Fix errors in NFT licensing | K&L Gates LLP

[co-author: Josh Durham]

As blockchain and non-fungible tokens (NFTs) are still emerging technologies, their legal infrastructure is still evolving, creating potential vulnerabilities. Three such vulnerabilities in the NFT space were revealed in our previous article, “NFT Licensing: Three Mistakes to Avoid” (available here): (1) the absence of any license, (2) unenforceable implementations of licenses, and (3) a lack on legitimate license enforcement mechanisms. This follow-up article explores further solutions to such licensing errors.

As an overview, an NFT exists as a smart contract on a blockchain; it is a digital token that refers to one’s ownership of a unique digital asset, such as a certificate of authenticity of, say, a digital photo of a cat. While an NFT proves cryptographic ownership of a digital asset, only a legal contract proves actual, legal ownership of it. Thus, these solutions aim to unify both cryptographic and legal contracts around NFTs.

Adopt licenses at the marketplace level

If NFT creators do not accompany their NFTs with appropriate license terms, they may fail to protect their own intellectual property rights. But where does an NFT creator even begin? While each NFT creator can implement their own individual set of license terms, a more universal solution could be to allow NFT marketplaces to adopt standardized licenses that NFT creators can choose from.

For example, one marketplace provides creators with various Creative Commons licensing options and even a full copyright transfer, should the creator wish to sell the intellectual property itself, which will accompany each NFT listing. Another marketplace has its own licenses with specific provisions such as non-commercial exploitation, private use and reproduction that creators can choose from. Such practices at the marketplace level enable an effective way to ensure that NFT creators legally protect their intellectual property by using licenses.

Use cryptographic signatures to manifest consent to licenses

Even if a license accompanies the NFT, it may not be an enforceable contract if buyers do not show their consent to the license. Courts will usually enforce “clickwrap” agreements where users confirm the agreement by, for example, clicking “I accept” after viewing the contract. Less widely accepted “browsewrap” agreements, on the other hand, simply provide users with a link to the terms without ever requiring the user to click “I accept” to continue. Such agreements are unlikely to be enforceable unless the link is prominently presented to users, not hidden away on a website; and even then, there is still no guarantee that a court will find such browser agreements enforceable.

The authors are not aware of any NFT marketplace that has clickwrap or browsewrap infrastructure to support adequate contracts with buyers. A practical solution would be to use cryptographic digital signatures for the blockchain on which NFTs are traded. For example, on the Ethereum blockchain, NFT buyers must “sign” each transaction to purchase an NFT (ie click a button in the cryptocurrency wallet.).

The difficulty is that such cryptographic signatures are general features of blockchains, not the marketplaces themselves. Therefore, one potential solution is to allow marketplaces to prominently follow a “proceed to checkout” button with: “by signing this transaction, I agree to NFT’s license terms,” ​​while clearly displaying the terms or a link to them. Such an agreement is enforceable, and all it would require is to change a few lines of the marketplace’s front-end code.

Enable role-based access control in smart contracts

Even if NFT creators agree to license terms and they are confirmed accepted by NFT buyers, the terms may still not be practically enforceable. Suppose the license allows revocation by the NFT creator if the buyer damages the creator’s brand. How will the creator actually revoke the license in the event of a collision, especially when the buyer may be an anonymous person in a foreign jurisdiction? The answer lies in the NFT’s code itself (ie the smart contract).

A common practice in the blockchain space is to grant administrative authority over smart contracts to key individuals such as core developers, achieved through what is known as “role-based access control.” Unfortunately, this is not yet a common practice with respect to NFTs, but perhaps enabling some access control in the NFT smart contract could enable creators to perform critical functions such as revoking ownership, or “burning” the NFT, if the license is violated.

Access control in a smart contract can also be used for a number of other practical purposes. For example, it may make it possible to create a “whitelist” of addresses of controlled persons who are the only ones authorized to purchase NFT.

Conclusion

These approaches bridge the gap between smart contracts and legal contracts to address NFT licensing failures: (1) adopting standardized licenses at the marketplace level enables efficient licensing for creators; (2) use of cryptographic signatures enables practical manifestations of consent, making such licenses legally enforceable; and (3) creating role-based access control over NFTs allows for actual, programmatic enforcement of NFT licenses.

We acknowledge the contributions to this publication from our associate attorney, Josh Durham.