So You Bought an NFT of a YouTube Video. Now, What Do You Own?
The market for Non Fungible Tokens (NFTs) has surpassed $2 billion, according to a report from NonFungible.com, and one of the first viral hits on YouTube — Charlie Bit My Finger — just sold for $760,000 in an NFT auction. But for all the activity in the market, the question has to be asked: what exactly are you buying?
A license. The majority of NFTs in their license agreements don’t convey ownership over the intellectual property being sold. What you purchase is non-exhaustible; there are still other copies out there, you just have the title to an authentic version. Imagine if the movie you downloaded from a streaming service like Google Movies or Amazon Prime came with a title to ownership of the license. After all, when you download that movie you don’t expect to be able to re-sell it or profit from its sales on the broader market so that title usually isn't a necessity.
Copyright attorneys Ryan W. McBridge and Silas K Alexander from Knobbe Martens, a law firm that specializes in IP, gave a rundown in a recent paper:
“From a legal perspective, when a buyer purchases an NFT attached to a copyrightable work, at most they may be purchasing a license to display the copyrighted work in a limited capacity. The copyright holder typically retains the rights of reproduction, adaptation, publication, and performance of the work. A person who buys an NFT cannot legally edit the digital asset and redistribute the work, even though they paid for it. They can display the work on social media, or they can transfer the NFT to another entity through resale if they choose, but they cannot reproduce any additional verified copies for a profit.”
The attorneys note that there isn’t much difference between purchasing an NFT and buying a song from the iTunes music store — with the exception that the NFT is traceable to the artist via the blockchain. Music from an iTunes store might have metadata that would allow for similar traceability, but it wouldn’t be as intuitive as linking it via the blockchain.
One of the most popular NFT applications is NBA Top Shots. These are virtual trading cards come with a highlight of the buyer’s favorite player from a recent game.
The license agreement attached to each Top Shot explicitly specifies that the purchase does not give you rights to “our copyright in and to the associated Art” nor can you “reproduce, distribute, or otherwise commercialize any elements”.
Do People Really Know What’s Going on?
Given the amount of money being splashed around the sector, one might expect there to be a significant amount of due diligence being done. Is a virtual certificate of ownership really worth hundreds of thousands if not millions of dollars?
There’s another theory that some stakeholders have been engaged in a form of wash trading to prop up and excite the market, making it more enticing to outsiders.
Consider the $69.3 million sale of Beeple’s Everyday: The First 5000 Days in March via Christie's auction house. Research done by cryptocurrency journalist Amy Castor points out that the buyer of the work, a crypto whale going by the moniker of Metakovan, which is believed to be a crypto executive by the name of Vignesh Sundaresan, has a financial interest in a bullish NFT market and specifically Beeple himself.
Castor lays out the case:
Metakovan is also behind Singapore-based Metapurse, a crypto-based investment firm. Metapurse’s mission, according to its website, is to “democratize access and ownership to artwork.” The firm has been acquiring NFTs. It purchased Beeple’s “Everdays: 20 Collection” artworks for $2.2 million in December.
Metapurse offers fractionalized ownership of all of Beeple’s works, with a catch. You’ll need to buy in via its B20 token. A successful NFT art market, with new buyers enthralled at the numbers being presented, brings in more users of the B20 token. It’s the network effect; tokenomics at work. Castor also points out that Beeple, the artist, owns 2% of all the B20 tokens.
The Washington Post also picked up on the issue of financial interest between Metakovan, Metapurse, and Beeple. Traders interviewed by the Post effectively had one interest in mind: the future of fractionalized artwork is B20, and the possibility of the success of B20 makes it an enticing investment opportunity.
“I invested because I want to make money, but I also want to be a part of the future of modern art,” one investor is quoted by the Post as saying.
“B.20 sounded fascinating because of the upcoming Christie’s auction and it sounded like a short-term speculation worth a try,” another trader is quoted by The Post as saying. “So I made my decision as a speculation mainly out of financial interest.”
All of this relies on a big bold market. The numbers go up with every blockbuster $69 million sales made.
Are All NFT’s Worth Millions?
For every multi-million dollar sale that dominates headlines and pushes up the value of the market as a whole, it’s important to remember that the real numbers are much more modest.
According to data aggregated by The Block, the seven-day moving average price of an NFT sale on CryptoPunks, an avatar marketplace, is around $100,000. On HashMasks, a similar marketplace, that number is just over $1,000. On some of the smaller marketplaces, it’s in the single digits.
Another report from industry publication ArtNet pegs average sales at around $200 — and that’s before the fees.
“NFTs are probably not the path to escape the hustle or to lift up masses of artists. Most can expect to get nickel-and-dimed,” the publication wrote.
Given the beginning of a crypto bear market, thanks to a combination of Elon Musk’s musings about crypto and fears of a further crackdown in China, deal flow and transaction volume have taken a hit with significant drops throughout the month of May.
The market could be realizing that the intrinsic value of NFTs are their future tradability, and it could be souring on this idea believing there was some stake of ownership included in the NFTs.
But NFTs Can Include Stake of Ownership
Even though the vast majority of NFTs confer no IP rights to the buyer, there is the possibility NFTs could include these in the future. After all, the smart contracts that power these tokens can easily be written in a way to confer ownership or even royalties.
One NFT platform called Zora allows for pre-defined contracts to be established so that buyers get a share of the royalties attached to the NFT’s IP, and sellers get a cut of secondary re-sale. BAND NFT is another example of fractionalizing the income from royalties via NFTs. Grammy-winning musician and producer known as RAC, is using this technology to provide liquidity to the next generation of artists while generating income through the minting of NFT tokens.
To be sure, NFTs have potential but they have yet to prove themselves aside from a few examples like BAND NFT, RAC, and other indie artists. A combination of suspected wash trading and hyping by crypto influencers primed the market, but ultimately it's becoming undone by skepticism and a macro bear crypto market. But that doesn’t mean we should lose hope in the underlying technology itself.