Part II: When Jumping Chains, Do NFTs Stay the Same? Ordinals on the Bitcoin Blockchain | Proskauer – Blockchain and the Law

As discussed in Part I in this series, Ordinals is a groundbreaking new method of using the Bitcoin blockchain that will usher in new and innovative use cases for Bitcoin. As promised, i Part II we will discuss the implications for creators and owners.

Implications of ordinary NFTs for creators and owners

As with most crypto innovations, savvy users quickly flocked to the shiny new object. Copies of popular Ethereum NFT projects started appearing on the Bitcoin blockchain after the launch of Ordinals. For example, a clone of CryptoPunks, called Ordinal Punks, appeared and is said to be gaining traction. Furthermore, the owner of Bored Ape Yacht Club (“BAYC”) #1626 permanently removed the NFT from its place as one of the most valuable in the space by “burning” it, and then writing the NFT to Bitcoin using Ordinals. While the owner of BAYC #1626 effectively deleted – or symbolically transferred – NFT, it appears that some NFT creators are not purists and are willing to experiment with Bitcoin. For example, Yuga Labs, the creator behind the Bored Ape Yacht Club Ethereum-based NFT phenomenon, announced that it would release an NFT project called TwelveFold on the Bitcoin blockchain.

In our December article we asked: what do hard forks mean for my NFTs? In this article, we ask a similar question: how does a copy of an NFT on a completely different chain (Bitcoin, not Ethereum) affect value and licenses?

A number of questions arise. Does the holder of copycat Ordinal on Bitcoin require a license equivalent to Ethereum NFT? What happens to the Ethereum NFT buyer’s rights granted to it under the license, which may include a commercial right to exploit and sublicense? Does an Ordinal Inscription of an Ethereum NFT fall under a buyer’s general non-commercial use and public display rights typically granted to buyers in NFT marketplaces? Does the original Ethereum NFT holder have one set of rights and the holder of the copy on Ordinals has some rights that may conflict with the original NFT holder’s? Generally speaking, would the value of NFT be affected if two identical copies exist on two different blockchains? Does the NFT owner or project have a say in which blockchain will be recognized? Has there been an IP breach?

These rights are not insignificant, as the holder, depending on the license grant, is usually permitted to display or otherwise use the NFT in a non-commercial way, and in some cases may even be able to exploit commercially, or provide a person(s) right to commercial exploitation, NFT. Understanding which package of rights, and whether others share that package, is useful for valuing the NFT and its underlying IP, as well as branding.

As with everything in the ever-evolving cryptosphere, there will be variation in how licensing agreements address these issues. Certain license agreements may provide clues as to how this problem can be handled. For example, the terms of one NFT marketplace, the Raribles Standard Collectibles Sale and License Agreement (“Raribles Agreement”), indicate that it only recognizes NFTs on Ethereum:

“Collector’s item” means the combination of: (A) an Ethereum-based NFT having a Uniform Resource Identifier (“URI”) that identifies a properly configured JSON file that conforms to the ERC-721 Metadata JSON Schema, ERC-1155 Metadata URI JSON Schema, or a similar JSON schema, as applicable ( such JSON file, ” Collectible ID “); and (B) the collectible metadata specified by such collectible ID.”

[While the Rarible’s Agreement only recognizes Ethereum-based NFTs, the Agreement does recognize NFTs on each chain after a hard fork]:

“Collector” of a Collection Object means at all times, the person who legally has exclusive right to and ownership of NFT included in such Collection Object, for as long as such person continues to have such right to and ownership of such NFT. All references to “Collector” include the Collector’s lawfully permitted successors and assigns. In the event that an Ethereum Persistent Fork creates copies of the Collectibles at the same addresses as they were then held on Ethereum, the scope of the term “Collector” and all licenses granted to and other rights of a Collector under these Terms shall be deemed extended to include each person who legally has exclusive right to and ownership of the copies of such NFTs included on the Ethereum Persistent Fork. The parties acknowledge and agree that, as a result of the foregoing sentence, in an Ethereum Persistent Fork, the aggregate number of Collectibles may be increased, which may have a negative effect on the value of each Collectible or the aggregate value of the total. Collectibles.

This raises another question, what would be the effect if Rarible’s agreement (or other similar terms of use on an NFT marketplace) were changed to allow an increase in the overall number of collectibles as a result of a new activation on a new protocol, similar to how Rarible’s treats a hard fork?

Like Rarible’s, Yuga Labs, a Web3 developer of NFTs – including CryptoPunks and BAYCs – disclaims that each CryptoPunk NFT exists only by virtue of its ownership record on Ethereum Blockchain:

EVERY CRYPTOPUNK NFT IS ONE INTANGIBLE DIGITAL ASSETS EXISTING ONLY IN TERMS OF THE OWNERSHIP HELD ON THE ETHEREUM BLOCKCHAIN. ANY TRANSFER OF OWNERSHIP THAT MAY OCCUR IN ANY UNIQUE DIGITAL ASSETS WILL OCCUR ON THE DECENTRALIZED TOOL OF THE ETHEREUM BLOCKCHAIN, WHICH YUGA LABS DOES NOT CONTROL.

BAYCs include a similar provision in the ownership section. As such, under these terms, Yuga Labs has de facto designated Ethereum as its blockchain of choice. But while Rarible’s license agreement could lead to a doubling of the amount of “Collectibles” in the event of a fork, Yuga Labs, a Web3 developer of NFTs, reserves the right to specify which fork is valid for their remarkable Cryptopunks:

The license applies only to CryptoPunk NFT on the blockchain that Yuga, in its sole discretion, may designate, which designation shall apply retroactively. Thus, for example, if a fork or other event purports to result in duplicate CryptoPunk NFTs, only the non-fungible token registered on the blockchain designated by Yuga Labs will be eligible to receive the benefit of the license. Any license purportedly granted hereunder to the owner of a non-fungible token registered on a blockchain not designated by YugaLabs is void ab initio.

So, in addition to saying that CryptoPunks exist by virtue of the digital asset record on Ethereum, Yuga labs can designate the blockchain where CryptoPunks exist. When it comes to forking, Yuga Labs’ approach is similar to that of venture capital firm a16z, which issued five template NFT licenses, each providing the industry-recognized chain post-fork, merger or duplication.

Transfer and Sublicensing. The licenses granted in these Terms are non-transferable, except that if you lawfully transfer ownership of your Project NFT, the license to NFT Media in Section 1.1 to you shall terminate on the effective date of such transfer, and such licenses will be assigned. to the new owner of Project NFT linked to such NFT Media. As a condition to any sale, transfer or similar transaction of the Project NFTs, the transferee agrees upon the acquisition of the Project NFTs that (a) the transferee is not a restricted party and (b) the transferee agrees to these Terms. Further, if you choose to sublicense any of your Licensed Rights set forth in Section 1.1 above, you are permitted to do so only if any such sublicensees agree (i) that they are not Restricted Parties, (ii) to the same agreement that not to assert as set forth in the penultimate sentence of Section 1.2, and (iii) that if your Licensed Rights in Section 1.1 are transferred (for example, because you sell Project NFT), then any sublicenses you have granted in such Licensed Rights will automatically is terminated. Because virtually all public blockchains are licensed under open source licenses, it is possible that the blockchain could split, merge, or duplicate the original blockchain that originally recorded ownership of your Project NFT. In such event, rights granted under these Terms to owners of a Project NFT will only be granted to the legal owners of such Project NFT whose ownership is registered on the main network version of the blockchain that is generally recognized and predominantly supported in the blockchain industry as the legitimate successor to the original blockchain (as determined in its sole discretion).

However, under this version of the a16z NFT license, a16z does not specify that the only valid ledger of ownership is on Ethereum, so the license agreement can arguably be used with respect to an Ordinal inscribed on the Bitcoin blockchain. Furthermore, Bitcoin is neither a fork from, a merger to, nor a duplication of Ethereum, and the license is silent on NFT copies; However, the clear emphasis is that IP licenses will only be granted to the legal owners of a project on a “blockchain that is generally recognized and predominantly supported as the legitimate successor to the original blockchain” as determined in the sole discretion of the Creator. It’s an open question whether this language would give holders comfort if the argument could be made that their licenses are protected from copycats on an entirely separate chain, like Bitcoin.

Alternatively, since a creator can reserve the right to upgrade the NFT’s smart contract in the event of a fork, reserve the right to declare future restrictions on the NFT’s use, or remain silent altogether, a creator can also decide to skip all the way to a separate chain. In the absence of a license agreement or specific guidelines, Archer v. Coinbase, Inc., 53 Cal. App. 5th 266 (2020), provides some clarity on how new chains can be handled. IN Archer, a user claimed that a cryptocurrency exchange was needed to give him access to all forked versions of Bitcoin in his exchange account. The state court in California disagreed and reasoned that the exchange’s user agreement did not oblige the exchange to support all forks. The court also found that Coinbase’s refusal to support a new form of forked cryptocurrency was not action amounting to conversion, as Coinbase did not host the forked cryptocurrency in the first place, and thus could not have deprived the plaintiff of an ownership right or exercised dominion over the forked cryptocurrency the cryptocurrency. Accordingly, platforms for trading digital assets (token, NFT or otherwise) tend to expressly reserve the ability to decide which forks they support or otherwise reserve the broad right to impose future restrictions on transactions.

It remains to be seen whether Bitcoin will become a popular chain for NFT enthusiasts and projects. Regardless, the revolutionary features enabled by Ordinals raise new questions around NFTs and licensing agreements, so NFT issuers and marketplaces should consider the impact Ordinals may have on their business models and also re-evaluate relevant terms as needed to take into account any future NFT-enabled blockchains.

[View source.]