Why the token hype could become zero

NFT have advanced to become the beacons of hope for the battered art business. A new sales market is being created for creative people, while buyers benefit from increases in value. The supposed win-win situation could, however, amount to a huge zero-sum game. Because what is actually acquired with an NFT is anything but clear.

Beeple did it, Eminem did it and Jack Dorsey couldn’t help it either: Non-fungible tokens are storming the auction houses and are fighting the copy-paste culture of the Internet age. There are hardly any limits to your imagination. From art to music to short messages: There is hardly anything that cannot be shown in token form and brought to buyers via marketplaces such as Rarible, Nifty or old-fashioned houses à la Christie’s and Sotheby’s. But while the art business continues to buckle its belt, the hype for buyers could still take its revenge. Because the legal situation is more than thin. What exactly is actually acquired with an NFT is still in a vacuum.

The empty promises

Non-fungible tokens are basically cryptographic signatures of digital content that are secured on a blockchain network. The majority of the NFT have so far been based on the Ethereum blockchain and are based on the so-called ERC-721 standard, which guarantees the uniqueness and indivisibility of the tokens. In contrast to payment tokens such as Bitcoin, each token is unique and cannot be duplicated. But what justifies the price of an apartment building for a file that is basically easy to copy? After all, a Beeple work is freely accessible on the Internet and can be dragged onto your own computer with just a few clicks, even without the NFT.

The answer is as banal as it is complex: an NFT buyer owns the NFT, not a pirate. The core promise of the NFT industry is based on this: In addition to the actual content, such as music titles or images, buyers also receive the rights to the work. The claim to ownership of the respective work and thus also the exploitation rights are evidenced by a smart contract. An NFT buyer can do whatever he wants with the work and has thus acquired a lifelong system. An Eminem or Beeple NFT could be used for advertising purposes, for example. The structure of a smart contract also allows the distribution of royalties, which can be distributed along the value chain, from the creative to various intermediaries to the end customer.

“Anyone who acquires an NFT without exploitation rights may not even publish the content themselves”

But this is exactly where the problem arises, because: “A transfer of rights does not take place without further ado when selling an NFT,” explains media lawyer Severin Riemenschneider to BTC-ECHO. Although the minted NFT is exclusive content from artists, “a transfer of copyrights is not normally associated with it”.

The NFT is more like a hand-signed workpiece. Whoever buys a hand-signed record does not necessarily acquire a copyright or exploitation right to the music.

Severin Riemenschneider, Media law firm Frankfurt

NFT acts rather “as a way to provide digital content with a unique signature”. But even this comparison is already lagging, says Riemenschneider: “because the signature is not linked to the work, but is in the ledger of the respective blockchain”. The blockchain does not contain the entire work, “just a link to it”. If this link were dragged on and therefore lead nowhere, there is nothing less than a total loss.

Although it is possible “to grant exploitation rights at the same time as the NFT”, this still requires a corresponding contract. The tokens thus complicate more than they simplify, because “the contract is relevant to copyright, not the NFT”.

Anyone who acquires an NFT without exploitation rights, and that should be the rule, is not even allowed to reproduce or publish the content themselves.

Severin Riemenschneider

In any case, it is worth taking a closer look. NFT is not just NFT. In the major companies in particular, the three letters are likely to be used as a catchphrase for marketing strategies. The band “Kings of Leon” has also hit the NFT advertising drum extremely well for their latest album. However, only “auction terms” are associated with the purchase, no exploitation rights. “According to their terms and conditions, buyers are given permission to exhibit the artwork created especially for the NFT versions for their own, non-commercial use. Rights of use to the music itself are not granted”, lawyer Marion Goller explains to BTC-ECHO. In this case, the tokens are more of a gimmick than an investment and no more than a poster.

Last but not least, there is a great risk of abuse in the market. Texts, images or even music titles are fair game on the Internet. Who guarantees that only those who mint the NFT who have the “right” to do so? Some NFTs have already been minted by people who “have no copyrights whatsoever to the content in question”. Beeple fakes are also already circulating on marketplaces, which can hardly be distinguished from the original NFT. The forgeries may be more noticeable in his pictures. The smaller the artist, the more difficult it should be to follow up. NFT are not copy-paste-resistant after all.

No one size fits all solution for NFT

In many ways, the NFT hype threatens to result in a zero-sum game. From a legal perspective, the NFT market is a huge gray area. Which promises can be kept will only become apparent when the license agreements are embedded in uniform regulations. However, it remains to be seen whether NFTs are the big game changer for art, music or literature.

In the eyes of their fans, NFTs should replace copyright with technology in the long term. But it is very questionable whether they will be able to do that. A blockchain-based register of copyrighted works would be useful; but that is not an NFT. NFTs are also unnecessarily complex to enforce. Known mechanisms of digital rights management (DRM) are more suitable for this.

Marion Goller, Media law firm Frankfurt

This background explains the reluctance of the collecting societies. The three big collectors for publishers, artists and labels – GEMA, VG Wort and VG Bild-Kunst – seem to be observing developments from a distance. However, there can be no talk of a trend reversal in copyright law.

A GEMA spokeswoman told BTC-ECHO that NFT “also causes a lot of discussions in the music industry”. But “numerous legal, technological and economic questions still need to be clarified”. GEMA is following these developments and “is currently analyzing the possibilities and effects”. Due to the “complexity of the use cases” there is very likely no “one size fits all solution” – simply “because NFT is not the same as NFT”. Urban Pappi, Managing Director of VG Bild-Kunst, confirms: “At NFT could the ownership can be seen in a transfer of the exclusive copyright rights to the new “owner”. But there is still a lot in the subjunctive, “because there are final exams here”.

Streaming services are calm

The major streaming platforms are also rather reluctant and seem to be calm about the trend. NFT could just re-regulate the distribution of royalties and thus also shake the remuneration models of the music services. At least if more artists and especially great artists sell their works exclusively on the NFT market.

But then the cat bites its own tail. Big artists and labels benefit first and foremost from the streaming platforms and have no interest at all in distributing exploitation rights for music via NFT. When asked, both Amazon Music and Deezer stated that NFT content was “not an issue at the moment”. Spotify did not want to make a statement, Tidal did not respond to a request. However, it is questionable that the tokens will provide more discussion there.

So whether NFT can keep what they promise remains to be seen. It is undisputed that the tokens have immense potential. That alone shows the variety of their possible applications. On the buyer side, however, expectations should be throttled. Quite a few tokens fall under the fan gimmick category. When the smoke clears in the market, the gold rush mood could turn into great disenchantment.