With the widespread adoption of blockchain technology and its continuous development, Non-Fungible Tokens (NFTs) have garnered significant attention and sparked debates within the legal community. However, how did NFTs come into existence?
The major breakthrough in the world of blockchain occurred with the establishment of the Ethereum blockchain in 2014. This allowed blockchain to be used not only for exchanging cryptocurrencies but also for other purposes, contributing to the integration of crypto assets into various fields beyond being a means of payment in commercial life.
On the other hand, NFTs represent non-interchangeable digital assets within the blockchain. These NFTs distinguish themselves from cryptocurrencies by being non-fungible, non-reproducible, and existing in unique or limited quantities. It should be noted that NFTs are not limited to digital art alone. Any content that can be digitized and transformed can be turned into an NFT. Whether these contents exist in the digital or physical world is not important. However, when it comes to the involvement of human labour, the discussion about the absolute rights of designers over NFTs becomes inevitable.
The rights of authors are regulated by Articles 21 to 25 and 45 of the Law on Intellectual and Artistic Works. These rights include the right of adaptation, reproduction, distribution, representation, and communication to the public, as well as the right to claim authorship and integrity. The moral rights of the author consist of the right to present the work to the public, the right to be identified as the author, the right to object to any modifications of the work, and the right to claim damages against the owner and possessor of the original work. In Turkish Law, the author is the exclusive holder of the economic and moral rights over the work. While the transfer of moral rights is not possible, the right to use can be transferred. The transfer of economic rights is possible only if explicitly specified in a written agreement.
The principle of extinction means that the owner of the work can not prevent the subsequent sales of the goods after the first sale in a geography, that is, the right of disposal on the goods is exhausted. It is also called the first sale doctrine. The principle of extinction is expressed in the last sentence of the second paragraph of Article 23 of the Law on Intellectual and Artistic Works: “On the condition that the authority to rent and lend to the public remains with the owner of the work, the ownership of certain copies is transferred and the first sale within the borders of the country as a result of the right owner’s use of the right to distribute or their resale after their distribution does not violate the right of publication granted to the author.”
When a buyer wants to acquire an NFT on any marketplace, although not mandatory, they usually first accept the rules set by that marketplace and then agree to the conditions determined by the seller, making the payment with cryptocurrency. NFTs always have a token ID and a smart contract address code. Their uniqueness stems from the fact that the token ID and smart contract address code cannot exist in any other NFT. NFTs can be classified as off-chain and on-chain. In off-chain NFTs, the represented content is not part of the NFT itself. When an off-chain NFT, which represents an artwork but does not contain the actual content, is acquired, the ownership rights over the underlying content are not obtained. Only ownership rights over that specific NFT are acquired. Therefore, the rights over the underlying content and the rights over the NFT token itself are separate. Even if specified in the smart contract, acquiring an NFT does not automatically transfer the rights over the content it represents. Thus, an off-chain NFT can be seen as a cryptographic asset consisting of metadata stored in an interplanetary file system, certifying the authenticity of the work.
For an NFT to be considered as a work, it is only possible when the work is part of the NFT (on-chain NFT). However, it can be argued that a NFT which is being entirely generated by computed and have no actual content in itself may undermine the qualification as a work. For example, converting a digital painting or a song created by an artist in a digital environment into an NFT and storing the data that constitutes the work within the NFT on the blockchain creates an on-chain NFT. Here, the NFT and the work are intertwined. In fact, the transfer of the economicrights of on-chain NFTs, which are considered legally inconclusive as they do not fulfill the requirement of a written agreement, can be argued to violate the principle of good faith due to the automatic execution.
The exhaustion principle aims to mitigate the absolute monopolistic rights granted by intellectual property law, ensuring that subsequent sales of a particular product or work within a certain geographic area do not infringe upon the right of distribution after the initial sale. Within the scope of all these explanations, it should be stated that the applicability of the exhaustion principle, which states that the owner of the work cannot prevent subsequent sales after a work is offered for sale in a geography, is very controversial.
If the exhaustion principle were applicable, NFT owners would need to obtain the original creator’s permission for subsequent NFT sales. However, both Turkish and EU law do not consider the sale of a digital work within the scope of the right of distribution, due to the absence of a physical copy or the nature of digital content. Therefore, a distinction must be made based on whether a physical copy of the work exists or if the content is purely digital. If a physical copy of the work exists, the right of distribution and exhaustion principle would apply, allowing the purchaser of an NFT to resell it without the consent of the original creator. However, in cases where the work is purely digital, the principle of exhaustion is not recognized due to the work’s nature of being made available to the public.
Lastly, a distinction needs to be made for on-chain NFTs as well. Whether on-chain NFTs fall within the scope of the right of distribution or are considered as being made available to the public is a subject of debate. If they are considered within the scope of the right of distribution, the exhaustion principle would apply, whereas if they are deemed as being made available to the public, the permission of the original creator would be required for resale.
In conclusion, it should be emphasized that there are currently no specific judicial decisions or regulations directly governing this matter. However, it can be argued that the exhaustion principle could potentially be generally applicable to NFTs with physical copies. While controversial, the acceptance of the exhaustion principle for on-chain NFTs is not entirely implausible. Nonetheless, it is important to note that both Turkish and EU laws recognize the exhaustion principle for works with physical copies, while the sale of purely digital works falls outside the scope of the right of distribution.
ALIHAN KOTAN
