Characteristics and Rules of NFT Digital Works Ownership

The rise of the Industrial Revolution brought art works into a brand new “mechanical reproduction era.” Traditional artworks usually rely on tangible objects; regardless of the degree of similarity between the originals and copies, or between legitimate copies and pirated copies, we can still distinguish them by their physical carriers. It is precisely this close connection between artworks and carriers that makes them subjects of joint jurisdiction under property law and copyright law: property rules mainly protect rights related to artworks on carriers; while copyright rules focus on protecting the informational attributes of artworks. However, the rapid development of digital technology has allowed the creation and dissemination of digital works to detach from tangible objects. This transformation has led to the gradual withdrawal of the traditional property protection system from the historical stage, while the traditional copyright protection system has also begun to appear outdated. Digital works have lost the carrier of tangible objects, and the rights in rem have lost their basis for realization, and their property interests can only be maintained through copyright protection mechanisms. Nowadays, the participation of the public in creating and disseminating digital works has become the norm in the online world, but it has also brought a series of problems such as the proliferation of “orphan works”, the failure of the “gatekeeper” mechanism, and the emergence of ownership disputes, making copyright rules seem inadequate.

The emergence of Non-Fungible Token (NFT) technology has endowed digital works, which originally detached from physical media, with new collectible value and vitality. In 2017, a project called “Crypto Punks” on Ethereum opened the curtain on the NFTization of digital works. This project launched 10,000 24×24 pixel punk art images generated by algorithms and stored them on the Ethereum blockchain. Each punk image is unique and comes with proof of ownership (including records of ownership and transaction activities). Although “Crypto Punks” is a product based on the fungible token technology standard ERC-20 (Ethereum Request for Comment-20), it inspired the establishment of the non-fungible token technology standard (ERC-721) and led to the emergence of a large number of modern digital art collection projects. Numerous digital art platforms have emerged, such as SuperRare, Known Origin, MakersPlace, OpenSea, Wax & Rare Art Labs, making it easier and more convenient for the general public to mint NFT digital works, further promoting the popularity of NFTs, and digital collectibles have frequently been sold at high prices.

NFT further bridges the gap between digital works and “objects” through the integration of three technologies. First, NFT sets a unique resource locator (URL identifier) for the storage of digital works, which begins with “http://” and points to the unique storage address of the digital work, ensuring the uniqueness of the object. This frees digital works from the dilemma of effectively distinguishing between originals and copies. Second, the NFT, through encryption algorithms, gives digital works a hash (HASH) value, serving as their “digital fingerprint” that accompanies them throughout. Moreover, any change to the NFT digital work will affect its hash value, and the consistency of the hash value can determine whether the digital work is the “original”, giving the state of the digital work objectivity. Finally, NFT uses distributed ledger technology to package the hash value of digital works and ownership information as metadata, registering it on the blockchain for fixation and protection. The trading of NFT digital works adopts an automated model of smart contracts (Smart Contract) based on “if-then” logic, avoiding the hijacking and tampering of the transaction process by unauthorized parties, maintaining the dynamic stability of the digital works. It is precisely these three technologies of NFT that enhance the “object” characteristics of digital works, laying the foundation for them to become collectibles.

It should be emphasized that NFTs do not revert to an era of physical carriers for digital works, but rather attempt to give them “object” characteristics through technological means, thus deriving two unique expressions. First, although NFTs also store digital works in specific locations, the trading object is not the storage carrier but the hash value registered on the blockchain, which projects the “attribute information” and “ownership information” of the digital work. Second, NFTs are highly dependent on blockchain registration, and the entire transaction process cannot exist without it. Moreover, the rich registration functions of NFTs allow digital works to realize more property attributes. NFTs do not change the digital works themselves but publicly announce the ownership of the digital works on the blockchain, thereby creating an exclusive “possession” and secure “transaction” conceptually, while the existence of hash values and identifiers prevents the holder’s digital works from being confused with other copies. Therefore, for NFT digital works, the registration behavior on the blockchain and the non-fungibility supported by hash values are the keys to their materialization and special characteristics as objects.

In fact, even before the emergence of NFTs, there had been discussions in academia about whether digital works as internet virtual property could constitute property objects. Article 127 of the Civil Code of the People’s Republic of China (hereinafter referred to as the “Civil Code”) only includes virtual property within the scope of protection, although it macroscopically recognizes the status of data as an object, it does not make a dichotomous arrangement of property and debt. If we take the property object theory of internet virtual property as a reference, internet virtual property is a special asset created and held by individuals on the internet, with legal attributes as property, and thus property rights can be established, making internet virtual property a subject of property rights. However, this theory mainly focuses on traditional internet virtual property, especially online game accounts, where holders can control and dispose of the account name and password to realize possession and delivery of property rights. Applying the property object theory of internet virtual property to digital works faces two obstacles: first, digital works are not immovable property and differ greatly from existing movable property concepts, and current laws and regulations have not yet applied them as property objects; second, the data representing digital works can be easily modified, making it impossible to guarantee their objectivity and specificity. Therefore, the property object theory of digital works has also been questioned by the intellectual property object theory and debt object theory. According to the intellectual property object theory, digital works belong to the intellectual achievements of copyright holders (such as digital work creators, online game developers, etc.) and should thus fall within the scope of copyright under intellectual property rights, meaning that online purchasers only obtain the right to use the digital work from the copyright holder and cannot monopolize or own it. Meanwhile, the debt object theory posits that when internet users exercise rights related to internet virtual property, they must do so in conjunction with internet service contracts and software licensing agreements, preventing them from escaping the classification of debt and unable to transform into property rights under the dominion. Thus, under the current legal framework, there remains a certain degree of controversy and uncertainty regarding the property object theory of digital works. To better protect the rights and values of digital works, it is necessary to further improve relevant laws, regulations, and system designs.

Despite the emergence and enhancement of NFTs strengthening the “object” characteristics of digital works, there are still doubts that NFTs are not “property certificates”. Some studies argue that NFTs are “debt certificates” for the following three reasons: first, compared to quasi-property objects such as electricity, heat, light, and magnetism, NFT digital works, as internet virtual property, exhibit significant differences. NFT digital works are images displayed through electromagnetic signals formed by electronic movement via a series of hardware devices, and there is no “third type of object”; moreover, the images themselves are not intangible, and there are no issues of possession or dominion. Additionally, NFT digital works do not enhance the utility value of digital works, and compared to other virtual properties such as game items, their value to players is not significant. Second, the exclusivity brought by the unique possession of NFTs is not unique to property rights. Any right has exclusivity, and debt rights also have dominion. Therefore, some scholars further argue that NFTs are digital certificates identifying data files, which should be adjusted as data units. Finally, from the perspective of the transaction process of NFT digital works, the minting and transfer of digital works rely on technical contracts with platforms, and the relevant disposal behavior is also a change in the related contract rights. Specifically, the minting of NFT digital works generates smart contracts, and subsequent transactions also depend on the recording function of smart contracts. The so-called tokens in civil law are essentially the basis for purchasers to enjoy rights against the minter and seller, i.e., debt certificates. Moreover, if the minting behavior by the platform is not constrained by contractual relationships, or if the platform issues excessively, harming the interests of original digital work holders, it becomes difficult to restrict the platform through property norms. Thus, many theorists continue to insist on defining the transaction behavior of NFT digital works based on the underlying logic of debt transfer.

However, I believe that while the debt theory can explain and regulate the transaction relationships of NFT digital works, it somewhat overlooks the new characteristics inherent in NFTs, which could lead to a series of legal issues for NFT digital works originally intended for collectible transactions. First, if we simply compare NFT digital works with traditional quasi-property objects such as electricity, heat, light, and magnetism, and directly conclude that they do not conform to quasi-property objects due to their differences, this clearly does not align with the actual effects of NFTs. Although digital works are based on electromagnetic motion, NFTs give them stability, specificity, and recognizability, allowing them to exhibit characteristics close to tangible objects. The matter of the objective world is also made up of atoms formed by high-speed-moving electrons surrounding atomic nuclei; however, the molecular structure of matter makes it a stable form that can be developed and utilized as a tangible object. In other words, the dynamic nature of the internal composition of an object does not affect the stability of its external form. Second, blockchain assets (such as NFT digital works) are fundamentally different from traditional internet virtual properties, allowing holders to exercise exclusive dominion and control, sufficient for them to become property objects. Once digital works acquire the attributes of property objects through NFTs, even if the platform violates and issues excessively, it will not diminish the value of NFT digital works, as “this object” (the original specific object) is not “that object” (the excessively issued object), and instead, it will further highlight the scarcity of the original work. Finally, compared to ordinary digital works, NFT digital works provide significant psychological value to purchasers. Just as owning a unique game item can provide players with a powerful psychological experience, possessing unique and rare digital works is equally significant for collectors. For example, for a well-known painting such as the “Mona Lisa”, modern simulation technology has reached a level where it can be indistinguishable from the original; however, for collectors, the original painting holds greater collectible value. Therefore, regarding NFTs as debt certificates overlooks the “materialization” effect of digital works, weakens the scarcity of digital works, diminishes the rights of collectors (purchasers), neglects the dominion of digital works, and fails to fully leverage their property rights effectiveness, while also dissolving the non-fungibility of digital works and leading to the pitfalls of new virtual currencies. Thus, I advocate for considering the legal attributes and regulatory mechanisms of NFT digital works within the framework of property object theory.

Even under the guidance of property object theory, whether traditional property rules can be simply applied in the face of the new characteristics of minting and trading digital works through NFTs remains to be scrutinized. It is undeniable that NFT digital works still belong to the category of intangible assets. If NFT digital works are included as property objects under property law, the question of whether traditional property rules can fully adapt cannot be avoided. If NFT digital works are disposed of as property objects, should their public disclosure method respect the appearance of movable property with delivery as the standard, or should it respect their high dependence on blockchain registration, thus treating them as immovable property and requiring registration? This will also bring a series of questions regarding blockchain registration: what is the role of registration (property registration or copyright registration), what is the effect of registration (registration effectiveness or registration opposition), and what is the examination method of registration (formalism or substantialism)? Currently, issues related to registration disputes and platform responsibilities have already emerged both domestically and internationally, such as the “Daystorm infringement of Basquiat’s work” case in April 2021 and the “Fat Tiger vaccination case” in April 2022. In fact, regulating the legal relationships of NFT digital works not only requires considering whether property rules can be applied, but also needs to focus on how property rules can adapt to the characteristics of NFT digital works to address the ongoing real challenges. Moreover, if the property object theory of NFT digital works is established, it will also raise a series of urgent questions regarding the rules of copyright and debt transfer for digital works. If NFT digital works are recognized as having attributes similar to tangible objects, then in copyright theory, does the sale of online digital works still not apply to the “exhaustion principle”? Does the mandatory blockchain registration practice in NFTs contradict the voluntary registration principle of copyright? In the transaction process, does the NFT digital work as a token have the potential to become virtual currency? Can the co-ownership system be applied to NFT digital works, thus opening the door to securitization activities? In the face of legal adjustments to new technologies, Joshua has proposed a pragmatic approach, suggesting that the focus of regulation should not be based on the annotations made by engineers on technology, but rather directly confront the problems people encounter when using that technology.

Therefore, this article does not stop at proving whether NFT digital works belong to property or debt objects, but delves into the adaptation issues of the traditional property rule system and the associated debt and copyright rule systems. The legal issues arising from NFT digital works, although seemingly chaotic, are closely related to their legal attributes presented after “materialization”. NFT digital works, as a new type of “object”, share both commonalities and particularities with traditional property objects, and rule adjustments must be based on their characteristics to achieve a perfect fit. This article first attempts to decode the technological route of NFT digital works into legal representations, analyzing the legal characteristics of digital works transformed by NFTs and their commonalities with traditional property objects, finding entry points for applying property rules. Then, it analyzes the special attributes of NFT digital works as “objects” and their derived impacts, exploring the path for traditional property rules to adapt and delineating the applicable paths and boundaries concerning copyright, debt, and other related rules.

Although digital works have certain disposability, they are composed of data with strong variability and lack stability, thus failing to possess the complete characteristics of “objects”, making it impossible to include them within the scope of property objects. The blockchain technology that NFTs rely on is an effective tool for cultivating trust in the virtual world. Consequently, NFT digital works can be stably controlled and dominated by humans, formally completing the elements of “objects”, theoretically meeting the conditions to become property objects, providing a foundation for the application of traditional property rules.

1. Legal Attributes of NFT Digital Works as “Objects”.

NFT digital works, although composed of data, are endowed with static stability by their hash values. Based on the standard of “objective reality” in Roman law, objects are divided into corporeal objects (res corporales) and incorporeal objects (res incorporales). Most countries and regions in the world limit objects to corporeal objects due to their stable existence and disposability. Shi Shangkuan argues that objects should not be limited to corporeal ones, but at least must meet the condition of “an object that can be controlled by humans” to be included as objects for adjustment. Liang Huixing and Chen Huabin point out that the controllability and disposability of objects are based on the element of material objectivity. Only by meeting the requirement of stable existence can rights holders exercise their civil rights through dominion over them. Digital works, after being endowed with hash values derived from cryptographic algorithms via NFTs, are thus also referred to as “encrypted assets”. Any modification to digital works will produce new hash values, but technically it is impossible to reverse-engineer the original data from the hash values; in other words, once a change in the hash value of a digital work is detected, it can be determined that the original data has been altered, making any tampering traceable.

Additionally, under the dual effects of blockchain technology and smart contracts, NFT digital works possess dynamic stability. Online transactions can only be conducted under lawful authorization, and any illegal tampering will be promptly discovered and corrected. For ordinary digital works in online transactions, the transfer of property interests is completed by sending copies to the storage devices designated by the purchasers (commonly known as “downloading”). Since there is no transfer through account passwords, there are no legal issues concerning the exclusive possession and delivery of property rights. For the buyers and sellers of NFT digital works, data transactions can be realized by delivering the private keys (Private Key). The private key is a randomly generated 256-bit number that has a mathematical correspondence with the public address where the specific digital work is stored, allowing only the holder to modify the holder’s information, thus enabling the transaction to be encrypted, signed, and confirmed. Since NFTs use distributed ledger technology, the metadata of NFT digital works is widely stored in public chain storage. Through the chain’s nodes’ interlocking mechanisms, any unauthorized changes can be promptly detected. Therefore, NFT digital works can be presented in a fixed form over the long term, overcoming the disadvantage of easy modification of electromagnetic records, achieving stability while enhancing disposability.

2. The Path to Applying Property Rules to NFT Digital Works.

Under the influence of NFTs, digital works possess the legal attributes of “objects” throughout their lifecycle, thus providing the possibility for the application of property rules.

First, NFT digital works can be originally acquired through registration of rights. Registration includes not only change registration but also rights establishment registration. Generally speaking, the creation of digital works is considered a productive activity, thus the ownership of the new object should be determined based on the factual act of production. Throughout history, interpretations of the source of ownership have varied widely, including divine right theory, first possession theory, natural rights theory, labor theory, social theory, legal theory, and so on. In the process of creating artworks, the labor theory serves as a standard for obtaining ownership based on the intellectual and physical contributions of the creator, which can better explain the issues of original acquisition of traditional artworks. Nowadays, creators form digital works through their labor and then utilize NFTs to fix them as objects, thereby becoming the original owners of the NFT digital works. NFT platforms need to ensure that creators, not infringers, register their works on-chain to prevent infringement behaviors like those in the “Fat Tiger vaccination” case.

Second, the acquisition of NFT digital works as objects can be guaranteed through the smart contract mechanism. The other property rights capabilities of NFT digital works (such as transfer of possession, leasing, pledging, etc.) can all be executed automatically under smart contracts, and the process of ownership changes is nearly impossible to be arbitrarily interrupted or redirected. Moreover, the public key (Public Key) of NFT digital works is publicly accessible to system participants, including the ownership, value, and transaction history of digital works, thus achieving public disclosure of exclusive possession. The parameters of the private key are controlled solely by the holder, not disclosed to the public, allowing only the holder to transfer or engage in other transactions regarding that asset through encryption, realizing exclusive possession and dominion over digital works. Although digital works are stored on public chains provided by network operators, they are not subject to the control of the operating platform, which cannot unilaterally force all nodes on the chain to jointly cancel the possession status of ownership. Therefore, NFT digital works fully meet the standards of property exclusivity (Exclusionism), and there are no obstacles to their inclusion in the adjustment of property rule systems.

Third, NFTs can even provide institutional support for the good faith acquisition of digital works. The transactions of NFT digital works are highly secure and public, allowing third parties to accurately understand the status of digital works’ rights by querying records published on the chain, thus clarifying the standards for good faith acquisition. However, in extreme cases (such as hacking or registration errors), the registered information may not match the actual ownership situation, at which point the system of good faith third parties may still be applicable and necessary. In other words, third parties in NFT digital work transactions should first fulfill general responsibilities such as public key inquiries and prudent trading, which is not difficult to meet in an online environment. Subsequently, the third party can obtain the corresponding protection of the good faith acquisition system by acquiring the digital work through the transaction.

Finally, NFTs will help fully realize the guarantee property attributes of digital works, thus promoting the prosperity of the digital economy. According to the progressive theory of property rights (Progressivism), the purpose of establishing property rights is to maximize the utility of property. Therefore, in countries with property rights legislation, in addition to ownership, usufructuary rights, and security rights are also stipulated. Theoretically, the blockchain technology of NFT digital works can embed relevant conditions and restrictions into digital works through smart contracts and decentralized finance (DeFi), achieving pledge registration to meet the requirements of security rights. In fact, Ethereum’s improvement proposals (Ethereum Improvement Proposal, EIP) have already made necessary technical preparations for fully realizing the property rights capabilities of digital works, such as EIP-2615, which can realize the mortgage and leasing functions of digital works, and EIP-2981, which can provide insurance protection for digital works. In terms of legislation, in April 2022, the Uniform Law Commission of the United States added Article 12 to the draft revision of the Uniform Commercial Code, including “Controllable Electronic Records” as part of digital movable property, thereby encompassing NFT electronic records and fully leveraging their property rights effectiveness.

Incorporating NFT digital works into the property legal system for regulation and adjustment is key to fully leveraging their rights effectiveness. However, this is not a simple imitation and continuation of past rules, but requires exploring suitable norms and adjustment methods based on the characteristics of NFT digital works. Essentially, NFT digital works still belong to the category of data in their basic composition, and this data is the result projected by the characteristic information of digital works.Rights holders can only realize exclusive possession and dominion through special digital technologies, namely blockchain registration. The core function of blockchain technology is to record and disclose, accompanying the entire lifecycle of NFT digital works. NFTs record the creation and ownership status of digital works on the blockchain, and transaction activities are also conducted through change records. Therefore, the on-chain registration of NFT digital works is a key legal act. It possesses characteristics of both property and copyright registration, covering the scope of rights establishment and change registration, and its effectiveness combines characteristics of registration effectiveness and registration opposition.This requires more clarity and regulation regarding the nature and characteristics of blockchain registration within the property rule system.

1. The Property Attributes of NFT Digital Works Blockchain Registration.

The registration of NFT digital works on the blockchain differs from the registration of property rights by registration authorities in three aspects: first, the subjects of registration differ. Property registration is usually implemented by centralized statutory institutions. For instance, in the case of immovable property registration, various countries typically assign judicial authorities or government departments to be responsible, such as Japan’s local legal affairs bureau, Switzerland’s local courts, and Germany’s land registration office. According to Article 7 of the Interim Regulations on Immovable Property Registration of the People’s Republic of China, immovable property registration is handled by the real estate registration authority of the county-level people’s government where the immovable property is located. However, registering digital works on the blockchain via NFTs utilizes a decentralized disclosure system, achieving consistency and accuracy of the ledger through consensus mechanisms to select (rather than designate) the record keeper. Therefore, NFT registration behavior lacks management and endorsement by specialized public authorities and does not have corresponding legal regulations for authorization and support. Second, the objects of registration differ. Property registration pertains to immovable property and special movable property (such as cars and ships), all of which are corporeal objects. In contrast, NFTs register specific metadata (i.e., characteristic information of digital works) on-chain. Due to the limitations of blockchain storage, digital works themselves are usually stored in distributed file systems outside the chain (Inter Planetary File System, IPFS) to ensure their permanence. This means that the owners of NFT digital works actually control the metadata bound to the digital works, rather than the digital works themselves. Lastly, the methods of registration differ. Property registration is achieved by recording on the ledger managed by the registration authority, and the ownership certificates issued by registration authorities only serve as proof of property rights. If the ownership certificate is inconsistent with the records in the registration ledger, it will prevail unless there is evidence proving an error in the registration ledger. In contrast, NFTs rely on distributed registration on the blockchain, where all nodes have records of the ledger. Any new transaction information on the blockchain generates a random number and broadcasts it to all nodes. Only when the majority of nodes confirm the transaction’s validity and it has not existed previously can a new block be formed and extend the chain. In Satoshi Nakamoto’s view, as the blockchain extends, attackers attempting to tamper with it will face the “Gambler’s Ruin Problem”, thus enhancing the credibility of the blockchain. This public broadcasting behavior achieves the effect of disclosure, compensating for the inability to verify the possession status of ordinary digital works. Moreover, both the public key and private key of NFTs possess encryption characteristics, fully ensuring the objectivity of the digital work carrier and the security of possession, further strengthening its trust ecosystem.

Although NFT digital works superficially exhibit certain characteristics similar to movable property, their rights establishment, change, transfer, and disposal or extinction all rely on blockchain registration behavior. Therefore, adhering to the registration effectiveness of immovable property is reasonable. Without the embedding of NFTs, ordinary digital works, even if classified as movable property, due to their high replicability, could lead to a situation where a digital work is simultaneously possessed by both buyers and sellers. Good faith third parties would be unable to discern the rights status from the possession situation of ordinary digital works. While voluntary registration of digital works has existed for some time, the registered information pertains to copyright management and does not have a substantive impact on possession status, unlike property registration, which can oppose the good faith acquisition of holographic copies. NFTs solve the problem of establishing and changing the public disclosure of digital works as data, but their effectiveness is built upon whether they are registered on the blockchain, primarily reflected in three aspects: first, registering digital works through NFTs not only establishes rights for digital works but is also a key step in fixing digital works as property objects, thus forming rights against the world. Second, NFT digital works can only ensure the uniqueness and exclusivity of digital works through comprehensive registration, thereby demonstrating their property object attributes. Finally, once digital works are registered on-chain through NFTs, they possess presumptive rights, and good faith third parties relying on the registration of rights changes for digital works according to NFT rules will not be affected by inaccuracies in registration. Additionally, since transactions of movable property often occur frequently, it is generally believed that adopting registration methods similar to immovable property may hinder the convenience of property transactions. However, blockchain registration, while technically ensuring the credibility of registration, also achieves registration simplicity, thus supporting frequent transactions of digital works. Therefore, although digital works may appear more similar to movable property, I advocate that if NFT digital works are included in the property rule system, their registration behavior should be adjusted according to the registration effectiveness of immovable property rather than the definition of “digital movable property” by the Uniform Law Commission of the United States.

2. The Copyright Attributes of NFT Digital Works Blockchain Registration.

The blockchain registration behavior of NFTs provides a beneficial supplement to the automatic acquisition system of copyright for digital works. For a long time, the method of confirming copyright has adopted an automatic acquisition system, meaning that copyright is automatically protected upon completion of an original intellectual creation. This system stems from the natural rights theory in the continental legal system. Simultaneously, the confirmation of copyright also recognizes the preliminary evidential role of voluntary registration. Article 12, paragraph 2 of the Copyright Law of the People’s Republic of China allows copyright holders to choose to register with a registration authority recognized by the national copyright authority. However, the rapid development of technology has changed the creation methods, dissemination pathways, and carriers of works, amplifying the risks of rights disputes under the automatic acquisition system. Therefore, some scholars have called for the application of blockchain technology in copyright registration, as its distributed sharing mechanism can unify registration standards, and its tamper-proof characteristics can enhance the evidential effectiveness of registration, compensating for the deficiencies of the existing copyright registration system. NFTs, as an application of blockchain technology to digital works, provide inherent trust in copyright for digital works. Combined with smart contract technology, they can clearly record and allocate copyright interests, enhancing copyright security and maximizing the intrinsic value of digital works’ copyrights.

It should be emphasized that the blockchain registration of NFT digital works does not fall under the category of work registration conducted by public registration authorities, but this does not affect its effectiveness as preliminary evidence. According to the first article of the “Trial Measures for Voluntary Registration of Works”, the main purpose of work registration is to provide preliminary evidence for resolving copyright disputes. Since work registration is regarded as a utilization of evidence, the Copyright Law does not require that registration by authorities recognized by the national copyright authority be the only admissible evidence. Moreover, in judicial practice, the standard for handling ownership disputes in copyright is based on the preponderance of evidence standard, rather than a limited evidence standard. Therefore, the copyright protection legal system in China does not exclude the possibility of private domain registration serving as preliminary evidence. Although blockchain platforms are not registration authorities recognized by any sovereign state, this does not prevent their registrations from being used as preliminary evidence to assert copyright ownership. Leveraging the characteristics of distributed ledgers and encryption technology on blockchain platforms can ensure the uniqueness and authenticity of NFT digital works, thus making them powerful tools for copyright protection.

Before the emergence of NFTs, digital works faced the dilemma of being unable to apply the exhaustion principle. In the era of hard copies, the inseparability of works from tangible carriers made the exhaustion principle an important tool in copyright law to coordinate intellectual property rights and personal property rights. Once the first sale of a work is completed, the copyright holder loses certain controls over the work, such as the rights to sell or lease. However, online works can be sold in the absence of physical carriers through issuance authorization or subscription services, as what is being transferred is the information of the digital work rather than the original or copies—the physical carrier of the digital work (the storage device), thus not constituting an “issuance” but rather an online dissemination, and therefore not applicable to the exhaustion principle. In judicial practice, in the case of Capital Records vs. ReDigi, the court held that uploading digital works to a third-party server for other users to download and use, even if the downloaded copies are automatically deleted, cannot be subject to the exhaustion principle due to the generation of new copies. The emergence of NFTs has changed this situation.

The registration and disclosure effects of NFTs create conditions for the application of the exhaustion principle to digital works. NFTs not only achieve specificity through identifiers but also make ownership perceptible through registration disclosure, thereby endowing the carrier with “quasi-tangible” characteristics. Once digital works possess an objective carrier, the property disposal actions of the carrier’s owner should also be protected under the exhaustion principle without needing permission from the copyright holder. Furthermore, service agreements of NFT trading platforms typically stipulate that users’ digital works can be displayed online, for learning, research, and appreciation, as well as for transfer. This means that while NFT digital works enjoy the right to public display by law, other copyright interests attached to the work (such as reproduction rights and adaptation rights) do not necessarily transfer with the transfer of ownership. In fact, safeguarding consumers’ property interests in the original or copies of digital works is not only a fundamental requirement of the ownership system but also plays a positive role in improving the copyright system, helping to balance the interests of consumers and copyright holders. The registration and disclosure of NFTs on the blockchain have already managed to promote the resale of digital works while avoiding infringement risks, providing a feasible technical foundation for the application of the exhaustion principle.

3. Rule Adjustments for NFT Digital Works Blockchain Registration.

NFTs play an important role in the registration and disclosure of digital works, necessitating a comprehensive review of subjects, objects, and remedy mechanisms. First, the registration subjects of NFT digital works are private entities, requiring strict legal regulation to establish civil liabilities for registration subjects and registration errors. Although blockchain technology can guarantee the credibility of registration, not all existing NFT digital works in China are registered on public chains; many are on alliance chains controlled by leading internet companies, which essentially remain under centralized management. Therefore, NFTs face the same issues encountered in traditional immovable property registration, including registration, inquiry, correction registration, objection registration, and pre-registration. If the subject of the NFT registration institution has faults and lacks liability, it may lead to a situation where rights holders cannot seek remedies for their losses. Second, platforms often involve original rights to digital works in the NFT minting process, requiring prior examination of registration objects to ensure accuracy. However, it is often unrealistic to implement strict substantive review for digital works registration, necessitating a predominance of formal review. The minting of NFT digital works often involves the acquisition rights and reproduction rights of the work, followed by the issuance rights and information network dissemination rights. While NFT trading platforms cannot actively seek out violations of these rights, they also cannot ignore obvious infringement behaviors. Therefore, if platforms provide NFT minting and issuance services, they must first confirm that the subject applying for minting is the copyright holder of the digital work or has obtained lawful authorization. Once the NFT digital work is minted, the subject applying for minting transforms into the owner, and the platform must ensure the smooth realization of property or copyright rights through examination. Given the multiple steps involved in minting NFTs, exceeding the substantive review capacity of platforms, both property law and copyright law systems should primarily adopt a formal review approach. However, adhering to a formal review approach does not exempt platforms from liability; if platforms fail to fulfill their relevant responsibilities, they will share liability with infringers of digital works, as reflected in the judicial opinion of the Hangzhou Internet Court in the “Fat Tiger vaccination” case.

Under a formal review approach, the likelihood of registration errors occurring at the front end of the NFT platform during the minting process is unavoidable, thus necessitating the establishment of corresponding remedy mechanisms at the back end to protect the interests of rights holders. First, an infringement compensation system for NFT platforms needs to be constructed. According to Article 1195 of the Civil Code, platforms managing NFT digital works should promptly forward infringement notifications received from rights holders to the relevant users who uploaded the NFTs and take necessary measures based on the preliminary evidence constituting infringement and the type of service provided. In determining necessary measures, it should consider the infringement scenario and industry characteristics, aiming for measures that are technically feasible, reasonable, and do not exceed necessary limits, rather than simply requiring “deletion, blocking, or disconnection”. For NFT platforms, technically feasible measures may involve deleting the purchase links of NFTs on their operating platform and placing them in a URL black hole. Second, objection registration and correction registration mechanisms should be introduced into NFT registration. Objection registration, also known as objection defense registration, refers to raising objections against the content of the registration to limit the “correctness presumption” of the registration, protecting the interests of specific individuals; it serves as a temporary measure prior to correction registration. In NFT digital works objection registration, if a registration error is identified, timely correction registration should be conducted. Correction registration refers to the registration made by the property owner or registration authority upon discovering registration errors. After correction registration, if the original rights holder disposes of the property object during the objection registration period, the rights of the person registered after correction will not take effect unless recognized, thus protecting the interests of the actual rights holder.

NFT digital works possess non-fungibility, and their uniqueness shares commonalities with the uniqueness of ordinary property objects to some extent, but they also have their own characteristics, which affect the applicability of related rules. This is mainly reflected in both external and internal aspects.NFT creates unique identifiers for digital works, distinguishing them from other copies, making them non-interchangeable in transactions, thus maintaining external non-interchangeability.Digital works must remain intact to fully present their artistic uniqueness; for instance, splitting them often leads to a reduction in value, maintaining internal indivisibility.The non-interchangeability of NFT digital works will project effects on tokenization and securitization; although they are termed tokens, they are not virtual currencies, hence should not be analogized as monetary objects and subject to property rules.Moreover, NFT digital works also exhibit indivisibility, necessitating caution in the application of co-ownership systems to prevent excessive securitization.

1. The Legal Attributes of Non-Interchangeability of NFT Digital Works and Rule Adaptation.

“Tokens” are precise evidence that can prove the existence of facts, existing in both fungible and non-fungible types. Fungible tokens are issued with completely identical characteristics, a typical example being Bitcoin. According to Nakamoto’s design, Bitcoin is a reward for miners contributing their computing power to participate in blockchain packaging and recording, distributed via a consensus mechanism known as “Proof of Work”. Therefore, Bitcoin needs to be issued and circulated as fungible tokens, which can realize the function of “cash” rewards. Since fungible tokens possess the nature of generic goods, they can easily be packaged as virtual currencies. Internationally, currencies themselves lack individuality, merely serving as a representation of value; they act as a medium for property exchange and a means for debt settlement, and are highly substitutable generic goods. Countries often define virtual currencies by comparing them to the characteristics of legal tender; for instance, the European Union’s Anti-Money Laundering Directive (2018/843), Germany’s Electronic Securities Act (2021), and Italy’s Anti-Money Laundering Decree (125/2019) require virtual currencies to serve as general equivalents and be usable as exchange tools.

NFT digital works are classified as non-fungible tokens, and their uniqueness is manifested through unique identifiers that allow them to be clearly distinguished from other holographic copies, thus reflecting the objective differences between this object and that object. Ordinary digital works possess replicability and intangibility, rendering them devoid of specificity and uniqueness. However, with the development of holographic copying technology, this difference has become minimal. To compensate for this difference, digital works marked by NFTs can not only be distinguished from other similar digital works but also from their own holographic copies. For example, the mainstream NFT standard on Ethereum is ERC-721, under which a single smart contract can only issue one NFT asset, making the original version of the digital work the creator’s unique “authentic” or “manuscript”. Although the development of new technologies may lead to the possibility of batch NFT identifiers, this does not affect the essence of their specificity. Therefore, NFT digital artworks fundamentally exist as “digitally formatted files that are uniquely marked and possess originality”.

Although the term “token” in NFTs implies a form of digital currency, their essence is not that of digital currency but rather a technology ensuring the uniqueness of digital content to facilitate the flow of objects in actual transactions. Due to the non-fungibility of NFTs, they cannot be regarded as interchangeable generic goods, rendering it difficult for them to serve as mediums for property exchange. Based on the nature of the objects represented by NFTs, they can be divided into equity tokens (Security/Utility Tokens) and asset tokens (Asset Tokens). Equity NFTs represent rights to stocks, bonds, tickets, etc.; although their corresponding objects can be fungible, as proofs of rights, they are unique. NFT digital works, on the other hand, belong to asset tokens, where the corresponding objects are specific and unique works, thus forming tokens with non-interchangeability. Furthermore, it is technically impossible to aggregate multiple NFT digital works, as one plus one of specific objects does not necessarily equal two, contradicting the attributes of money. Therefore, non-fungible tokens cannot serve as general equivalents or unified accounting units, nor can they become any form of currency.

Thus, the law should avoid packaging NFT digital works as virtual currencies for financial activities. Regulatory authorities in China have maintained a rigorous and strict stance on token financing activities. For instance, on September 4, 2017, the People’s Bank of China and seven other departments issued the “Announcement on Preventing Risks of Token Issuance Financing” (commonly known as the “Nine-Four Announcement”), explicitly stating that “token issuance financing refers to financing subjects raising Bitcoin, Ethereum, and other so-called virtual currencies through the illegal sale and circulation of tokens, which is essentially an unauthorized public financing behavior.” In 2021, the Banking Regulatory Commission issued a notice on “Further Preventing and Addressing Risks of Virtual Currency Trading and Speculation”, further strengthening regulatory measures based on the “Nine-Four Announcement”. Given the significant differences between NFT tokens and fungible tokens, any attempt to package NFT tokens as virtual currencies lacks factual basis, and related activities such as issuance, circulation, and financing suspected of fraud should be prevented and prohibited.

2. The Legal Attributes of Indivisibility of NFT Digital Works and Rule Adaptation.

Although NFT digital works have initially possessed the attributes of “objects”, it is still premature to discuss the application of co-ownership rules. Co-ownership, originating from Roman law, refers to the legal status where two or more co-owners share rights and bear obligations regarding shared property according to their shares (entitled portions). In traditional co-owned properties, all co-owners generally have similar ownership rights and can freely dispose of their shares, request division at any time, and enjoy management, usage, and profit rights. However, the complex transactions related to NFTs can easily be falsely securitized, packaged as “non-standard products” akin to equity and improperly applied in the financial sector. NFT digital works themselves are intangible virtual assets, making arrangements for co-ownership unrealistic.

First, although individual ownership of NFT digital works is emerging, the legal rights are still in discussion and construction, let alone co-ownership. Essentially, the individual owner of NFT digital works does not control the digital works themselves, but rather the characteristic information projected by them. Individual ownership of NFTs is realized under a state of indirect possession of digital works; splitting ownership to achieve co-ownership would further blur the correspondence between ownership and co-owned objects, resulting in a series of legal issues.

Second, under a co-ownership state, there are certain obstacles to the disposal of NFT digital works by co-owners. While there is a common view that even if co-owned objects cannot be divided, ownership can still be split in terms of quality and quantity, legal maxims state, “multiple people cannot possess complete rights over the same object.” A fundamental requirement for NFT digital works as art collectibles is to ensure their integrity; if they are split into fragments, it will significantly impact their appreciation and value. If the owners of NFT digital works request division, they can only proceed according to Article 304 of the Civil Code, involving pricing or auctioning. However, both actions involve the disposal of co-owned objects, requiring the consent of all co-owners. In an anonymous blockchain system, achieving this consent may present certain challenges. Therefore, there are legal obstacles to the disposal of NFT digital works under a co-ownership state.

Finally, management, usage, and profits of NFT digital works under a co-ownership state pose a series of challenges. According to Article 301 of the Civil Code, if co-owned property is to be disposed of, the consent of co-owners holding more than 2/3 of the shares is required; otherwise, it constitutes unauthorized disposal. In practical operation, obtaining the consent of co-owners meeting this numerical condition is not easy, and coordinating internal relationships becomes extremely difficult. Additionally, co-owners can raise requests to external third parties based on their shares, a phenomenon academically referred to as “the external expansion of share rights”. However, since the ownership attributes of NFT digital works have not been legally clarified, how to define, exercise, and limit these share rights to realize their ownership capabilities remains an unknown issue. Consequently, the management, usage, and profits of NFT digital works under a co-ownership state exhibit significant legal obstacles and uncertainties.

Therefore, we need to prevent the weakening of the non-fungibility of NFT digital works through the division of ownership and avoid indirectly conducting financial activities through securitization. Although art securitization does exist internationally, China has adopted a very cautious attitude towards it. The Central Propaganda Department clearly required in 2011: “Cultural property trading places must not publicly issue any rights by splitting them into equal shares.” Currently, there is no conclusive opinion on whether NFT assets can be securitized in various countries. In the United States, for instance, the determination of asset securitization still employs the relatively lenient Howey Test. In the case of Jeeun Friel vs. Dapper Labs filed in May 2021, the question of whether NFTs belong to securities remains unresolved. Given the differences between China’s securities market and that of the United States, overly lenient regulation of new phenomena is not conducive to protecting the interests of investors, thus a more cautious attitude should be adopted. On April 13, 2022, the China Internet Finance Association, the China Banking Association, and the China Securities Association jointly issued the “Initiative on Preventing Financial Risks Related to NFTs”, proposing guidelines to “resolutely curb the financialization and securitization tendencies of NFTs”. When issuing NFTs, we should strictly prevent illegal financial activity risks and avoid splitting NFTs into equal shares for illegal issuance, circulation, and financing activities.

I believe that in addressing NFT digital works, the property and related rule systems should adopt a threefold approach of acceptance, adjustment, and limitation. First, given the non-tampering and disposability of NFT digital works, we should recognize their property object attributes under property law and apply property rules to protect the rights of their owners, such as possession, dominion, and benefits. Second, based on the registration disclosure characteristics of NFT digital works, we can treat them as immovable property and conduct registrations in accordance with the requirements of registration effectiveness and formal review, eliminating chaos in the ownership and trading of digital works. Finally, considering the non-fungibility of NFT digital works, we should fully recognize their non-interchangeability during buying and selling transactions and be vigilant against treating them as fungible goods for virtual currency trading. At the same time, we must approach the idea of splitting them into equal shares for securitization operations with caution.

Editor, Proofreader: Li Jiajun

Review: Shen Hao

Previous Recommendations