NFTs: CMS Committee highlights scale of potential copyright infringement

Last year, NFTs were everywhere and IP lawyers across the country were grappling to understand their potential impact on IP rights. This year, we’ve heard very little about them. Until now. A few weeks ago, the House of Commons Culture, Media and Sport (“CMS”) Committee published a report entitled “NFTs and the Blockchain: the risks to sport and culture”. Intellectual property issues and copyright infringement feature heavily in this report, with the CMS Committee describing them as the “most pressing” issues creators and consumers face from NFTs in the art and culture sector. 

In this blog, we look at what NFTs are, discuss some of the key IP issues with NFTs that are identified in the report and highlight the solutions and recommendations proposed by the CMS Committee to address them.

What are NFTs?

NFT stands for ‘non-fungible token’. A type of cryptoasset, an NFT is a unique piece of code on a distributed ledger such as a blockchain, which is capable of being traded and which is linked to or represents an associated asset – often (although not exclusively) a digital asset such as digital artwork. 

NFTs are regarded as “nonfungible” as each token has a unique number or ID which is tracked. This means that no two NFTs are identical – one is not equivalent to another and they are not mutually interchangeable in the way that fungible assets such as gold are (see further our publications here and here).

One of the main attractions around NFTs in the digital art space is that they look to create artificial scarcity (and, closely related to this, collectability). They also, theoretically at least, make it easier for artists to collect resale royalties on secondary sales of their works. 

However, as with many emerging technologies, they are open to abuse and have given rise to several new risks and issues for creators and consumers alike, including with respect to IP.

What IP issues are identified in the CMS Committee report?

The most pressing issues identified in the report relate, perhaps unsurprisingly, to copyright infringement. Whilst it hasn’t yet been tested in the English courts, many people hold the view that creating (or “minting”) an NFT for a digital artwork without the rights owner’s permission amounts to copyright infringement. The CMS Committee appears to have endorsed that assessment by stating that “creating an NFT from a creative work…is a restricted act under copyright”.

And, it appears that the potential scale of infringement is high, with the CMS Committee referring to it as “widespread” and “systemic”. In part, this is due to the ease with which an infringing NFT can be created. But “lazy minting” processes (which effectively allow sellers to pass the upfront costs of minting and selling an NFT onto the buyer) are also identified as a contributing factor. 

Whilst the usual lines of enforcement may be available to rights holders in principle, they may be of limited use. Legal proceedings are often not practical or appropriate in these sorts of cases and, whilst many NFT marketplaces offer notice and takedown procedures, they can be time consuming to file (compared to the ease of minting) and don’t protect against those same works re-appearing in new NFTs. The immutable nature of blockchain technology also causes issues when looking to remedy infringement.

As for bringing a claim directly against the NFT marketplaces themselves, they are likely to be protected from liability under the safe harbour provisions set out in the E-Commerce Regulations 2002.

What recommendations has the CMS Committee made?

Acknowledging the importance of IP rights for artists, the CMS Committee recommended that the Government:

• engages with NFT marketplaces to address the scale of infringement and enable copyright holders to enforce their rights; and
• address the impact of the safe harbour provisions by introducing a code of conduct for online marketplaces operating in the UK, including NFT marketplaces, that protects creators (as well as consumers and sellers) from infringing material sold on these platforms.

There were also some suggestions from contributors that the UK should look to adopt measures akin to those introduced in the EU under Article 17 of the Directive on Copyright in the Digital Single Market. That article sets out a new liability regime for online content sharing service providers in the EU, which provides less protection than the existing UK safe harbour. Whilst Article 17 doesn’t apply to online marketplaces, the CMS Committee appeared interested in this and has asked the Government to publish its analysis of the implementation of Article 17 (as well as other approaches taken by countries outside the EU), by the end of the year.

Comment

The hype may have died down around NFTs over the last 6 months or so, but the IP issues they give rise to remain very real for many rights holders. They will therefore be pleased to see the publication of this report and the CMS Committee’s recommendations, and will no doubt be watching with a keen eye to see how the Government responds. 

More broadly, the thrust of the “Art and culture” section of the report and its focus on the roles and responsibilities of NFT marketplaces like OpenSea seems to fit with the continuing trend of holding larger tech companies and online marketplaces to account for IP infringements taking place on their platforms (see e.g. here and here). 

We, for one, will be keeping a close eye on whether a code of practice for online marketplaces materialises and are looking forward to hearing the Government’s views on the implementation of Article 17 in the EU.