFT refers to, it can be divided into two types: asset-based NFT and rights-based NFT. Asset-type NFT refers to NFT of various physical or digital assets. Rights-based NFT means that the holder has rights such as equity, bonds, or the right to use specific goods or services, such as performance admission qualifications, online game login qualifications, etc. Asset-based NFT is currently the most common form. At this moment. Among them, the most common form of digital content traded through NFT is works in the field of literature and art. Digital works such as digital music, digital photos, digital images, and video animations are sold as NFT in the form of tokenization on the trading platform. In fact, they are called "NFT digital works." Their essence exists in digital form. Documents that are uniquely tagged and have original content.

Transaction methods and processes for NFT digital works

Trading of NFT digital works is conducted on online platforms. Generally speaking, NFT trading platforms can be divided into two categories: one is the official distribution platform operated by the copyright holder himself, such as sports companies, game companies, etc. on their official websites or official NFT digital works sold on mobile applications; second Class is a third-party trading service platform. When the copyright owner or its authorized entity issues NFT digital works on the trading platform, the platform will draw a certain percentage of service fees from the transaction amount. Some third-party trading platforms not only allow buyers to resell or regift the NFT digital works they purchased, but also allow entities that purchased NFT digital works through other channels to resell them on their platforms. Most trading platforms rely on Ethereum, a global public chain network, which lays the technical foundation for interconnection and mutual recognition of transactions between trading platforms.

At present, buying and selling NFT digital works through third-party trading service platforms has become mainstream. Internet users need to register and log in to the NFT trading platform. Most trading platforms allow users to log in via a digital wallet account. A digital wallet is an account used for online payments, similar to Alipay wallet. Some overseas platforms use Ethereum wallets to store virtual currencies, and users associate their cryptocurrency wallet accounts with NFT trading platform accounts. After logging into the NFT trading platform, you can add the works you want to sell under your account. Generally speaking, the first step in the operation process is to upload the digital works stored in the computer to the NFT trading platform. The platform supports various document formats such as pictures, animations, audio and video, etc., and the file size has an upper limit. You can preview it after uploading. Then fill in the basic information such as the title of the work, description information, classification attributes, etc. Some platforms also have additional functions, such as setting file passwords, redemption codes, links, etc.; and setting information that is only displayed to the buyer after the transaction is successful. Different trading platforms have different arrangements for the storage location of NFT digital content uploaded by users for transactions. Some platforms require trading entities to upload the digital content to be traded to the blockchain (“uplink”). Although going on-chain can ensure that digital content is not tampered with, most platforms do not adopt this model due to the high cost of on-chain storage.

The second step is to set the trading conditions. Whether you choose to sell a "single" or "multiple" pieces of the same work, the terms of the transaction are completely different. If it's a single, only one digital piece is sold. If there are multiple copies, you need to set a specific number of sales copies. These number of copies are all the same digital work and no distinction is made between the original and the copy. Multiple NFT digital works under the account can also be packaged and sold in folders. Since "multiple" sales may dilute the market value of a work, in order to preserve the scarcity value of the work, sellers tend to sell "single" works of visual arts such as fine art and photography. For comprehensive art works such as auditory arts or musical works and audio-visual works, sellers often sell limited quantities through "multiple" sales. Next, set the transaction price and sales method. You can choose an auction or fixed price, or set a sale time period and a floating price. Some platforms also allow sellers to set a secondary sales commission rate, which is the proportion of the price that the original seller can receive when the digital work is transferred next time.

The third step is to select the underlying smart contract for this transaction. Generally speaking, most NFT trading platforms use Ethereum standard smart contracts. Smart contracts are programs composed of underlying code that can be executed automatically. As a tool that carries the consensus of both parties to the transaction, smart contracts "contain the unanimously expressed intentions or offers and commitments of both parties." Then pay the NFT "minting" service fee through the digital wallet and click "Confirm" in the pop-up window of the digital wallet. At this point, an NFT is "minted" and automatically written into the smart contract on the blockchain. Each NFT has a number, which refers to its encoding in the blockchain platform smart contract. The contract network address of the NFT can be found on the blockchain platform through the number. Open the address and you can see the underlying code of the smart contract corresponding to the NFT. In the queryable function of the contract, the metadata of the NFT can be queried. For buyers on the NFT trading platform, after discovering the digital works they are interested in, they pay the consideration and service fees through the digital wallet. Buyers immediately become owners of digital works displayed publicly on the platform and embedded in smart contracts. "Automatic execution" code will also be triggered to generate new owner information on the blockchain.

Opportunities and challenges of tokenized transactions of digital works

The tokenization of digital works reflects the innovation of digital commodity trading models in cyberspace. Different from the traditional model in which the copyright owner of a digital work disseminates the work through various online platforms to obtain copyright licensing fees, the copyright owner in the NFT model commercializes the work on his own and determines the only original copy of the digital work by setting the number of tokens. Sold as multiple copies of a digital work. It can also set the percentage of the price received when the digital work is resold in the future. The tokenized transaction model allows copyright owners to have greater initiative, convenience and sustainability in realizing the economic value of their works. In addition, every resale of NFT digital works is immutably recorded on the blockchain, ensuring the traceability, security, transparency and authenticity of the identity of the buyer and seller.

At the same time, the tokenized transaction model has also changed the previous virtual property ownership certification model. For virtual property in an online environment, rights holders usually rely on usernames and passwords to achieve "possession" of the property. Tokenized digital works rely on information recorded on the blockchain to prove ownership of property rights. Its initial creator information and listing time are permanently recorded on the blockchain. Therefore, the emergence of the tokenization model can provide strong proof for artists to claim the identity of the creator and the time of creation, and can inhibit plagiarism to a certain extent. Moreover, the emergence of the NFT trading model can reawaken the vitality of some works that have faded from public view.

Compared with the traditional offline transaction model, the tokenized transaction model can make full use of the social attributes of the Internet. By displaying works on the NFT trading platform, Internet users can interactively appreciate the works or view sales information. The openness and transparency of the historical owner information of digital works makes it easier to meet the social nature of art collections. Its unique mark can also better satisfy the psychological possessiveness of collectors and investors. Some platforms have launched additional services that allow buyers to add content with the buyer’s personalized characteristics to purchased digital works and allow buyers to transfer purchased digital works as gifts. Some platforms can also interconnect with social media platforms. In the era of fan economy, the social attributes of NFT digital works are more obvious and have the meaning of status symbol and group recognition.

Although the emergence of the tokenized transaction model has opened up a new market for work creators that is independent of copyright authorization and work transfer, there are many hidden legal issues that need to be clarified and resolved, which are issues that this emerging business model must face. . . Legal challenge. First of all, what rights does the counterparty have when purchasing NFT digital works? Is it really a property right like purchasing a physical object? Most digital works are not permanently stored on-chain with NFTs, but rather on centralized or decentralized network servers. So, if the digital file no longer exists due to server shutdown or being lost or deleted by the original uploader, does the purchaser of the NFT digital work have the right to seek legal relief? The tokenized transaction model relies on blockchain and smart contracts to implement. If the smart contract program is hacked and the data is tampered with, how can the holder of the NFT digital work obtain compensation for losses? Secondly, when the minter of an NFT is not the copyright owner of the digital works related to it, it is questionable whether his actions infringe and which copyrights he infringes. When an author transfers or exclusively licenses the copyright of his work to others, does he have the right to tokenize that work? Furthermore, can museums, cultural centers or anyone digitize works that have entered the public domain and sell them as tokens? Do people who purchase NFT digital works through the platform have the right to disseminate the work on social media platforms and commercially exploit the work?

To answer the above questions, the prerequisite question that needs to be resolved is whether the NFT transaction is a transfer of property rights or a license or transfer of the copyright of digital works. The act of tokenization itself falls within the scope of rights control under copyright law. In addition, what rights can buyers get by purchasing NFT? This issue is also closely related to the legality judgment of subsequent display behavior and resale behavior.

2. Legal nature of NFT digital works and irreplaceable tokenized transactions

Digital works and digital goods

There are tons of digital works on the Internet. According to its original form, it can be divided into two categories: one is works created in digital form with the assistance of computer technology; the other is works created in digital form with the assistance of computer technology. The other is traditional works on physical carriers. Digital copies of works created on. Since the original digital work is indistinguishable from each copy in form and content, from the perspective of carrier property rights, digital works cannot be as scarce as works attached to tangible carriers such as paper and CDs. The non-fungible tokenized transaction model enables each digital file to have a unique token, and each copy of the digital work to be referenced by a unique string of metadata, resulting in "quasi-tangibility," "uniqueness" and " Scarcity” impact. Therefore, when a copy of a digital work exists on a trading platform in the form of an NFT, it is designated as a specific digital commodity.

Digital goods are a type of virtual property. Virtual property is a simulation of real things. It exists in the virtual space in the form of data code and is property. It has the virtuality, dependence, and particularity of use of things, but it also has the independence, particularity, and dominance of things. However, traditional property law has always used tangibility as the basis of the concept of "thing" to delineate the boundaries of rights and obligations in things. When intangible virtual property appears, the ownership rules of property law cannot apply. When defining ownership, the property rights chapter of my country's Civil Code stipulates that "the owner shall have the right to possess, use, benefit from and dispose of his or her real estate or movable property in accordance with the law." Virtual property does not belong to movable property created and transferred upon delivery, nor does it belong to real property registered in accordance with legal provisions and resulting in a change of ownership. In view of the fact that "virtual property" is clearly mentioned in Chapter 5 "Civil Rights" of the General Principles of Civil Law of my country, the rights and interests enjoyed by civil subjects in virtual property, although not ownership in the legal sense, should be protected by civil law. Virtual property embodies the contribution of human labor and money. "Virtual property is the object of rights, which is undoubtedly the correct conclusion." Specifically, for digital works, when their copies are stored in cyberspace and become tradable commodities through unique NFT pointers, rights are protected. Property rights protected by law. "The rights that NFT holders have over their NFT include exclusivity, access, control, use, income and disposal." When conducting online transactions of NFT digital works, both parties to the transaction establish contractual debts and repay their obligations in accordance with the provisions of the contract. Determine the ownership of various rights and interests after commodity transactions.

The nature of tokenized transactions for digital works

When copies of a digital work enter circulation and are sold as commodities, the same object is both a work and a commodity. In this object, there are both copyright as a work and property rights as a commodity. Theoretically, as far as the transaction of works is concerned, it can be a legal relationship in which the copyright itself is the transaction content, or it can be a legal relationship in which the work carrier is the transaction content. If it is the former, what is formed between the two parties to the transaction is a licensing and licensing relationship in terms of copyright property rights. If it is the latter, it can be divided into two situations: one is a sales relationship based on the transfer of the carrier's ownership; the other is a legal relationship based on the authorization of the carrier's use rights. The legal characterization of digital works tokenization transactions not only depends on the legal effects intended to be achieved by both parties to the transaction, but also depends on the legal effects achieved after the transaction is completed.

Judging from the consensus of both parties, the effect of property rights transfer is in line with the psychological expectations of both parties. The word "purchase" itself and the word "owner" displayed on the trading platform indicate the psychological understanding of both parties that the completion of the transaction means the transfer of property rights. This effect is also what practitioners in the NFT industry want to achieve. For example, Alibaba's NFT product service agreement stipulates that "you can obtain NFT digital works through purchase, exchange or other participation methods in accordance with the event rules... You can transfer the NFT digital works you hold to other friend users, and have registered through Alipay's real-name Certification." The service agreement for Tencent NFT products stipulates, "When you purchase an NFT digital work, as a buyer, your relevant information will be written into the metadata of the work as proof of your ownership of the work." ""The user agreement for the NFT product states, "Each is a non-fungible token. Upon purchase, you fully own the non-fungible token and may sell or give it away."

Judging from the effects achieved after the transaction is completed, the buyer has the right to dispose of NFT digital works through resale, transfer, etc. after paying the consideration. When the transaction object is game skins or virtual images, buyers can use their own NFT digital works. Purchase NFT digital works in online games and virtual communities. In fact, this creates a transaction effect similar to the transfer of ownership of tangible items between the transferor and transferee of NFT digital works. The blockchain records the owner of the digital work referenced by each NFT and changes the record immediately after each transaction is completed, "playing the role of proving that the rights and interests it represents belong to it and that third parties in the transaction can act in good faith." .” Trust the ownership status shown on the blockchain. "Selling digital works in the form of NFT, just like selling the physical object that carries the work, is a way to realize the economic value of the work. The relationship between digital works and NFT digital works is like art and silk scarves printed with art. . The slight difference is that the scarf is the carrier of the artwork copy, while the NFT is not the carrier, but the certificate of each digital copy. The digital copy to be traded exists in an invisible storage space on the server. With the need Different from the change of ownership of the delivered scarf, the change of property rights of NFT digital works relies on the automatic execution of smart contracts, supplemented by changes in the rights holder information recorded on the blockchain.

To characterize the transaction of NFT digital works as property rights transfer, two confusions need to be clarified: First, the owner of the NFT digital work cannot actually own the NFT digital work. In the first transaction and subsequent transactions of NFT digital works, the NFT digital works always exist in the server where the issuer originally uploaded them, and their storage location in the digital context does not change. Nonetheless, ownership records on the blockchain can ensure that digital property rights belong to the entire world, and the owner of the rights can "quasi-possess" the property and decide on the transfer of property rights. Secondly, on some trading platforms, the issuer of an NFT digital work can set the proportion of revenue earned each time the digital work is resold in the future. For those who purchase NFT digital works, it seems that they obtain incomplete property rights, and the issuer always retains the right to income based on the transaction object. But in fact, this is an extension of the right to resell artistic works within the meaning of copyright law. Resale right means that after the work is first transferred, the author or his heirs have the right to enjoy a certain percentage of the increase in value of the property after subsequent resale. Some countries and regions stipulate resale rights in copyright laws, and the establishment of an NFT trading platform provides technical support for the implementation of this right. In countries where the law does not provide for the right of resale, such resale effect is generated by the contractual agreement between the parties to the transaction. The existence of resale rights does not change the transfer of property rights of NFT digital works.

To sum up, the non-fungible tokenized transaction model technically creates a buyer-seller relationship for digital content rather than a license to use digital property or a license to intellectual property. The copyright owner or its authorized person exercises the right of reproduction and copies the work into an NFT digital work. NFT digital works enjoy the property rights of digital goods and have the right to dispose of the digital goods through sales contracts. The irreplaceable tokenized transaction model enables this digital commodity to produce the same transaction effects as physical commodities. After paying the consideration, the buyer obtains the property rights of the digital goods, and can resell, transfer, and enjoy the premium income of the goods without interference from the seller. When the owner of a digital commodity dies, the property rights of the digital commodity can be inherited or bequeathed. If NFT digital works are lost due to system vulnerabilities, hacker attacks, etc., tort law rules can be applied for relief.

NFT and other forms of digital works trading

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