Let’s talk about NFTs, blockchain

Welcome to another edition of Legalist! In this edition, we’re going to talk about Non-Fungible Tokens, blockchain, and what legal implications these carry. And as part of my research for this edition, I took the step of making an NFT and attaching it to a picture of my dog, a rescue from Tijuana, and listing it for auction this weekend. If you feel like supporting this newsletter and supporting rescue animals you can buy it.

My dog’s name is Beastie Boy, and he fought for your right to party so you don’t have to. You can bid on this item by clicking here. 1/2 the sale will go to the rescue I adopted him from. The rest I’ll spend irresponsibly and if you want I’ll give you a shout out in Legalish.https://www.linkedin.com/embeds/publishingEmbed.html?articleId=9081018170938369314

And on the topic of things that make this place possible please take a moment to check out Nota! They handle client trust accounting so you don’t have to worry about one of the few things that could get you in trouble with the bar.

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It’s a pain to constantly have to do trust accounting. This system saves you a lot of time you could use to practice law. Or blow off work and go bowling or something. No judgment from us. This is a safe space. Live your best life.

Nota helps make Legalish possible! Take a demo.

Do it. Right now. Take the demo.

Anyway here’s Legalish.

What’s an NFT and why does it have value?

NFT stands for “non-fungible token.” This is a way of saying that a token is created on certain blockchains, like Ethereum (Bitcoin and most other cryptocurrencies don’t support NFTs). An NFT is a unique token that you can’t replicate and you can do stuff with it like affix it to things like digital trading cards, music videos, audio recordings, tweets, or digital works of art. It’s kind of like a digital autograph that says a certain rendition of work is the original digital work and all others are copies of that work.

When you register an item on the blockchain you can sell it and the sale is recorded on the blockchain ledger. If the person who bought that piece from you then resells it, that transaction is also recorded. You can see the entire transaction history and through that record, you can see to some degree how an original digital item performs in the marketplace.

And a few people have made some impressive coin auctioning off their works using NFTs.

People, for example, auctioned off an NFT for 69 million dollars. Beeple is a talented guy. I’ve followed him on Instagram for a while and I recommend checking him out if you have a penchant for weird stuff. You can find his Instagram page here.

And sales of NFTs aren’t limited to just major artists. Zoë Roth, the little girl in the “Disaster Girl” meme, sold the original picture of herself smirking in front of a house fire for nearly $500,000. An amount she used to pay off her student loans and donate to charity.

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Marking an original copy with an NFT is an interesting way to create scarcity for a digital asset. For some people, it’s hard to wrap their brains around it. Why would you care about an NFT for a digital asset when the part of the premise of digital assets is that you can produce infinite copies of them? Why would you take the NFT copy of a meme when you can reproduce it on your own? It almost sounds like kids ascribing value to a cup when there are several identical cups nearby and then competing for possession of the one cup.

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But adults aren’t that far above and beyond kids fighting over objects with seemingly irrational value assignments. You can buy baseballs at any sporting goods store. They’re all the same. But the ball knocked out of the park to win a World Series and signed by the guy that hit it is worth a mint. It’s identical to all the other baseballs but knocking it out of the park and that signature makes it unique and NFTs in the digital space provide that same sort of uniqueness.

Is an NFT a substitute for copyright?

An NFT is not a copyright or a substitute for copyright. It just says that a specific digital thing is a unique thing. Copyright exists for original works of authorship fixed in a tangible medium. That’s a fancy way of saying that if you make a thing you automatically have rights to that thing. Typically, for digital things, you can only transfer those rights through something like licensing, assignment, or work-made-for-hire agreements. And you should register your copyright with the Copyright Office if you ever want to enforce your rights in court.

But copyright laws are a little behind for digital works and NFTs. It’s only a recent event that you could create a unique digital asset on a blockchain and sell that one particular asset almost like it’s a real-life item. If an artist creates a physical oil painting and sells it off to a buyer that buyer should be able to subsequently auction it off from their private collection at a later date without asking permission from the original artist. The same thing goes for that autographed World Series baseball everyone loves. When you catch the ball, it’s yours, and you can sell that thing on eBay, take the money and run.

This kind of seems like a no-brainer. If you own a unique physical thing, you own that thing and can resell it. It would be kind of wonky to buy a painting and then have the artist come to sue you later for selling it without their permission. And the legal concept that protects that sale is called the First Sale Doctrine. 17 U.S.C. § 109 states that you don’t need to ask permission to sell these physical works that you purchased.

But this isn’t so for digital items because until blockchain came into existence every digital item was considered to be a copy of a thing—not a unique thing unto itself. The Copyright Office released a report on the idea that digital things are inherently non-fungible back in 2001. It’s old enough that it even references floppy disks. I think I was a sophomore in high school downloading albums legally from the Internet and not through Napster like a degenerate Internet pirate.

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So if you recorded a musical work onto a record you could sell the physical record and that new owner could then resell it under the first sale doctrine. If you recorded a musical work to a computer and then sold a digital version it is merely considered a copy of the recording. (Capitol Records LLC v. ReDigi Inc)

The concept of digital asset ownership is changing. Transferring an NFT is a much stronger analogy now to physical ownership than it was back in 2001. An NFT sale provides a record of a sale of a unique thing that’s published publicly for anyone to look at on a blockchain. If you’re the purchaser of that NFT you should be allowed to sell it again without going back to the original owner. You don’t want to sell an NFT thinking you’re the exclusive owner only to have a court consider it just any old digital copy.

You can learn more about First Sale Doctrine, the Wu-Tang Clan, and NFT’s in this neat piece from the Cardozo Arts and Entertainment Law Journal.

Bitcoin is an environmental disaster. Exploring proof of work versus proof of stake.

Bitcoin has some issues and while I wouldn’t necessarily call lack of support for NFTs a problem the environmental impact of Bitcoin mining is undeniable. Bitcoin “mining” produces between 22 and 22.9 million metric tons of carbon dioxide which rivals the output of entire nation-states, like Jordan or Sri Lanka. That is insane.

The problem was also highlighted when a massive coal mine in China flooded and shut down one-third of Bitcoin’s computing power. The incident was an astonishing real-world demonstration of just how much power it takes to keep Bitcoin mining efforts going and the amount of carbon sent into the atmosphere.

China is responsible for about half of Bitcoin mining efforts through the proof of work system. Computing power fuels the proof of work that adds to the blockchain ledger by verifying transactions through increasingly difficult cryptographic problems and produces Bitcoins as a reward for the work. Because Bitcoin is based on proof of work, as Bitcoin is mined it takes more power to add to the ledger for a chance at yielding another Bitcoin.

Bitcoin is inherently built on the backbone of fossil fuels, it’s bad for the environment, and incentivizes a country like China to burn through coal at a lunatic rate. I’m not going to give you investment advice but if you have a conscience for environmental issues I wouldn’t recommend buying Bitcoin.

And in the aftermath of that coal mine problem in China certain major backers of Bitcoin took notice. Elon Musk took to Twitter calling out the issues with the inherent centralized nature of Bitcoin.

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It was always kind of an odd thing that Musk’s electric car company, Tesla, ever accepted or invested in Bitcoin. But the major environmental impact and the fact that China is a controlling investor in the price was a bridge too far. Musk announced that Tesla would cease to accept Bitcoin due to the environmental cost.

Musk, to say the least, can be somewhat of a polarizing figure with some of his comments and decision-making. A couple of years ago he got in trouble with the SEC over securities violations over Twitter, for example. However, you feel about the guy or his past decisions he’s probably not wrong about Bitcoin here.

Whether the environmental argument is compelling to you or the fact that one major player, China, could end the whole party if they felt like it, it’s hard not to conclude that supporting Bitcoin isn’t the most ethical choice or best gambling situation in the world. China recently announced it would seek tougher regulation of Bitcoin mining and trading which helped precipitate a 40% crash from its peak. China is also in the process of shifting its currency, the Yuan, over to a blockchain system in some capacity.

So what are the alternatives to the “proof of work” system?

Ethereum, the cryptocurrency from the last section about NFTs, is in the process of shifting from proof of work to proof of stake. Where proof of work uses huge amounts of energy to fuel the computing power to add to the blockchain, the proof of stake system allows people that own coins to run a validator on their own, appending blocks to the chain, in exchange for interest on their staked coins. It is comparatively a more energy-efficient system.

So if you’re looking for a more ethical way to gamble on imaginary internet pseudo-money, look no further than cryptocurrencies like Ethereum that either already uses or are shifting to the proof of stake system.

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I specialize in trademark, copyright, and matters related to the Internet. I work with my brothers who also do fantastic work with patients. If you feel like chatting don't hesitate to reach out and connect. I am a licensed attorney in California. I am admitted to practice in the Central and Southern District of California as well as the Ninth Circuit.