Since their inception, unique (non-interchangeable) tokens, known as NFTs, have been positioned as one-of-a-kind. At least within the native blockchain. NFT standards (ERC-721, ERC-1155) imply that two NFTs with the same content cannot exist in one blockchain. But what happens if you copy not a token or a collection, but the whole blockchain?
How NFTs differ from other tokens
Unlike most tokens that exist entirely within the parent blockchain, many NFTs are there only as a kind of mapping, an avatar of external objects. In some aspects, they can be compared to stabelcoins, which reflect in the blockchain the value of external assets (e.g., a bank deposit in dollars). Token transfer does not mean a physical transfer of dollars, although in most transactions it is conventionally equivalent.
While stabelcoins are not tied to the blockchain economically, NFTs are essentially outside it legally. The basis of NFT value is the copyright and proprietary rights to the image or other work of art associated with that token. These rights are tied to the object itself, not to its hash in a particular blockchain. This applies even to digital art objects originally created in blockchain. On the other hand, most NFTs only have value because they are stored on a blockchain.
Without delving into the whole creative mess of different types of NFTs, they can be divided into three big categories:
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Digital art objects that originally exist on the blockchain. These are the most popular and actively traded collections, such as cryptopunks (and technically these are ERC-20 tokens), bored monkeys and the like. This also includes NFT-embedded AI creativity and the works of “digital artists” who created with the NFT in mind.
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Collectible and gaming tokens. These are sets of tokens issued and distributed by commercial organizations under certain conditions. This includes tokens from various sports clubs and associations, as well as in-game items purchased or earned by players. The legalities of owning these tokens are, of course, described in the license agreements, but few people read them.
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Tokenized artwork from the real world. This includes, for example, the collections of the Hermitage and other museums, art groups, individual authors, and performers.. As a rule, ownership of tokens does not give rights to ownership of the tokenized object itself. The rights here are also governed by the issuer’s offer or other contract that exists outside the blockchain.
Even a layman can see that such a legal zoo is extremely confusing and without any hardforces. The lack of high-profile trials so far means that there is rather a lack of awareness of possible contradictions. In practice they have not yet had time to accumulate, but in time they will definitely show up.
What will happen to NFT after the hardforward
The situation described here is in the nature of speculation and is not related to a specific project or collection of tokens. All of this can happen either as a result of the impending Ethereum hardforward due to the transition to PoS, or after the hardforward of any blockchain for any reason. If there are enough valuable NFTs on it. From a legal standpoint, all blockchains look similar, and the precedent set is likely to apply to all similar situations.
The legal framework for NFT
The copyright subject matter to which most NFTs relate is regulated in a similar way in most countries. The modern approach began with the American DMCA. In Russia, the regulation of intellectual property rights, including works of art, is concentrated in Part IV of the Civil Code. The definition of NFT and its legal status is still missing in the Russian legislation, so for now we can apply only the general rules of intellectual property law to NFT.
Ownership of a work (text, image, audio or video) arises at the moment of creation, but if the case goes to court, the author needs to prove his priority. And that’s where blockchain, with its timestamps and non-rewriteability, has become a very handy tool.
From the moment an NFT is created, its “creator” becomes the author and copyright holder. Yes, that scary word is familiar to anyone who has downloaded (or, God forbid, distributed) pirated movies or software.
Copyrights are lifetime and inalienable, they cannot be transferred. But property rights are a common commodity. The copyright holder has full rights to the work and can do anything with it – sell, donate, trade, license it for limited use (that’s what all copyists do); in the end, destroy it and/or prohibit any public use of it. The main thing is to express your will in accordance with applicable law. Which is also outside the blockchain and not managed by the protocol, but by people far from perfect.
The bifurcation of uniqueness
After a fork, different events will occur in the resulting chains, and with proper technical “bifurcation” there will be no overlap of transactions and arbitrary back and forth asset migrations. With each block these chains will become more and more distant from each other and become more and more different. However, the legal problem of rights to copies of “unique” tokens will eventually come to a head.
The risks described below could materialize if both branches of the fork prove viable. That is, keep active development teams, a comparable community, and at least some of the projects that worked on the original blockchain. To avoid diving into the horror of multiple copying, let’s settle for a one-time hardforward.
When the blockchain splits as a result of the hardforge, the owners of all the “unique” NFTs stored in it will receive a copy of each of their tokens for free. And without asking or informing. A completely similar (as of the time of the fork) blockchain with all its contents will emerge. And there can be any number of forks, and therefore copies. In the case of Etherium, the entire ecosystem will be copied, including links to sidechains and other blockchains, all decentralized applications and, of course, tokens.
Thus, even a single bifurcated hardforward creates a massive legal mishap, and far beyond the NFT. Many items of intellectual property are copied without the consent of their owners, although without transferring ownership. In both blockchains, the token will be owned by the same wallet that owns it in the original. However, such a copy is not a reproduction, but a completely identical object. It destroys the uniqueness of the original. The worst part is that the hardfork does not legally determine which of the two instances of NFT is original and unique, and which is just a useless copy of a masterpiece.
Andrey Tugarin, managing partner of GMT Legal:
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– Let’s take the example of NFT, which transfers to the holder the rights to a real work of the material world. In the case of a hardforward, from a legal point of view, a serious question arises: which of the two NFTs would retain the rights to the actual artwork? Or will both NFTs retain the rights to the original work, which means that in a future sale both new purchasers of such NFTs will have equally similar rights to the original artwork? So far, there are no answers to these questions.
The value of both copies of the same token will be determined first by the market and then by lawyers. The subject of a dispute could be, for example, the transfer of rights when the owners of tokens in different blockchains change, if they are sold to different people. Or in case one of the NFT marketplaces recognizes tokens after the hardforces and the other does not.
Scenarios for different types of NFTs
For the types of NFTs identified above, the approaches to resolving contradictions and the consequences of a hardforward may differ. Let’s try to predict what might happen.
Items of digital art. A few years ago, it was completely ridiculous to suggest that a small pixel avatar could be worth several million dollars just because no one could create the exact same one in the Ethereum blockchain. But it happened, and pictures of punks and monkeys in spades in 2021 sold for seven-figure sums. It is the price of a mansion in a prestigious metropolitan area or a rare sports car.
The owner of the token is rightly proud of his “unique” acquisition. And suddenly learns that there are now two such monkeys. They are exactly the same.. And it can get even bigger.. Which monkey is worth millions, and which one can be given to a friend as a fun souvenir? Or split the price in half? Or would they be worth more than one in total? Or both will be worth less? His Majesty the market will decide.
Both NFT marketplaces and collection developers have choices to make. They can support one blockchain or both. But the decision of the marketplace cannot serve as a basis for changing the rights to the tokens belonging to their holders, regardless of the number of copies. However, the choice of marketplaces can significantly change the availability, and therefore the liquidity and price of tokens. The rights of collection creators are somewhat broader, but they can’t order token holders to consider one of the copies as true and the other as fake, either.
Centralized token collections in a sports club example. With collections of tokens, the value of which rests on the prestige and popularity of the organizations that issued them, not just anonymous developers, the situation will become even more confusing.
For example, a soccer fan honestly bought a collectible token from the official website. It would seem that he is the rightful owner of it. But the club itself owns the rights to its symbols and other attributes used in the token. And if the club decides to prohibit the use of its collection on one of the blockchain branches resulting from the fork, the owner of the token may disagree and sue. Or the club itself will sue the token holders who use the “wrong” collection. As the collectible token market grows, the likelihood of such contradictions will also increase.
Gaming tokens.. Various game artifacts also have a market price, although not in the millions of dollars. In games that use blockchain, they are “earned” by game activity or bought by players for cryptocurrency. But few players realize that ownership of these tokens is limited by the game developer’s license agreement. To a greater extent, this applies to industry giants, but all popular projects, even those created by crypto-anarchists, sooner or later come to monetize and create complex legal schemes aimed at protecting this monetization.
With gaming tokens, though, the controversy is less likely. If a game developer decides to focus on one blockchain (and no one can forbid it), the game assets in the other fork chain will naturally depreciate.
Tokenized works. This is probably the easiest option from a legal point of view. In most cases, token holders do not get real rights to the original work and essentially own a special type of reproduction or just a souvenir. The rights of the owner of the token are limited to the right to transfer that reproduction, and the rights to the work are retained offline by its copyright holder. Of course, lawsuits are possible in this area as well, but they are unlikely to set precedents beyond current practice.
The future is uncertain
For now, one can only speculate on how the courts will handle NFT-related disputes. And there may be conflicting decisions in different countries. Blockchain lawyers should already be digging into the codes and worrying about finding arguments for future processes.
Those who promote the high value of NFT emphasize the uniqueness of each token the most. Indeed, if the token is saved on the blockchain, no one else can create a token based on the same data, i.e. completely similar content. But if you change even one pixel in the image, it will be a different token. The blockchain protocol will not notice a difference of just one pixel – to it it will be different objects. This is the trick digital artists use to produce different versions of the same work. But that’s where timestamp priority comes in. The author of the original can always prove that he created his token earlier. Unless he loses the locked keys to the wallet in which the token was released.
However, the hardfork does something scarier. It doesn’t copy an NFT or even a collection of NFTs. It creates a copy of the entire environment where the NFTs are stored. Simply put, creating a copy of the blockchain creates completely identical copies of all the tokens stored in it. Without the knowledge of their rights holders, of course. And which blockchain, or rather, which copy of the token on which blockchain should be considered true? The original one, on the ETH1 blockchain, stored in the ETHPoW chain? Or the new one, transferred to the ETH2 chain? The first one is more original, the second one is backed by the Etherium development team. The very term “merger” used by Vitalik’s team should not be misleading – changing the consensus protocol creates new rules, and the community does not have to accept them. But the legal battle will be off the record.
This legal conflict is not easily resolved from the raid. A single centralized solution is not possible. The creator of each token or collection has the right to decide on which chain its “true” work is. And each rightsholder will get the same rights to their tokens in both blockchains. Otherwise, it smells like a dictatorship of the developers, deciding instead of the rights holder where his property is located. Therefore, the NFT copyright holder has every right to sue both Vitalik Buterin and Chandler Go.. Depending on your mood or the sharpness of your lawyer’s tongue.
Andrei Tugarin, managing partner of GMT Legal:
– Hardfork will create very serious legal complexities. One way of dealing with “clones” of the original NFT might be to recognize all rights to the real-world subject matter to one “original” NFT. Accordingly, copies of such an NFT do not transfer any rights to the real-world object underlying the NFT. Another way to solve the problem could be to assume that only ownership of both NFTs created as a result of the hardfork grants all rights to the original work. Time will tell which method will eventually be used, but either way it will undoubtedly be an important precedent for Web3 lawyers.
There’s another risk that lawyers can’t help avoid. There is a high probability of fraud in the form of simultaneous token sales on both blockchains, especially if the token has not moved since the fork. After all, tokens don’t have to be traded on marketplaces – direct transactions from wallet to wallet are also possible. In the blockchain browser, both versions of NFT look exactly the same. And inattention or ignorance on the part of the buyer can be very costly.