“The ownership of a thing is the right of one or more persons to possess and use it to the exclusion of others. In this code, the thing of which there may be ownership is called property.”1Civ. Code, § 654.
The State of California gives us this very elegant definition of property, which is based on the ability to enjoy something “to the exclusion of others.” If one cannot enjoy it “to the exclusion of others,” then there can be no “ownership.” And if there is no “ownership,” then the thing is not “property.”
How is ownership tracked?
If whether or not a thing is owned determines whether a person may have property rights in it, then tracking ownership becomes incredibly important. How does one show others that he or she owns a thing?
Ownership can be shown by various methods. Real Property transfers ownership through deeds, which may be recorded or unrecorded. Personal property can transfer through a bill of sale, but it also can be transferred by implication, gift, or an oral exchange.
Being able to transfer smaller items without proof is important. Think about how many children receive a bill of sale from Santa Claus. But, as items become more valuable, tracking ownership becomes more important: think about how much paperwork you must complete when you buy a car.
What happens to the evidence of ownership?
If you think about most personal property, the evidence of ownership disappears or is misfiled quickly. People loose receipts. They often throw away warranty booklets, and bills of sale, and all other paper documents that show ownership has transferred.
For some items, like cars, guns, and real property, the government keeps records of who owns what. But outside of these very specific items, no one really keeps track of their documents evidencing ownership.
Non-fungible Tokens (NFTs) aim to fix that.
What is an NFT?
Like a recorded deed, an NFT is a way of recording ownership. Unlike paper, the NFT exists on the blockchain, which is semi-permanent. As long as the blockchain servicing the NFT continues to exist on at least one computer in the whole world, then the record of the token continues to exist, even if you discard it.
The NFT tells all users of a particular blockchain that the holder of the NFT has ownership rights to a real thing in the world. In fact, Nike has created a shoe that is linked to NFTs. (See this article that describes Nike’s patented use of NFT’s to prove authenticity of a pair of CryptoKick shoes.)
More frequently, an NFT is used to represent ownership of a digital asset. Although some have argued that NFTs can only be used to track ownership of videos and images, the founder of Twitter quickly sought to prove otherwise.2NFT’s, explained (March 11, 2021) The Verge To prove that an NFT could represent the ownership of any digital asset, even a tweet, the founder of Twitter (Jack Dorsey) sold the first tweet he ever posted for about $2.9 million on March 6, 2021.3See the bidding history which ended at $2.9 million when @jack sold the first tweet ever made.
To accomplish this, Jack Dorsey created a unique token that included a legal description of the asset being owned. As the creator of the token, he owned it, and he had the exclusive right to transfer it to anyone in the world. He then offered to transfer ownership of that token for a fee at auction. When a winning bidder paid the necessary fees, Jack Dorsey then used his private key to transfer ownership of the token to the new owner’s public key. (To simplify things, Jack Dorsey gave the token to the new owner.)
The new owner can prove that he owns the token (and thus the associated asset), because he or she is the only person in the world who holds the private key that can prove ownership. (The private key is the one thing that you absolutely CANNOT loose; as long as you have that, it doesn’t matter if you keep track of your NFTs.)
What do you buy with a Non-fungible Token (NFT)?
But what do you really buy with an NFT? Can you really enjoy Jack Dorsey’s tweet to the exclusion of all others? Can you make it private so that only you can see it? Could you destroy it? Could you move it from Twitter’s server to a server in your home? Could you block Twitter from sending the binary data representing that Tweet over public networks to show it to someone else?
Probably not! And, this is the underlying problem with NFTs. Even though the NFT itself is unique, and there can be only one, the underlying asset can be duplicated and remains in the control and possession of another person.
Imagine that you see a digital painting that you like. The artist has made five copies of the file, and he makes five NFT’s, one for each file. You buy one of the NFT’s, but what stops the artist from later creating more copies of that file? What stops the artist from converting the file into a T-Shirt or a coffee mug? What rights did you actually buy?
NFT’s currently don’t track ownership
Since you cannot enjoy the underlying thing to the exclusion of all others, then the underlying thing is not owned and cannot be property as defined by California. What you more likely possess is evidence of a license to use the image within some limited context. By purchasing a digital asset as an NFT, you likely possess the right to copy that image and use it as you see fit. Your rights may not be exclusive. And the original artist, who holds the copyright, probably cannot make a claim copyright infringement against you, since you can show that he or she sold you the “ownership” of the art through an NFT.
NFT’s actually track and prove ownership of a license. Ownership of a license, unless it is exclusive, is not nearly as valuable, since the license can be given to many people.
Perhaps I am being harsh. Here is how the Verge summarizes what you get as an NFT buyer:
According to the Verge, you don’t own the underlying art, or the copyright, but you have permission to use the art “as your profile picture.” Let us not forget: “Plus, of course, there are bragging rights . . .”
Personally, I’ll pass on the bragging rights and keep my money for more important things.
Do you need help with your digital creations?
If you have a digital creation and you want help protecting it, consider filing your copyright and taking other steps to protect your interest before selling rights through NFTs. If you want help considering your options, contact Coleman & Horowitt, LLP, and ask to speak to a member of the Intellectual Property group.