NFTs have a “Digital First Sale” problem

Good morning. Here’s what happens:

Prices: Crypto is once again becoming the domain of short sellers.

Insight: Interpretations of copyright law around the principle of digital-first sales are stuck in the Napster era, and have not caught up with blockchain.

China Token’s Lead Drops

When Asia opened for business on the first day of March, a number of Chinese tokens were deep in the red.

Short interest in these tokens continues to build, according to data from CoinGlass. NEO is split down the middle between longs and shorts, with 50.26% and 49.74% respectively, while CFX has dipped into majority short territory with 52.71%. Filecoin’s FIL, on the other hand, is almost smooth.

Meanwhile, bitcoin and ether also begin the day in the red. Bitcoin opens the business day in Asia at $23,141, down 1.3% while ether is at $1,607, down 1.4%.

CoinGlass data shows an almost even split between longs and shorts for bitcoin and ether.

Traders may be looking to the first jobless claims figures, scheduled to be released on Thursday, for guidance.

All eyes will be on bitcoin to see if it can push back and sustain $25,000, or if we go back to $20K.

NFT’s “Digital First Sale” Problem

Like many things in crypto, the law has not caught up with the speed at which the industry is moving.

That includes copyright law.

Based on a current but outdated reading of the law, the entire secondary market for non-fungible tokens (NFTs) is illegal. And the original creators of the NFTs could – based on how the law is understood today – invalidate the entire secondary market.

All because of something called the “first sale” doctrine and the current lack of a digital counterparty.

Why is there no digital counterpart? Because the courts’ understanding of technology is stuck in the Napster era.

The plate is yours, the IP mine

Do you have a Blu-Ray copy of “2001: A Space Odyssey”? Go ahead and sell it when you’re done viewing it. After all, the record is yours. But the same version downloaded from Amazon Prime’s store? You don’t own it. It is not yours to sell.

This is the tricky world of the “first sale” doctrine, outlined in 17 US Code § 109. The law dictates that you can sell your property, even when it contains copyrighted intellectual property such as a Blu-Ray disc of a movie or to and with A painting.

But should the copyrighted material exist in digital form, such as a movie in file format, a video game from the Xbox Live Store or a monkey jpeg, this is where things get complicated – and illegal.

Why? Because the courts believe there is no effective way to transfer a copyrighted digital file from one party to another while ensuring that the original is deleted (therefore the file is not reproduced, rather than just transferred).

Central to the debate about the digital right of first sale is the “inexhaustibility” of files.

When you sell a Blu-Ray or a book to someone, they have the only opportunity to enjoy it. But with computer files, there’s no concept of ownership—you’re simply given a license to use it—and the courts haven’t become comfortable confirming that a file has been deleted on the first user’s computer. After all, files are not “exhaustible”; they can be copied an infinite number of times. Or in crypto parlance, “double used.”

Durham points out that the US Copyright Office would not allow a “digital first sale” principle because it would have required a mechanism to ensure confirmation of deletion of the sender’s copy or some form of automatic deletion.

This is why digitally purchased movies and games come packaged with Digital Rights Management software that controls how you can use the file.

Around 2011, a company called ReDigi tried to offer an online digital peer-to-peer marketplace that tried to respect the first selling principle and bring it into the digital era.

On ReDigi, users would “forward and delete files.” There would never be two copies of the same file.

The courts didn’t like it, finding that it reproduced files and was thus an unauthorized reproduction, even though the original was destroyed.

“Policymakers have concluded that since digital transfers required the reproduction of a copy of a file (the work), digital transfers violated the exclusive right of reproduction,” writes Durham. “A digital distribution of a reproduced copy was thus unlawfully made, and outside the ambit of the first sale doctrine.”

Dual use and blockchain

But all this seems a bit outdated for the blockchain era.

After all, the blockchain’s key principle is to prevent double spending. Or, to put it another way, you cannot reproduce a bitcoin or an NFT. Should you be able to do this, crypto will have no shortage since it would be infinitely reproducible.

Dual use attacks are a critical threat to blockchains, and much has been done to try to prevent them.

So for NFTs, there can never be two of the same tokens. During a transfer of an NFT, there is no reproduction or transfer as there would be for ReDigi’s marketplace. There is no violation of the right to reproduction.

This is something that is only possible with blockchain, before we just sent copies of the file that would not qualify for protection under the first sale doctrine.

“Any unscrupulous NFT creator can invalidate all secondary sales of their NFTs through the outdated reading of § 109,” writes Durham.

After all, they didn’t authorize the sale. In a direct reading of the law, it would appear that Apple is going after someone who sells copies of songs they obtained from iTunes.

Of course, this is not going to happen. NFT creators expect, and almost always want, a lively secondary market.

But it is a case of the law not keeping up with the times. On the one hand, blockchain technology satisfies all the problems previous cases have identified with the nature of digital first sales. It’s just that there has to be a clarification from the courts, so there is no monkey business.

Coinbase will suspend trading of Binance USD (BUSD) starting March 13 because the stablecoin does not meet listing standards, the US cryptocurrency exchange announced in a tweet on Monday. Lumida CEO and co-founder Ram Ahluwalia shared his reaction. Separately, Forbes reported that Binance moved $1.8 billion in collateral to back its customers’ stablecoins to hedge funds last year. Forbes director of data and analytics Javier Paz joined the conversation. And bitcoin (BTC) continued its weekend camp near $23,500. Options Insights founder Imran Lakha shared his crypto market analysis.