Architecture and Hardware Law and technology

These Are Not the Apes You Are Looking For

Considering copyright licensing issues involving non-fungible tokens to manage creative works.
  1. Introduction
  2. A Stolen Ape
  3. What Are NFTs, Really?
  4. Conclusion
  5. Author
  6. Footnotes
Bored Ape characters, illustration

Imagine you want to stream some music. On today's Web, you would sign up for a service such as Spotify or Apple Music. These platforms have obtained copyright licenses from record companies and artists, and they offer you that music for a monthly subscription. The music streaming services are centralized intermediaries. They exist to connect musicians and fans, and in exchange they take a substantial cut of the money.

But a growing number of technology enthusiasts have a different vision, which they call Web3. To them, it "represents the next phase of the Internet and, perhaps, of organizing society.'a One of the pillars of the Web3 vision is tokenization: using representing ownership of different assets using cryptographic tokens that can be exchanged on a blockchain or other decentralized system. Only the person who knows the private key associated with a token can use or transfer it. A token can be used to represent anything, from frequent-flyer miles to hotel reservations. By transferring a token from user to user, it can record who owns an associated asset.

In a Web3 world, your music experience would be mediated not by Spotify but by tokens. Instead of signing up for a music service, you would buy a token directly from the artist. The token would represent your right to listen to the music. The token's cryptography would be tied directly into the digital rights management protecting the music, so that only token owners would be able to listen. In other words, the token living on a decentralized blockchain would let you and the artist automatically cut out the middlemen like Spotify, and maybe even record companies.

One of the sectors receiving particularly intense Web3 interest and investment is the creative industries. In this area, the tokenization push is being driven by non-fungible tokens (NFTs), cryptographic tokens that represent a unique asset. One banana is pretty much like any other banana, but a Picasso portrait and an Ai Weiwei sculpture are radically different. The tokens representing them are not interchangeable, or fungible, hence the name.

The most famous NFT project is the Bored Ape Yacht Club, whose collection of "Bored Ape" NFTs have been selling for hundreds of thousands of dollars. Each of the 9,999 Bored Ape NFTs consists of a token on the Ethereum blockchain linked to a JPEG cartoon drawing of an ape. The JPEGs were procedurally generated with different combinations of traits, including jackets, hats, and facial expressions. While they all resemble each other, each individual Bored Ape is unique, a bit like the different cards in a trading-card set

There is currently a push to move the economy in the direction of a wider use of tokens, and this is being driven mostly by a combination of Silicon Valley venture capitalists and crypto-currency holders and investors. If the funders, developers, and artists pushing NFTs and Web3 get their way, the media landscape will look very different from what it looks like now.

This might sound like a great idea, but only until you start looking in detail at how it would actually work. As soon as you do, there are serious problems at every practical level.

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A Stolen Ape

Actor Seth Green, who is most famous as the creator of the comedy series "Robot Chicken" and for playing Scott Evil in the Austin Powers movies, has been a vocal proponent of NFTs. Recently, he has been developing a new series called "White Horse Tavern," which will feature a mixture of live-action actors and animated ones. As Green explained in an interview, "it doesn't matter what you look like, what only matters is your attitude."

Part of the gimmick of "White Horse Tavern," is that the animated characters will be based on NFTs. For example, the protagonist, Fred Simian, will be based on Bored Ape #8398—whose traits include a skeleton shirt and a halo—which Green bought last year. Green could do this because the Bored Ape NFTs come with a copyright license letting their owners use the artwork to create "derivative works" such as TV shows.

If the funders, developers, and artists pushing NFTs and Web3 get their way, the media landscape will look very different from what it looks like now.

Unfortunately for Green, in May 2022 he fell victim to a phishing attack. A unknown hacker was able to obtain access to the private key securing Green's Bored Ape NFT and sold it to a third party for approximately $200,000. The buyer of the stolen ape NFT, who uses the Twitter handle DarkWing84, said they bought it in good faith and have no intention of parting with it.b

For a traditional video series based on traditional copyright licensing, a theft like this would be no big deal. The animators who work on Robot Chicken and other series have contracts letting the producers use their creations in the show. If the producers wants to include an existing character, they will get a license. These are written documents, drafted by lawyers, and in the names of all of the parties. Even if the actual physical document is stolen, the contract is still valid. Everyone still knows what it said because they all keep copies, and in many countries important documents are notarized or recorded to provide extra security.

But in the Web3 world, licenses, registrars, notaries, and contracts are supposed to be replaced by the block-chain and tokens. The blockchain never lies, goes the theory: whatever the blockchain says is the absolute truth. Whoever possesses the NFT owns the rights that come with it. That is what it means to "tokenize" rights. Code is law.

In this world, when Seth Green loses his Bored Ape NFT to a hacker, he also loses all his rights to the artwork associated with it. Now, Fred Simian, the star of "White Horse Tavern," cannot be played by Bored Ape #8398, because Seth Green no longer owns the rights. DarkWing84 does. Unless Green can buy back the rights for whatever DarkWing84 demands, the show will have to be reanimated with a different lead. Either way, a lot of his investment in developing the show and character was lost when his wallet was hacked.

In a Web3 NFT world, no production would ever be safe. Suppose Disney gets an NFT to license a pop song to play over a training montage in an upcoming Marvel movie. Filming and production go ahead, the movie is playing in theaters and on Disney+, and then the NFT is stolen. Does Disney have to pull the movie until it can recut the scene?

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What Are NFTs, Really?

Situations such as described here arise because there is little clarity regarding what one actually gets when buying an NFT. At its most basic, an NFT is just a chunk of data stored on a blockchain. Even if that data includes a link to some other asset, such as a JPEG of an ape or a pop song, the NFT is not the asset itself.

When a person buys an NFT, they are buying the NFT, not the artwork or music. Ownership of the token does not guarantee in any way ownership of the asset. People use all sorts of analogies to explain this. Some say an NFT is like a receipt, others say it is more like a treasure map. Either way, the token is not the thing. A receipt is not pretty to look at; a treasure map is not a treasure. An NFT is a chunk of metadata, and that is the extent of it.

Since an NFT is just a chunk of data, the transfer of an NFT does not confer any rights other than control of that chunk of data itself.

For some uses, this is enough. Some people give value to NFTs because owning one gives them bragging rights, like owning a rare stamp or other collectible. Other people value NFTs because they like being part of a community, or it helps them feel a connection to an artist. These are all legitimate reasons to hold NFTs.

But if the intention is to manage rights, then NFTs are a uniquely bad tool for the job. Seth Green's story illustrates one problem. An NFT is what lawyers call a "bearer" instrument, like a check that can be cashed by whoever physically has it. Checks can be stolen and cashed by the "wrong" person, and they can also be lost. Similarly, the owner of an NFT could lose the private key associated with it, and end up unable to prove they own it. Imagine paying big money for a copyright license and then being sued for copyright infringement anyway.

Another problem is that copyright licensing law is not designed for NFTs. If you buy an oil painting from a gallery, or a book from a bookstore, you do not get the copyright too, just the specific painting or book. If you want to buy the copyright, you need something more. Copyright law requires "formalities" such as signed written contracts for this and many other common licensing transactions.

But since an NFT is just a chunk of data, the transfer of an NFT does not confer any rights other than control of that chunk of data itself. While the blockchain transaction transferring an NFT to someone else must be "signed" using a private key, this is not likely to meet copyright law's requirements to also transfer copyright ownership. The result of this is that there are thousands of people who may very well believe they own some art, video, or sports highlight, when in reality they just own a link to those digital items. If you actually want to buy a copyright, the best way to do it is still the traditional way, not with a smart contract but with a "dumb" paper contract, signed and in writing.

Finally, even though NFTs are supposed to simplify licensing by cutting out the middleman, they can often make it more complicated by adding their own intermediaries, platforms, and third parties. If an artist sells an NFT, she might list it on a gallery website with the terms and conditions of the license, and sell it to a buyer on a marketplace such as OpenSea with its own terms and conditions. Then that buyer might resell it through a different marketplace with a third set of terms and conditions. The downstream buyer may not have agreed to the terms on OpenSea or the gallery website, or even be aware they exist. Now think about transactions further down the distribution chain, and the author's original intentions when licensing the work are lost.

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There could be perfectly legitimate uses for NFTs. It seems inevitable that we will start seeing tokens in different sectors of our lives, particularly given the economic investment that is pushing us toward Web3 (not to mention the nebulous concept that is the metaverse, which is a subject for another time). But NFTs are not good at managing rights to digital assets. Copyright licensing is the point where grandiose claims about a Web3 future of using of NFTs to manage creative works crashes back into reality.

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