NFTS RESCUE RESALE ROYALTIES? THE WONDERFULLY COMPLICATED ABILITY OF NFT SMART CONTRACTS TO ALLOW RESALE ROYALTY RIGHTS.

• Author: Murray, Michael D.

CONTENTS I. Introduction 208 II. Tokens On a Blockchain 210 III. The Mechanism of Smart Contracts That Pay Resale Royalties 213 IV. Will NFT Smart Contracts that order the payment of 216 resale royalties be preempted by the Copyright Act? V. Concluding Observations 218 I. Introduction

Resale royalty rights (also known by the French phrase, droit de suite or "right of continuation" rights) give artists a right to participate in the proceeds realized from the resale of their works. (1) According to DuBoff, "[w]hile copyright laws give the creator of a work the right to control reproduction of the work, many visual artists do not benefit as directly as print authors do from this aspect of copyright protection." (2) Unlike print authors, who derive their primary economic return on a literary work through the sale of multiple copies, visual artists receive most of their economic returns from the sale of the original works they create. (3) DuBoff states that "[r]oyalties paid to artists upon the resale of their works put visual artists on a more equal footing with print authors by giving artists the right to participate in any exploitive use of their creation and by recognizing that increases in the value of art are most often based on the artists' on-going labors." (4)

Artists across the globe have had the ability to receive resale royalty rights by means of contract and covenant and often by national law (5) and international law. (6) Nevertheless, American artists and art enthusiasts might be excused in their ignorance of the global resale royalty situation because in the United States (and many other countries), resale royalty rights have never caught on, with exception of the State of California, and even California's law was hounded out of existence by a series of lawsuits that ultimately declared the law to be incompatible with United States copyright law. (7)

Congress has not acted to provide for artists' resale royalties, and bold and valiant state efforts like California's have failed. (8) But the void in legal initiatives has been filled by a technological innovation: Non-fungible tokens (NFTs) with smart contracts that seek to allow resale royalty payments on every resale of NFTS. NFTS have made the calculation and payment of a resale royalty a built-in option that can be programmed into the NFT's smart contract. (9)

To explain how this works, one should first understand the workings of NFTS:

* NFTS are a cryptography tool defined and operated by a "smart contract." A smart contract is a small bit of code that makes up a simple computer program that runs the operation of an NFT. (10)

* Smart contracts use blockchain technology (11) to verify and record the existence and ownership of digital assets and physical three-dimensional (12) assets. (13) Smart contracts can be programmed (coded) to pay a resale royalty to the creator of the NFT if the smart contract receives the proper input indicating that a resale has taken place. (14)

* NFTS are not artworks. (15) An NFT records the creation and ownership of an asset that could be an artwork.

* An NFT owner owns the smart contract that defines and operates the functions of the NFT. (16) The smart contract creates a registry entry on the blockchain that is understood in the NFT industry and crypto community to represent proof of ownership of the asset linked to the NFT, whether that be an artwork, a piece of real estate, or other asset. (17)

* An NFT does not automatically provide ownership or control of the copyright to the artwork linked to the NFT nor does it automatically guaranty the right to possession and control of the artwork linked to the NFT. (18)

Each of these concepts deserves to be unpacked to understand the role NFTS can play with resale royalties.

2. Tokens On a Blockchain

   Breaking down the term "non-fungible token" itself helps define its place within the greater world of blockchains. A "token" is an asset encrypted into the blocks on a blockchain. (19) The process of creating a token is often called "minting" the token. (20) A blockchain is the background architecture onto which a token is encrypted to make an immutable record of the existence and ownership of a digital asset such as an artwork. (21) Blockchains are built by cryptography in a process called hash encryption through which transactions recording the creation, ownership, and transfers of a variety of tokens are encrypted into the blocks on the chain. (22) The blockchain serves as a public ledger of the records of creation, transfer, and ownership of the tokens recorded on the blockchain. (23)

   Tokens can be fungible, meaning a fungible token can be exchanged one for one with any other token of its kind. (24) A perfect example of a fungible token is a unit of cryptocurrency, such as one bitcoin on the Bitcoin blockchain (25) or one unit of ether on the Ethereum blockchain. (26) One bitcoin can be exchanged for any other bitcoin. (27) They are fungible and have the same value.

   But tokens also can be non-fungible--the example being an NFT which represents a unique asset that is not the equivalent of any other asset or token. (28) An NFT that records the existence and ownership of a work of art cannot be presumed to be worth the same or exchangeable for any other NFT in the same way that one 30X40" oil painting will not be presumed to be exchangeable for another 30X40" oil painting.

   In this discussion it is critical to understand that the NFT is not the artwork and it does not become the artwork. Rather, the NFT records the existence and ownership of the artwork onto the blockchain, and because no two NFTs are the same, and no two blockchain registrations can be the same, the tokenized asset linked to the NFT also can be considered unique and nonfungible. (29)

   This is an exciting development for digital artworks because previously claiming ownership of a digital file such as a .jpeg image felt like a hollow boast when the asset often could be found in many places on the internet and copied just as easily. The NFT makes a unique registration which makes the tokenized digital artwork a unique asset. (30) There may be other, similar artworks in existence, and some may even be registered by NFTS on a blockchain, but each creation of an NFT makes a unique record on the blockchain of a unique asset. (31)

   Artworks become "tokenized," (32) or linked to a non-fungible token, in a variety of ways, but the three most common ways are the following:

   In the case of Example 3 from the chart above, the chart does not mention whether the physical three-dimensional artwork itself is being offered for sale to the buyer. In truth, some buyers may not want possession of the physical work. (37) In such a case, buying the NFT is just buying the blockchain registration listing the purchaser as "owner" of the artwork, as if one bought a deed of ownership and certificate of authenticity for a baseball card without ever taking possession of the card. But if the physical work is being offered for sale, then instructions about...