The (Copyright) Trouble with NFTs

From Jane Friedman:

We have an original oil painting hanging over our fireplace in the basement. We commissioned it many years ago from a young local artist whose work we enjoyed. The painting is probably worth less today than when we bought it in the late 90s.

On the back of the painting is an envelope, taped there by the artist. Inside is a handwritten “certificate of authenticity” signed by the artist indicating that he in fact did paint the picture, a whimsical scene of a stylized living room that was meant to be hung, well, in a living room. That certificate is the only proof of provenance we have should that artist suddenly become famous.

If instead of actually committing oil to canvas, however, the artist had created the work purely and only in a digital form, he could not have attached his physical certificate of authenticity to the work. Thus, when he emailed me the JPEG or PNG of the image for me to presumably print, frame, and hang over my fireplace, all I would have to prove provenance is his email indicating that the attached was his original work of authorship. And I might not even have such an email!

So, what to do to establish provenance of wholly digital works of art? NFTs! These digital certificates of authenticity, minted and recorded in the blockchain, certainly have their utility in terms of establishing provenance, but as a copyright lawyer, I frankly stand all amazed at the hoopla surrounding non-fungible tokens.

Why? Well, whence does a work of art derive value? Provenance, yes, but more accurately, scarcity. It’s Econ 101 all over again. If there’s only one The Starry Night, never to be re-created again by Van Gogh, and the provenance is not in question, that work of art is worth tens of millions of dollars. If there were fifty or a hundred The Starry Nights, however, all identical to the original and all painted by Van Gogh, the value of that masterpiece would certainly decrease.

So now consider a wholly digital work of art, a work that may be infinitely and easily copied and re-created by everyone who sees it on the internet simply by right-clicking on the image and selecting “Save As.” Or “Print.” Or “Email.” Or “Publish to Facebook.” Again, and again and again. There is thus no inherent scarcity to wholly digital works of art.

And this is true even if the artist has minted an NFT to go along with it because all an NFT is is a digital form of provenance. Admittedly the unique, immutable non-fungible token itself may have value as a novelty and because there is only one, but I worry about the general public’s perception that the NFT somehow establishes the value and creates scarcity of the underlying work of art.

And so now enters our old friend copyright law. With or without an NFT, the only way an artist can stop the unlawful reproduction of a digital work of art is by using copyright law, as is true for any work authored in, say, the last 100 years. For today, U.S. copyright law does not recognize an NFT as that “thing” that will get you admission to federal court to sue for copyright infringement. Unless a digital artist has registered her copyrights in her portfolio with the United States Copyright Office, she has no legal remedies against illegal copying of her digital works, NFTs notwithstanding, and this means she has no real effective mechanism to create scarcity of her work by controlling the supply.

So until Congress rewrites 17 USC Section 411(a) or the U.S. Supreme Court revisits its recent Fourth Estate decision (holding that the plaintiff must have a copyright registration certificate in hand to maintain an infringement action in federal court), an NFT is not equivalent to a copyright registration certificate issued by the Copyright Office. Thus, cutting-edge digital artists are left with a legal remedy hundreds of years old to create the requisite scarcity to drive value in their digital works, even if the artist has minted an NFT for the work.

. . . .

Think of it this way: an investor paid $69 million for the NFT minted in connection with Beeple’s digital work of art Everyday: The First 5,000 Days, but unless and until Beeple obtains a copyright registration certificate on that work, someone could, for example, print 1,000 T-shirts with exact copies of 5,000 Days on them and sell them on Etsy with relative impunity. 

Link to the rest at Jane Friedman

From The Verge:

There’s nothing like an explosion of blockchain news to leave you thinking, “Um… what’s going on here?” That’s the feeling I’ve experienced while reading about Grimes getting millions of dollars for NFTs or about Nyan Cat being sold as one. And by the time we all thought we sort of knew what the deal was, the founder of Twitter put an autographed tweet up for sale as an NFT.

You might be wondering: what is an NFT, anyhow?

After literal hours of reading, I think I know. I also think I’m going to cry.

Okay, let’s start with the basics:

What Is an NFT? What Does NFT Stand For?

Non-fungible token.

That doesn’t make it any clearer.

Right, sorry. “Non-fungible” more or less means that it’s unique and can’t be replaced with something else. For example, a bitcoin is fungible — trade one for another bitcoin, and you’ll have exactly the same thing. A one-of-a-kind trading card, however, is non-fungible. If you traded it for a different card, you’d have something completely different. You gave up a Squirtle, and got a 1909 T206 Honus Wagner, which StadiumTalk calls “the Mona Lisa of baseball cards.” (I’ll take their word for it.)

How do NFTs work?

At a very high level, most NFTs are part of the Ethereum blockchain. Ethereum is a cryptocurrency, like bitcoin or dogecoin, but its blockchain also supports these NFTs, which store extra information that makes them work differently from, say, an ETH coin. It is worth noting that other blockchains can implement their own versions of NFTs. (Some already have.)

What’s worth picking up at the NFT supermarket?

NFTs can really be anything digital (such as drawings, music, your brain downloaded and turned into an AI), but a lot of the current excitement is around using the tech to sell digital art.

. . . .

A lot of the conversation is about NFTs as an evolution of fine art collecting, only with digital art.

Do people really think this will become like art collecting?

I’m sure some people really hope so — like whoever paid almost $390,000 for a 50-second video by Grimes or the person who paid $6.6 million for a video by Beeple. Actually, one of Beeple’s pieces was auctioned at Christie’s, the famou—

Sorry, I was busy right-clicking on that Beeple video and downloading the same file the person paid millions of dollars for.

Wow, rude. But yeah, that’s where it gets a bit awkward. You can copy a digital file as many times as you want, including the art that’s included with an NFT.

But NFTs are designed to give you something that can’t be copied: ownership of the work (though the artist can still retain the copyright and reproduction rights, just like with physical artwork). To put it in terms of physical art collecting: anyone can buy a Monet print. But only one person can own the original.

No shade to Beeple, but the video isn’t really a Monet.

What do you think of the $3,600 Gucci Ghost? Also, you didn’t let me finish earlier. That image that Beeple was auctioning off at Christie’s ended up selling for $69 million, which, by the way, is $15 million more than Monet’s painting Nymphéas sold for in 2014.

Link to the rest at The Verge

From Investopedia:

Greater Fool Theory

The greater fool theory argues that prices go up because people are able to sell overpriced securities to a “greater fool,” whether or not they are overvalued. That is, of course, until there are no greater fools left.

Investing, according to the greater fool theory, means ignoring valuations, earnings reports, and all the other data. Ignoring the fundamentals is, of course, risky; and so people subscribing to the greater fool theory could be left holding the bag after a correction.

. . . .

Understanding the Greater Fool Theory

If acting in accordance with the greater fool theory, an investor will purchase questionably priced securities without any regard to their quality. If the theory holds, the investor will still be able to quickly sell them off to another “greater fool,” who could also be hoping to flip them quickly.

Unfortunately, speculative bubbles burst eventually, leading to a rapid depreciation in share prices. The greater fool theory breaks down in other circumstances, as well, including during economic recessions and depressions. In 2008, when investors purchased faulty mortgage-backed securities (MBS), it was difficult to find buyers when the market collapsed.

By 2004, U.S. homeownership had peaked at just under 70%. Then, in late 2005, home prices started to fall, leading to a 40% decline in the U.S. Home Construction Index in 2006. Many subprime borrowers were no longer able to withstand high interest rates and began to default on their loans. Financial firms and hedge funds that owned in excess of $1 trillion in securities backed by these failing subprime mortgages also began to move into distress.

Example of the Greater Fool Theory

Bitcoin’s price is often cited as an example of the greater fool theory. The cryptocurrency doesn’t appear to have intrinsic value (although this is an area of debate), consumes massive amounts of energy, and consists simply of lines of code stored in a computer network. Despite these concerns, the price of bitcoin has skyrocketed over the years.

At the end of 2017, it touched a peak of $20,000 before retreating. Attracted to the lure of profiting from its price appreciation, traders and investors rapidly bought and sold the cryptocurrency, with many market observers positing that they were buying simply because they hoped to resell at a higher price to someone else later. The greater fool theory helped the price of bitcoin zoom upwards in a short period of time as demand outstripped supply of the cryptocurrency.3

The years 2020-21 saw Bitcoin rise to new highs, topping $60,000 and hovering above $50,000 for weeks. This time, however, large institutional investors and corporations such as Tesla and PayPal have been involved in the buying—and it is debatable whether or not they can be considered fools. So, perhaps Bitcoin is not an example of the greater fool theory, after all.

Link to the rest at Investopedia

From Wikiquote:

Unattributed Variants to Murphy’s Law

  • It is impossible to make anything foolproof because fools are so ingenious.
  • Nothing is foolproof to a sufficiently capable fool.
  • Make something idiot-proof, and they will build a better idiot.

Link to the rest at Wikiquote

PG suggests that copyright is only one of a great many problems with a collector’s market for Non-fungible tokens.

A great many things that are rare are not valuable. PG cites originals of his third-grade homework as examples.

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