The Ownership Illusion in Digital Art NFTs: Bridging the Gap Between Smart Contracts and Copyright Law

- Ekansh Jain

INTRODUCTION

Non-Fungible Tokens (NFTs) witnessed a revolutionary new economy in 2021, when Beeple's digital artwork was sold for a record-breaking $69 million, and the launch of Bored Ape Yacht Club. Proponents argued that a decentralized ledger would enable digital artists to track sales, establish ownership, and obtain perpetual royalties without the need for middlemen. However, as the dust settled, a harsh legal reality surfaced. Beneath the veil of ownership lies a complicated network of intellectual property (IP) misunderstandings that has trapped both buyers and creators. The unsettling reality is that the digital asset many collectors spent thousands of dollars on is, under the law, essentially a receipt.

As we transition from the “Wild West” phase of Web3 to a more regulated era, it is critical to understand why code is law is crumbling under IP frameworks. It’s a common misconception that purchasing an NFT entitles you to the artwork itself. However, in practice, NFT is merely a piece of information on a blockchain that contains metadata directing to the artwork stored elsewhere. The token, not always the work, is what a collector buys when they buy an NFT. This distinction is crucial: purchasing the NFT does not provide copyright, the ability to duplicate the image, or the ability to license it for commercial use, unless specifically stated differently. Instead of purchasing the digital piece, you are only licensing it.

COPYRIGHT AND THE BUNDLE OF RIGHTS

The central misunderstanding in the NFT space arises from a misunderstanding of what copyright actually is. Copyright is not a single right but a bundle of rights. Under the copyright law and international frameworks like the Berne Convention, this protection vests in the creator immediately upon the creation of the work.

This bundle includes exclusive rights to: “Reproduce the work; Prepare derivative works; Distribute copies; Publicly display the work.” These rights are not extinguished merely because the art is tokenized or exists on a blockchain. The original creator retains this bundle unless they are expressly licensed away or assigned in writing. Under Section 19(1) of the Copyright Act, and in other jurisdictions, including the U.S. (under 17 U.S.C. § 204(a)), a valid assignment of copyright requires a written agreement signed by the assignor. 

In the context of typical NFT marketplaces, such written assignment is often missing. If a marketplace’s Terms of Service are silent on license rights, the buyer likely acquires only a limited, implied license to display the work for personal use, such as in a digital wallet or as a profile picture. They do not acquire the right to commercialize the work. A customer may believe they have acquired the right to launch a merchandise line, but in reality, they have essentially bought nothing. This creates an uncertain situation.

THE SMART CONTRACT FALLACY: CODE VS CONTRACT

One of the most touted features of NFTs is the “smart contract”, programmable code that can automatically execute transactions. A common error among issuers is assuming that coding a royalty structure into a smart contract constitutes a legal assignment of rights. However, smart contracts are automated execution scripts, not legal contracts. They lack the semantic capacity to define the scope of usage (e.g., commercial vs. non-commercial).

While the smart contract implements the royalty, the entitlement to that royalty is rooted in the economic rights of the author. Smart contracts are largely used to provide programmable royalties to authors for the secondary sale of their work. However, reliance on code over law has proven dangerous, as technical mechanisms can be bypassed. Since there is a lack of standardization for programmable royalties, marketplaces often need to overlay their own contracts to collect them. If a platform updates its policy to zero royalties to attract traders, as seen in recent market shifts, the creator’s income stream vanishes. When the technology fails, creators are forced to fall back on traditional copyright law to prove their rights were frustrated.

An example of such limitation of smart contracts occurred with the Moonbirds collection. The creators unilaterally shifted the project to a CC0 (Creative Commons Zero) license, effectively waiving all copyright and placing the art in the public domain. This angered collectors who believed they had purchased exclusive commercial rights. It highlighted a critical vulnerability: without a binding off-chain contract, “ownership” is subject to just the whims of the project founders.

THE PROBLEM OF ZOMBIE ASSETS AND MORAL RIGHTS

NFTs face issues that differ from copyright and trademark concerns. These issues relate to Moral Rights, which are connected to the original work. Moral rights (Article 6bis), originating from the Berne Convention, safeguard the personal and reputational value of a work, regardless of economic rights. These include: Right of Attribution: the right to be recognized as the author, and Right of Integrity: the right to prevent distortion or mutilation of the work.

Proponents argue that NFTs solve attribution by creating an immutable record. However, this relies on the assumption that the minter is the creator. Copyminting - where bad actors mint stolen art - and create a permanent false attribution chain on the blockchain. Even if a marketplace removes the listing, the token remains on a decentralized ledger. This creates a class of “zombie assets” - that exist on the blockchain even after the underlying media has been deleted/de-linked, violating the Right of Attribution and integrity, creating legal complexities. Here, the artists are left with limited remedies - they can sue the minter for copyright infringement to claim damages, provided the minter’s identity can be de-anonymized. In such cases, the marketplaces rely on safe harbour provisions (like DMCA, 17 U.S.C. § 512), which provide them immunity from liabilities as long as they promptly remove infringing listings. However, such immunity doesn’t apply if they profit from such infringement or fail to takedown even after a formal notice.

LANDMARK LEGAL DISPUTES

1.     Roc-A-Fella Records, Inc. v. Dash

Roc-A-Fella Records (RAF) sued its co-founder, Damon Dash, after he attempted to auction the copyright to Jay-Z’s debut album, Reasonable Doubt, as an NFT. Dash argued that as a shareholder, he had the right to sell his stake. However, RAF successfully argued that the album and its copyright were assets belonging to the company, not the individual. The court held that RAF owned all rights to the album, and prohibited Dash from selling any interest in it via NFTs without authorization.

2. Miramax v. Tarantino: The Catch-All Clause

Miramax sued Quentin Tarantino, who announced an NFT collection based on high resolution scan of his handwritten screenplay, Pulp Fiction. Miramax argued that Tarantino had sold the studio all other rights, even though he had reserved the print publication rights.In their original contract, Miramax relied on broad language that granted them rights to “all media now or hereafter known” and argued that NFTs fell under this broad umbrella of future media. Ultimately, the parties reached a settlement; however, this case highlights how broad provisions in legacy contracts can be interpreted to encompass new technologies like NFTs.

3. Hermes v. Mason Rothschild: NFTs as goods

Hermes International et al v. Rothschild is arguably the most important case for the sector. Artist Mason Rothschild claimed that his digital representations of fur-covered Birkin bags, known as MetaBirkins, were protected by the First Amendment as artistic commentary.He was found guilty of trademark infringement by the jury. Under the Lanham Act (15 §§ 1051 et seq.), the court regarded NFTs as “goods” that could confuse consumers rather than merely as code. It affirmed that digital assets are subject to real-world trademark rights; a digital bag may violate a physical bag’s trademark.

4. Yuga Labs v. Ryder Ripps: Satire is Not a Shield

Similarly, the creators of the Bored Ape Yacht Club sued Ryder Ripps for copyminting (copying) their NFTs and selling them as satire. The Ninth Circuit affirmed that such use is not protected artistic expression because he used the marks in the same commercial manner as Yuga Labs, to identify and sell the NFTs. Thus, decentralization or satire can’t be used as a shield to sell counterfeit digital goods.

These rulings underscore that Web3 is a lawless zone, affirming that intellectual property frameworks apply rigorously to digital assets. Whether through contract interpretation, corporate governance, or trademark enforcement, courts have consistently held that minting an NFT does not bypass existing legal rights or shield unauthorized commercial exploitation behind the guise of decentralization

The ownership promised by Web3 is often an illusion unless backed by the bundle of rights recognized by copyright law. As the Tarantino and Hermès cases show, the courts are unwilling to let the metaverse become a lawless haven. There is a need for a dual-layer approach where the technological layer (the smart contract) is bound to the legal layer (the copyright assignment). The right to receive royalties and control one's work is not just a line of code; it is a fundamental economic right that must be respected, regardless of the medium.

The intersection of NFTs and Intellectual Property is not a lawless model; it requires new laws to be implemented. Under the Indian laws, there is a need for rigorous frameworks under the IT Act, 2000, for this ecosystem to mature and to move beyond the “receipt” model.

To mitigate these risks, issuers must adopt clear licensing frameworks. There are three prevailing models currently in the marketplace:

1. No Commercial Rights (The NBA Top Shot Model): The buyer owns the token but has a strict personal license. They cannot use the image on T-shirts, movies, or merchandise. This is the safest model for IP holders (like the NBA or Disney) who want to retain control.

2. Limited Commercial Rights (The Bored Ape Model): Yuga Labs famously granted BAYC holders a license to use their specific Ape for commercial purposes (e.g., opening a burger joint branded with their Ape). However, this license is usually tied to the possession of the token. If the NFT is sold, the commercial rights automatically transfer to the new owner, stripping the previous owner of their rights.

3. Public Domain (The CC0 Model): Projects like Nouns or CrypToadz dedicate their IP to the public domain. Anyone can use the art. The value proposition here is purely the provenance of the original token, not the exclusivity of the image.

Also, smart contracts are not a substitute for legal contracts for creators/artists. To clearly define what rights are being transferred, attaching a PDF license or a link to clear Terms of Service in the NFT's metadata becomes necessary. Further, diligence of clear licensing terms and review of past agreements must be done. Similarly, for buyers, due diligence is paramount. Verification of the creator’s identity and smart contract address, whether it includes associated commercial rights or only the license needs to be checked.