Limits of ownership. Why you cannot use purchased NFTs as you like

NFTs appeal to the idea of “owning” a piece of digital art or an avatar from a sensational collection, implying that the owner can use them at will, including creating goods and derivative objects with the image, that is, using it for any personal or commercial purpose they wish. But is this so? A Galaxy Digital study says big projects are “misleading” NFT buyers about what they get when it comes to intellectual property rights.

As part of the report, titled “A Survey of NFT Licenses: Facts & Fictions,” Galaxy Digital analysts examined the licensing agreements of major NFT collections, including Bored Ape Yacht Club (BAYC), VeeFriends, Moonbirds, and World of Women, as well as the Decentraland and Sandbox metaverses. The study's main finding was that the vast majority of NFTs “convey zero intellectual property ownership of their underlying content,” misleading token holders as to their rights.

According to the report, some projects, in an attempt to prevent confusion, have adopted the widely known Creative Commons license, but at the same time, some of them have effectively decoupled intellectual property rights from NFTs, making it impossible for NFT owners to protect the exclusive rights to the digital art objects they own.

Creative Commons (CC0) licenses give an author or copyright holder the ability to grant, under certain conditions, the right to use his or her copyrighted work to absolutely anyone without payment, and without any restrictions on the area.

In the case of the BAYC collection, the text of the license on the website of the company behind it, Yuga Labs, states that “when you purchase an NFT, you own the underlying Bored Ape, the Art, completely,” with special emphasis on the word “completely.” However, under the terms of the license, Yuga Labs is still the copyright holder, which retains the right to intellectual property. According to the Galaxy Digital report, Yuga “implicitly acknowledges that the NFT holder does not, in fact, own the art.”

“When you buy one of these tokens, you’re not buying the media that the metadata points to, you’re actually buying a license from an issuer,” explains Galaxy Digital's head of research Alex Thorn on CoinDesk TV.

However, Yuga Labs recently unveiled significantly revised terms of service for CryptoPunks and Meebits collections, showing what a more professional version of NFT licensing might look like. According to the rules, a CryptoPunk NFT owner has the exclusive right to store, sell, transfer, perform blockchain transactions with their NFTs and even create derivative works, explains Andrey Tugarin, managing partner of GMT Legal, admitting that other well-known projects may also allow NFT owners commercial use.

Analysts of Galaxy Digital noted the “noble effort” of World of Women (WoW), the only project in the review, whose creators are trying to officially transfer copyrights on images with NFTs. However, according to the authors, the terms of sale of WoW still do not clarify how NFT transfers rights to any derivative works or in secondary sales through Opensea and other marketplaces. That said, it is generally possible to organize the transfer of intellectual property rights in NFT's secondary sales if it does not contradict the original licensing agreement, Tugarin explains. The terms may provide for full transfer of rights to the buyers without restrictions, so they will be able to sell the NFTs and transfer all their rights to the intellectual property along with the NFTs.

When the original creators of NFT retain the rights, they can unilaterally change the terms in a way that hardly makes customers happy. This recently happened with the Moonbirds project, which announced its transition to the CC0 license. The authors of the project essentially put the collection in the public domain after months of telling buyers that they “own” the Moonbirds images they purchased. The collector, nicknamed Lakoz, wrote on Twitter that this decision caused him to miss out on a “six-figure” deal with an unnamed brand that he had hoped for when he bought NFTs.

Some projects give token buyers much more freedom to use their intellectual rights, the report claimed. BAYC, being probably the most notorious NFT collection, gives token owners the right to use their images as they see fit. This is how clothing with the collection's symbolism, music projects, and even themed fast food restaurants have emerged.

👀 @HYPEBEAST - We appreciate the love! Thank you to the community for making this opening weekend a success! A lot more to come soon. 🦍🍔 #BAYC #MAYC @BoredApeYC https://t.co/9smaMEc71Y— Bored & Hungry | Home of America's Best Burger (@BorednHungry) April 11, 2022

Another example was the recent sale of NFTiff tokens by luxury jewelry brand Tiffany & Co. Token holders of the CryptoPunks collection could purchase one of 250 NFTs for 30 ETH apiece (over $50 000 at launch) and then exchange it for a physical pendant with their CryptoPunk image on it. Yuga Labs, which owns the license for the collection, was not involved in any way on its part. The project with Tiffany was initiated by the blockchain company Chain, whose head is famous for buying the most expensive pendant in history for $23,7 million. Speaking to Decrypt reporters, Yuga Labs chief development officer Noah Davis called the Tiffany project a great example of how commercial rights to NFTs can be used in the future.

Other projects are less likely to welcome commercial use of NFTs from their collections. The creators of Doodles, according to the Galaxy report, limit the amount of revenue that can be generated from derivative works as well as the ability to modify the original images. The project of American serial entrepreneur and writer Gary Vaynerchuk VeeFriends has an extremely limited license “for personal use only,” the terms of which do not allow the creation of commercial products in principle.

If the licensing agreements prohibit commercial use, it means that the owner of an NFT must use it only for non-commercial purposes, Tugarin explains. An NFT buyer can put the image as an avatar on social media, but cannot profit from its use. “The buyer in that case owns that NFT, just to a limited extent. And in order to understand the limits of such ownership and use, you need to carefully study the projects' license agreements before buying the tokens,” adds a GMT Legal representative.

The authors of the report focus on future refinements to NFT regulations. This could help token owners license their assets or make fan art out of them. However, the current state of affairs does not suggest that NFTs are an effective way to manage intellectual property rights, at least not without further work in this direction.

Thorn at Galaxy Digital attributes this to the fact that the NFT space in the broad sense is just nascent, and that initiatives for commercial image rights only began to gain traction last year. Some licensing agreements still look “amateurish,” and many projects are just taking a cue from one another. However, as the NFT field matures, the licensing terms are becoming more detailed. The Bored Ape Yacht Club collection may be the first example of an NFT project growing out of a niche market and increasingly integrated into the big business. This inevitably leads to the need for a more professional approach, including clarity in licensing terms. “Perhaps in the future, we will see effective and thoughtful legal regulation of NFTs. But currently, there is none, and for now, even just defining NFTs within the existing legislation is quite difficult,” Tugarin states.

Concluding the report, Galaxy Digital analysts recommend that the owners of NFTs struggle for clarity of their intellectual property rights and that the projects and their creators find ways to validate their property, adequate to the realities of a decentralized Internet. Otherwise, the whole field of NFTs runs the risk of becoming a product of a bygone era, which marketers present as a new word in the concept of Web3. In an interview with Coindesk TV, Thorn brings enthusiasts back to reality by saying that “if you think NFTs are this revolution in digital property rights, which many do, we’re a long way off.”