What Happens When You Own an NFT?

NFT's legal issues, as well as NFT-related policies and legal documents, are always concerns of NFT buyers and sellers. This article will not go into technical analysis but will present an easy-to-understand presentation so that investors, NFT traders, and those without professional legal knowledge can also understand and find it interesting.

If you purchase an NFT, your absolute ownership of the NFT is undisputed. However, the issue of ownership arises when NFTs are attached to physical assets, which are commonly works of art such as paintings, photographs, music, and videos. This is a special type of property - intellectual property and always comes with copyright.

Unlike normal physical assets, NFTs are purely digital assets. There can even exist parallel two instances in the same NFT asset if the real-life asset is digitized, then the owner is identified by NFT – that is, the original physical one and the digital one.

So what does a buyer actually own when he/she acquires an NFT?

Let's take a look at the two ways in which NFT assets are created: One is the original asset from real life; The second is to initialize NFT assets directly digitally.

1. NFT real-life original assets

Referring to art is referring to intellectual property rights. Since there is no law governing NFT in most countries, we need to consult the relevant legal regulations in the world on intellectual property (IP). Under the Copyright Law of the United States, the author is the creator of the original and first version of the work. The author owns the copyright unless he/she agrees in writing to transfer the rights to another person. The author has the exclusive right to copy, distribute, modify and publish the work. This is also the approach to the copyright of many countries around the world, including Vietnam.

Behind a real-life digitized NFT work, three assets coexist: NFT digital asset, the physical underlying asset, and the copyright accompanying the original asset. So what property does the buyer have the right to own?

First, the buyer owns the digital asset, which is essentially a cryptographically created copy of the original asset. Thanks to NFT technology, this copy is considered unique in the market and the buyer's ownership is also authenticated. Next, whether a buyer owns more physical assets in addition to digital assets is up to the seller (or author), and will be clearly noted in the transaction's introduction. 

Finally, according to the rules analyzed, the copyright belongs to the seller. The seller retains the exclusive right to commercially exploit the original work, for example, to make other copies, even to resell the original work to a third party.

Buying an NFT work is similar to buying a physical work in that there is no automatic transfer of copyright unless otherwise agreed upon between the two parties.

The buyer has title to the NFT work, but does not have any rights to the original work, much less to create subsequent copies of the NFT work – this is a limitation of the owner's ownership rights.

2. Initializing NFT assets digitally 

For assets created on a digital platform that is then tokenized, there will be no physical original assets.

Instead, there are three types of assets: NFT Digital Assets, original assets in digital form, and the copyright that is attached to the original property.

Similar rules can be applied to the IP regulations of the US or Vietnam. To visualize, we look at the NFT version of the Nyan Cat Meme, which was auctioned for US$590,000 on the crypto art platform this past February (2021).

The buyer only owns the NFT copy, while the author retains the original digital work (original meme) and associated copyright (including rights such as copying and distributing the original meme work).

Other Aspects of Owning NFTs: Royalties and Smart Contracts

NFT royalty fee

In addition to satisfying the hobby of collecting, buyers are willing to spend large amounts of money on NFT for investment purposes, ie reselling for profit (resale). This resale means that the buyer is using the artist's copyright, specifically the right to distribute copies of the work, which is included in the group of property rights under the 2005 IP Law.

To exercise this right, the artist (the licensor) must transfer the right to use the copyright to the buyer (licensee) through a type of contract called a licensing agreement.

One of the most common payments in a contract is royalty. This is the amount the licensee has to pay to the licensor, usually as a percentage of the revenue earned from the use of the copyright. Some countries in the world, such as Germany, allow authors to continuously benefit from the exploitation and increase in value of their works (German Copyright Act). This explains why the concept of NFT royalty exists, which allows the artist to generate passive income by receiving a portion of the selling price each time the NFT work is resold on the exchange (secondary sales on). marketplace).

Depending on each exchange, the calculation of NFT royalty is different, usually from 5-10% of the value of each resale transaction. Let's say the artist creates an NFT painting on OpenSea and sells it for 8 ETH, plus 10% royalty. The work is then resold by the buyer to another party for 100 ETH. Immediately 10 ETH royalty will be automatically transferred to the artist's wallet. As long as the new buyer resells this work, the artist continues to receive 10% royalty, and the process repeats itself.

If only selling physical works, mostly after the first sale, it is difficult for the author to control the timing and value of subsequent resale. If the work is not a big hit, the artist has little chance of making extra profits from the works that have been sold. NFT royalty now becomes a great opportunity to increase income and profit for artists.

Smart contract

A generated NFT is not automatically associated with royalty. Royalty must be recognized as a provision in the smart contract between the buyer and the seller in order to be automatically enforced.

About smart contracts: this is a special set of protocols based on blockchain technology, capable of automatically performing agreements between the parties in the contract. Only with the internet, smart contracts allow parties to perform contracts accurately and quickly, without knowing each other's identities, without meeting face-to-face, and without the intervention of an intermediary third party. A smart contract is equivalent to a legal contract but is written in a programming language.

When the author sells the NFT asset to the buyer, a smart contract is automatically formed between the two parties. NFT smart contract includes the contents of the NFT sales contract and the license contract between the author and the buyer. Which clearly defines the selling price of NFT assets, whether or not there is a transfer of copyright or copyright use rights, the scope of the rights to be transferred, royalty, etc.

Thanks to blockchain and smart contracts, the royalty mechanism as well as many other conditions in the buying and selling process are designed automatically and precisely.

Conclusion: Understanding NFT Assets

If you purchase an NFT, your absolute ownership of the NFT is undisputed. Generally speaking, the NFT buyer only owns the NFT copy of the artwork, while the author or artist retains the copyright to the digital work and can create non-NFT copies of the art.