NFT: the new ERC 721-C standard and copyright protection

NFTs as artwork

Non-fungible tokens ("NFTs") are digital tokens characterized by unique IDs recorded on the blockchain, typically associated with artworks and possibly related rights. This has introduced an important concept into the world of digital artworks: the so-called digital scarcity. Therefore, while it's true that two digital images are or appear identical (imagine a photo taken with a phone and a screenshot of the same photo taken on the phone), Non-fungible tokens have introduced the possibility, even in the digital universe, to distinguish between original work and copy.

Artworks and Copyright

Modern legal systems protect, albeit with different facets, the author of a creative work. Italian copyright law protects both the "human" aspect of the author, recognizing the protection of moral rights, and the "material" aspect, through the protection of the economic exploitation rights of the work. The latter represents the core of the concept of "copyright" known in the Anglo-Saxon world.

Under Italian law the author is typically the only (except for some exceptions) legitimate subject authorized to exercise a series of economic rights over the work, such as the right to reproduce it, share it, translate it, etc.

However, the author is allowed to transfer one or more economic exploitation rights through the mechanism of licensing. Thus, although the moral right necessarily remains with the author, a third party can become the holder, for example, of the right to reproduce the artistic work even without being its author.

The licensing of the work against payment represents one of the most important monetization tools in the hands of the author. Conversely, the circulation of works without the author's remuneration represents a significant loss, capable of also hindering the growth of the art market (authors are not very motivated to create if they cannot monetize securely)

Management of NFT royalties

The ability of non-fungible tokens to create digital uniqueness, i.e., to identify a digital work as the original one from its author, has greatly contributed to the ability to ensure economic recognition for the exploitation of digital works.

Typically, non-fungible tokens are granted royalties, i.e., compensation intended for the creator of the work whenever the token is sold, usually determined as a percentage of the sale price.

However, usually, the amount of royalties associated with non-fungible tokens is determined by the marketplace on which they are sold. It is indeed its smart contracts that regulate the transfer of the NFT, the payment of the price, and the transmission of royalties to the author.

The ERC 721-C standard

The Ethereum Request for Comment 721-C standard ("ERC 721-C") consists of a recently invented standard for creating non-fungible tokens on the Ethereum blockchain, or rather a modification to the classic ERC 721 standard, which was developed by a game development studio called Limit Break.

ERC 721-C allows managing royalties directly at the smart contract level, thus granting the author total freedom in setting up royalties related to their non-fungible tokens. This may include not only the amount (potentially adjustable from 0% to 100% of the resale value of the NFT) but also the conditions and methods for payment. In this way, the author could share part of the royalties with the early buyers or minters of the NFT, or could limit the payment of royalties only under certain conditions (e.g., only when the resale price is higher than the original price).

The result is to put the management of royalties directly in the hands of creators, limiting the control by marketplaces.

ERC 721-C and copyright law

The introduction of the ERC 721-C standard certainly offers many points for reflection regarding the evolution of the NFT market. The market's drive, at least in its growth phase, has been strongly linked to marketplaces, some of which have indeed grown incredibly. Since it is a new and global market, the relationship between marketplaces and creatos has not been specifically addressed by the law. However, an important legal source can be found in copyright laws, particularly following the transposition of the so-called Copyright Directive (EU Directive 2019/790).

In particular, in addition to the rules governing the obligations and responsibilities of online sharing service providers (which may include marketplaces), an important amendment was made to article 107, paragraph 2 of the Copyright Law. This provides that in case of licensing or transfer of exclusive rights for the exploitation of works by authors, they must be granted adequate and proportionate remuneration for the value of the rights licensed or transferred and commensurate with the revenues derived from their exploitation.

The approach of the legislator of the Copyright Directive was therefore to raise the level of protection for authors, both in terms of respecting copyright by digital platforms (for example, with explicit obligations to obtain licenses from authors) and by providing forms of adequate remuneration in case of license