Roots Of Confusion Over “v1” CryptoPunks NFTs Raise Key Copyright And Practical Considerations For NFT Minters, Acquirers And Platform Operators – Technology

Minters of collectible non-fungible tokens (NFTs) have taken a
wide range of approaches. In addition to variations in the means of
distribution, token standards, governing smart contracts and
platforms on which initial sales or transfers are made, the terms,
conditions and content licenses (or lack thereof) under which users
take possession of an NFT often differ from project to project. The
recent delisting by OpenSea of the original (or
“v1”) version of the popular “CryptoPunks” NFT art collection in light
of a takedown notice issued pursuant to the Digital Millennium Copyright Act (DMCA) by the
collection’s creator, Larva Labs, and the ensuing DMCA counter-notification by v1 owners,
illustrates some of the challenges that can result from the absence
of clear written legal terms governing an NFT distribution.

What Happened With CryptoPunks?

In 2017, Larva Labs offered the original collection of 10,000
CryptoPunks NFTs (now commonly referred to as the “v1″
CryptoPunks) for free. However, Larva Labs quickly discovered that
the Ethereum smart contract governing the collection contained a code error that resulted in the buyer
of a CryptoPunk receiving back the proceeds of CryptoPunk resales,
leaving the seller with nothing. This prompted Larva Labs
to create a new “v2” collection of 10,000 CryptoPunks
NFTs governed by a different smart contract (without the v1 smart
contract defect), each of which is associated with the same
CryptoPunk image as one of the v1 CryptoPunk NFTs. Due to the
blockchain-based nature of the v1 NFTs, Larva Labs could not simply
fix or replace the problematic smart contract through an update or
erase and replace the v1 NFTs. As indicated in a series of Tweets by Larva Labs, after creation of the new
smart contract, each v1 CryptoPunk that was sold was returned to
the wallet to which it was initially issued (i.e., the owner who
originally received the NFT from Larva Labs for free). Each v2 NFT
was then “airdropped” to the wallet address of the
holder of the corresponding v1 NFT.

To add further complexity, the v1 CryptoPunks were initially
offered without any written content license or governing legal
terms. In 2019, long after the issuance of the v1 CryptoPunks,
Larva Labs announced, via a post on the social media platform Discord, that
it had adopted an NFT license drafted by Dapper Labs as a
proposed standard for NFTs. That license permits limited commercial
use of the content associated with an NFT, including the right to
display it on a marketplace for purchase and sale and to sell
merchandise up to $100,000 in gross revenue per year, but does not
grant the right to create derivative works. It was not clear from
that Discord post whether that license was intended to apply only
to v2 or also to v1. In 2021, Larva Labs added a Terms and Conditions page to the CryptoPunks
website, but it does not discuss permissible use of NFT content and
does not link or refer to the 2019 license.

Roughly five years following the release of the v2 CryptoPunks
(which has become one of the most valuable NFT collections ever
created), a community consisting of v1 CryptoPunk owners,
developers, NFT enthusiasts and others were able to work around the
original smart contract defect by “wrapping” v1 CryptoPunks in a new
smart contract, which enabled proper resales of the v1 CryptoPunks.
As explained by the v1 CryptoPunks community, the
only difference between the unwrapped v1 CryptoPunks (containing
the smart contract defect) and the wrapped v1 CryptoPunks (which
work around the issue) is the background color. The v1
“revival” has led to trading of both v1 and v2
CryptoPunks and Larva Labs’ Tweet that the v1 NFTs “are not official
CryptoPunks”.

So far, this has culminated in Larva Labs’ DMCA take-down notice to OpenSea and OpenSea’s
removal of v1 CryptoPunks listings to avail itself of the
DMCA’s “safe harbor” protection against copyright
infringement liability (which service providers may qualify for
with respect to content stored on their platform at the direction
of a user). In response, the community that revived the v1
CryptoPunks submitted a DMCA counter-notification contesting the legitimacy
of the take-down notice and seeking reinstatement by OpenSea. Section 512(g) of the DMCA insulates service
providers from copyright infringement liability for reinstating
taken-down content following receipt of a “counter
notification” from the user that satisfies certain
requirements, if the service provider promptly provides a copy of
the counter notification to the take-down notice submitter and
informs them that the content will be reinstated in 10 business
days, unless, before then, they file an action seeking a court
order to restrict the allegedly infringing activity.

Questions Raised and Practical Tips

“Ownership” of an NFT, in the absence of written terms
with the minter stating more, generally evidences only the
“owner’s” ability to possess and control the
disposition of the NFT (i.e., the token on the blockchain) itself,
and not the acquisition of any intellectual property right in, or
license to, any content to which the NFT is associated. The history
of CryptoPunks highlights some of the conundrums that can result
from the distribution of NFTs without clear written legal terms.
For example:

• What scope of license (if any) to the associated content is
  granted by implication to an NFT owner when the NFT is transferred
  to that owner without any express license? How will the specific
  facts and circumstances (and, in particular, the technical aspects
  of blockchain-based NFTs and how they are created and distributed)
  impact that analysis?




• In what events can such an implied license be revoked or
  terminated by the copyright holder?




• To what extent can license terms “adopted” by an NFT
  minter after NFTs have already been issued without written terms
  effectively become the terms governing those NFTs and the
  associated content?




• To what extent can an NFT minter that owns the copyright in the
  content associated the NFT issue a valid DMCA takedown notice to an
  NFT marketplace operator requesting that the NFT be delisted, if
  the NFT was distributed without an express content license grant to
  the recipient?




• To what extent can an owner of an NFT described in the question
  above validly submit to an NFT marketplace operator a DMCA
  counter-notification in response to the minter’s takedown
  notice?




• What legal and practical approaches will be taken to
  effectively administer “product recalls” in the NFT
  context without undermining the philosophy underpinning
  blockchain-based digital assets?




• Will Congress update the DMCA in light of new
  considerations raised by NFTs, the metaverse, Web 3.0 and other
  developments? If so, how?

The ongoing v1 CryptoPunks issues serve as an interesting case
study to illustrate certain key considerations for NFT minters,
acquirers and platform operators, such as:

Minters

• To avoid uncertainty over whether the owner has been granted by
  implication a non-exclusive license to the content, and what the
  scope and nature of that implied license (if any) is, best practice
  is to expressly grant to the owner of the NFT a license to the
  content associated with the NFT and specify the parameters of that
  license (e.g., whether personal or commercial use is permitted,
  whether the NFT owner may create derivative works, automatic
  assignment to the new owner upon a resale of the NFT, what
  restrictions there are, and what termination rights the content
  owner has).




• To account for potential smart contract errors, specifying
  circumstances in which the copyright owner has the right to
  terminate the license or correct or replace an NFT (or its
  associated content) may be helpful.




• Clarity can be created by ensuring:
  
  • that the terms and conditions governing the initial sale or
    distribution of NFTs are written in a way that is legally
    enforceable and accurately capture the intended scope of rights and
    licenses to be granted to the NFT owners;

  
  

  • that the platform through which the initial sale or
    distribution of the NFT occurs implements those terms and
    conditions using mechanisms that obtain the affirmative agreement
    of the purchaser or recipient in a manner that creates a legally
    binding contract, and

  
  

  • continued availability of those terms and conditions on the
    official website of the NFT collection, so that subsequent owners
    of the NFTs can readily ascertain the rights and licenses that they
    acquire (and the associated restrictions and limitations) when the
    NFTs are transferred to them.

Acquirers

• Understand the legal meaning of NFT “ownership”
  versus ownership of intellectual property rights in the content
  that NFTs point to, and the implications of the specific terms and
  conditions (or the absence of terms and conditions) that govern the
  acquisition of an NFT and the owner’s rights to the associated
  content.




• In particular, review the language of the license grant and the
  types and scope of uses of the associated content it permits, and
  the conditions under which the license can be terminated or
  modifications can be made to the NFT or the associated
  content.




• For significant acquisitions, given the general irreversibility
  of blockchain-based transactions effectuated via smart contract, have the code of the smart contract reviewed
  to assess whether defects exist that could compromise the security,
  accessibility or transferability of the NFT or enable unexpected
  behavior.

Platform Operators

• Implement DMCA-compliant take-down and counter notification
  policies and procedures.




• Draft the governing Terms of Service in a manner that
  appropriately limits the platform operator’s liability and
  creates clarity for users about the applicability of third-party
  terms imposed by the NFT minters.




• Given the borderless nature of NFT and other digital asset
  transactions, it should be noted that the DMCA “safe
  harbor” provisions apply only with respect to U.S. copyright,
  and worldwide copyright infringement issues should be considered
  more broadly.

Looking Ahead

As the landscape of collectible NFTs continues to evolve and
mature, it will be interesting to see if (and how) courts address
intellectual property issues specifically in the NFT context, the
extent to which the technical realities of blockchains and NFTs
affect the analysis, and what technological and market standards
ultimately prevail.

Yuga Labs, best known as the creator of the Bored Ape Yacht Club
(BAYC) NFT collection (which provides NFT owners with notably broad
personal and commercial use rights, including the right to create
and commercialize derivatives of the Bored Ape NFT images),
recently acquired from Larva Labs the intellectual
property rights to CryptoPunks. It will be interesting to see how
Yuga Labs addresses the scope of licenses granted to CryptoPunk NFT
owners on a going-forward basis.

Roots Of Confusion Over “v1” CryptoPunks
NFTs Raise Key Copyright And Practical Considerations For NFT
Minters, Acquirers And Platform Operators

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