What Are NFTs?
The abbreviation of NFT stands for 'non-fungible token'.
Before diving deeper, let's look at the word "fungible". According to Merriam Webster's Dictionary, fungible means being something of such a nature that one part or quantity may be replaced by another equal part or quantity in paying a debt or settling an account or something capable of mutual substitution making it interchangeable. Cryptocurrencies can be fungible meaning all tokens are the same which can be traded or exchanged for one another as they are equal in value. For instance, one Bitcoin is always equal to another Bitcoin or Malaysian Ringgit is fungible because RM1.00 is interchangeable for another RM1.00.
On an opposite spectrum, non-fungible tokens unlike any other cryptographic assets are unique and incapable of replication due to their unique identifying codes. They are one of kind and runs limited. For instance, digital arts, collectibles, memorabilia, music, video games – the list is endless, but the current trend is mainly using tech to sell digital art.
To illustrate, each Pokemon card is unique, different and one-of-a-kind as they differ in value, which means they are incapable of being exchanged or traded. So, what happens when you own a Pokemon card in the digital world? A buyer of a Pokemon card gets to own the original item which contains built-in authentication that shows proof of ownership.
In essence, NFT is the digital version of a certificate of authenticity, embodied in the blockchain.
Nfts And Copyright Laws In Malaysia
Copyright Law in Malaysia is governed by the Copyright Act 1987. Generally, the author of a work is the creator of the work. For example, the writer of a book is the author and a music composer of a music piece is the author.
Section 13 of the Act states that a copyright owner has the exclusive right to control the following acts with respect to literary, musical or artistic works, films, sound recordings and derivative works:
- the reproduction in any material form;
- the distribution of copies to the public by sale or other transfer of ownership;
- the communication to the public;
- the performance, showing or playing to the public; and
- the commercial rental to the public.
A person who is not the copyright owner and who does any of the above acts, without obtaining permission from the copyright owner, commits a copyright infringement.
In the digital world in respect of NFTs, one common widespread confusing issue arises – if a NFT-buyer purchased a GIF belonging to Elon Musk, does actual ownership and intellectual property rights of that GIF now rests with the NFT buyer and no longer with Elon? In Malaysia, the law surrounding this issue is yet to be settled.
Generally, in Malaysia, a NFT buyer does not own the copyright of the artistic work created by the artist unless prior consent is obtained. In other words, the NFT buyer must first obtain Elon's permission to replicate, reproduce, and distribute the artistic work belonging to Elon for any commercial purpose.
Similarly, in the UK, under the Copyright Designs and Patents Act 1988 (CDPA), a transfer of copyright requires a copyright assignment in writing signed by or on behalf of the assignor.
Potential Issue On Copyright Infringement
Prior to the birth of NFTs, it was not possible to sell something like "the first ever tweet" – (Twitter CEO Jack Dorsey sold his tweet as an NFT for $2,915,835.47), or the digital art depicting apes in creative and imaginative designs, widely known as the Bored Ape Yacht Club – the infamous news that broke the internet when the owner of Bored Ape NFT accidentally sold their Bored Ape NFT for $3,066.00 due to a devastating "fat finger error").
With the birth of NFTs and its nature, owners of limited works and/or collections will be able to reach their audience directly.
The common misconception between NFT buyers is that they acquire the underlying work of the art and all its accompanying rights, when in reality, these buyers are simply buying the metadata associated with the artistic work; not the work itself – you're buying the cryptographically signed version of the art, not all the rights to that artwork.
One of the attributing factors that caused such confusion is the amount of money spent on the tokens. When a NFT buyer purchases a piece of art worth over USD 1 million, it is easy to assume that the buyer has acquired more than its metadata.
When an NFT buyer buys from the creator, they obtain ownership in the sense of that the NFT becomes their property – as NFT is a form of digital certificate ownership representing a purchase of a digital asset traceable on the blockchain.
However, the NFT holder does not possess ownership of other rights related to the work, especially rights conferred under copyright law, such as right to make the work available to the world at large, right of adaptation, reproduction and distribution – to name a few.
Likewise, in the non-digital world, if you buy a physical artwork; the owning of that artwork does not axiomatically give you the right to display the artwork in public or to sue for infringement of copyright if someone were to reproduce the image in the artwork without your permission. In order to obtain such rights, one needs to be owner of the artwork itself or obtain prior consent to have the copyright assigned to you by the creator.
By virtue of NFT's digital nature, it is easy to share, copy, screenshot, and reproduce. NFTs buyers need to know and understand that they would be committing copyright infringement without obtaining permission from the copyright owner.
To address the issue above, NFT owners have introduced terms embedded in the NFT, in the form of licence whereby NFT buyers have been granted the right to use the copyright in a limited way.
Owners of CryptoKitties NFTs for an example, have been allowed to make up to US$100,000 in gross revenues from them each year. To the contrary, Kings of Leon NFTs clearly stipulated that their NFT music was not to be made for commercial purpose.
NFT buyers should be aware of the authenticity of the creative work before making a purchase as blockchain of an NFT cannot absolutely know whether the creative work is authentic or otherwise.
Another growing trend of concern in the NFT marketplace, is a person who takes another person's work and tokenise it as an NFT, thereby infringing the rights of the copyright owner. Therefore, an NFT buyer must be sure that the NFT purchased originates from the original creator.
Conclusion
While Malaysian Courts have recognised Bitcoin as security and commodity under the Contracts Act 1950, arguably as it stands, there is no regulatory body governing NFTs.
The author of this article foresees an influx of these cases and one of it is going to be litigated and the issue on whether NFT is actually infringing a copyright holder's right will arise at some point.
NFTs have clearly raised ownership questions relating to copyright law and the law in Malaysia is still unsettled, thereby it is important for NFT enthusiast to consult legal advice in order to protect their own rights.
Originally published December 2, 2022
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
