The NFT-linked Trust
Look at me - I am the licensor now.
What if I told you that ownership of an NFT does not equate to ownership of the associated artwork?
You probably knew this already. Most people in the NFT space do - we just pretend it isn’t a problem. We tell each other that legacy legal systems don’t apply and it is all good because the community recognizes the NFT owner as the owner of some sort of ‘moral’ right over the associated artwork.
So we prance about showing off our Bored Apes and Punks, cats, penguins, whales and all manner of adorable little critters based on our communal understanding that if I own the Bored Ape #1000 NFT, I own some sort of right over the associated artwork.
The solution isn’t simple - so we pretend there isn’t a problem.
I first started thinking about this problem when loom dart approached me to get involved in the Wassies by Wassies (then loomlocknft) project. I wasn’t really an NFT guy at the time - I had more of a reputation as a ‘fixer’ in the crypto space - the sort of guy you go to when you need someone who understands legacy world stuff like law, finance and operations while still understanding crypto and wasn’t afraid to be a little creative when solving problems.
loom sought my advice on his upcoming NFT launch around August 2021 - mainly because he needed my help with legacy world concepts which were incredibly important to his blended physical-metaverse vision. “I want to do things right” - he told me. “This is really important because we aren’t just a pfp project.”
He told me about the Wassies and where they came from. A silly piece of art which had been originally created by a Japanese artist, modified and popularized by a few members of the community and had then taken a life of its own as a crypto twitter wide meme.
So we started discussing IP. Our first step was to go to tukinowagomo - the original artist - to purchase rights to create derivative artwork based on his original. After we had done so, we turned our attentions to how we were going to get this IP to NFT holders.
Now loom dart is not a lawyer but his objectives were very clear. The project wasn’t going to try to privatize the meme. “Wassies are for everyone” - he said. “We are never going to privatise it”. But we did want to give the rights of the artwork in our NFT project to persons that owned the NFT.
“I really want the NFT holders to own their Wassie”.
NFTs and IP are fundamentally broken.
The market standard is to use a licensing structure. The terms and conditions of the “blue chip” NFT projects all involve licenses. When you buy a Bored Ape NFT - you get an unlimited worldwide personal and commercial license. When you purchase a Punk, you get a personal license but no commercial license. Since the market leaders are using a licensing structure - most NFT projects obviously do a quick copy-pasta of their T&Cs. Seriously - look at the terms of most NFT projects - even the loomlock / Wassies by Wassies terms were heavily based on the Bored Apes precedent.
But licenses fucking suck.
Without going into a lecture on legal principles - here is a short explanation of why licenses don’t really work that well with NFTs and artwork.
A License is not Ownership.
When you are given a license to the IP - all you own is the license. The IP itself still belongs to the person who licensed it to you. You can only deal with the IP in accordance with the terms of the license itself. If the license is only a personal license, you can’t print and sell merch of the associated artwork. If it is a commercial license - you are again limited by the terms! A license is quite simply the owner of the IP himself allowing you to use the rights to the associated artwork that is owned by the owner.
A License requires a Licensor
This brings us on to the second point that a license is a secondary right. You cannot have a license without a licensor. When an NFT project gives you a license over the artwork associated with your NFT, you are taking it on good faith that they will continue to license it to you on the same terms (assuming you are happy with those terms).
A License is not rug-proof or insolvency proof
Because your license is a secondary right and not a primary right - you are susceptible to events that impact the licensor. One risk is obvious - your project team rugs and unilaterally terminates the license and asks “What you gonna do - sue me?” Another risk is if your project team runs out of money and the company gets liquidated - if the licensor gets liquidated - you no longer have a license. In other words, if you derive your rights in the associated artwork via a license - you are forever exposed to risks associated with the licensor.
A License may not follow a secondary transfer
Now this is the bit that may seem completely mind-boggling. Yes - you read that right. When you buy an NFT at mint, the terms and conditions of the NFT projects apply. And the legal position is basically this - if you buy an NFT at mint, we will give you a license over the associated artwork.
But when you purchase an NFT from someone else who has that initial license - there is no obligation on them to transfer the license to you. When you purchase an NFT on OpenSea for example - you are purchasing the NFT, not the license. Some NFT projects avoid the ludicrous legal scenario which can happen where an NFT holder who minted the NFT sells the NFT but retains the license over the associated artwork by incorporating a term that your license ends when you stop holding the NFT. This is fine - but how does the new owner of the NFT get the license / IP rights?
There are two possible interpretations.
The first is that somehow there is an assignment of the license from the NFT seller to the NFT buyer that takes place at the same time as the NFT sale.
But this requires that your terms somehow staple the license to the NFT and say that you can only sell the NFT together with the license and the terms of the secondary sale incorporates an assignment. Did you negotiate an assignment the last time you bought an NFT? Probably not.
This view can only be saved (without a very comprehensive transfer framework) if we somehow say an assignment is ‘implied’ when the NFT transfer takes place. To explain briefly, when lawyers / legal systems want something to happen that isn’t in the contract (normally for consumer protection) - we say that terms are implied into the contract to make sure people are protected. But what is the basis for implying this assignment? There is no global case law on this point and there is no global statute for this. The best we can say is that maybe it would be an implied term in a certain common law jurisdiction if the matter ever gets fully litigated but until then, we can only speculate about whether or not any legal system (and its boomer lawmakers and/or judges) will imply an assignment into an agreement to sell an NFT. Good luck with that sers.
If you a lawyer that believes in NFT licenses - you would probably look to find an assignment under this first interpretation because the second one (which is more intuitive) really doesn’t work.
The second interpretation is that the licensor enters into a new license with the new owner of the NFT. This seems to have been how most NFT projects have thought about it. When an NFT changes hands, I simply enter into a license with the new NFT owner. Easy!
Except for the fact that one of the first principles taught in contract law in law schools around the world is that consideration must move from the promisee. This means that for there to be a valid grant of a license from the NFT project to the new owner, the owner must pay or provide some sort of consideration (meaning money, services, value or some sort of benefit etc.) to the NFT project. But this doesn’t happen in a secondary transfer. In a secondary transfer - consideration (or value) is moving from the NFT buyer to the NFT seller - not to the NFT project.
Since there is no consideration moving to the NFT project in exchange for the new license which the NFT project is purportedly granting - there is no enforceable license.
Now I acknowledge I am starting to ramble on so let us move onto the solution before this starts to resemble an article in a legal journal which nobody reads.
The solution came to me late one night while I lay in bed. While I was half asleep - I remembered a little throwaway line in a textbook on the law of trusts and some work I did long ago during my law school days where I spent a summer working for a lawyer who serviced ultra high net worth clients.
Now you have all heard of trust fund babies - so I will try not to go into a lecture about the law of trusts immediately after a long rant about contract law. Even law school back in my day didn’t put us through that. But the short summary is this - a trust is a legal arrangement where one party (the trustee) owns property for somebody else (the beneficiary). This is used by super high net worth individuals to ensure their assets live on after they are gone - perhaps by stipulating that all of their descendants shall have their education covered, be paid a maintenance, be allowed to use the private jet etc. So I thought to myself - how do we make a trust work with NFTs?
The minority of readers that are common law trained lawyers will probably be thinking “ser purpose trusts are not ok - were you sleeping through law school?”
They are right.
Without going into a lecture (as promised!), trusts are limited in many ways. You normally can’t have a trust that lasts forever. You need a trust with identifiable beneficiaries and not just a specific purpose. A trust with identifiable beneficiaries can shut it down.
Unless you went to certain jurisdictions that allow you to a trust that does go on forever… and does exist for a certain purpose.
And so this was the throwaway line I recalled in my textbook which I was assured by my lecturer would never show up in an exam, was super niche, and I would never have to deal with in my life.
Yes - we went to the Cayman Islands to set up a trust.
Our idea for how the trust would work is simple - all of the IP which we purchased from tukino would be transferred into a trust. This IP would be held by an independent professional trustee who would hold this IP until the end of time (or until the money runs out) in accordance with the terms of the trust document which created the trust.
Now the trust document is a terribly long and boring document but the main directive of the trustee is this - to recognize whoever owns a Wassie by Wassies NFT as the beneficial owner of the artwork associated with that NFT.
This means that if you own the NFT token for Wassie 300 - you will be recognized as the owner of the associated artwork. Not a licensor - but the actual owner. And with this comes all of the rights associated with ownership including exploiting the IP in any way you want - including licensing it to someone else, commercializing it etc.
But the moment you trade the NFT to someone else, you lose all of these rights because the trust decides whether or not you own the IP to the artwork based on whether or not you are able to prove that you own the NFT. Think of it as the legal equivalent of a true/false equation. If ownership of NFT = true; recognise person as owner of IP.
Now to tie the whole thing together - we have the concept of an enforcer. An enforcer’s role is to ensure that the trust is being operated the way it is meant to be - and to defend or enforce the rights of the beneficiaries. NFT holders will be able to report any grievance to an enforcer who will take the necessary steps to address the complaints.
After many hours of first explaining to some boomer lawyers and trustees on a beach how NFTs work and then convincing them we weren’t involved in terrorist financing (harder than you might think) and then amending their draft documents to do exactly what we wanted it to do… we got it to work.
And so we set up the first NFT perpetual IP trust which recognizes ownership of IP based on whether or not a certain individual is in possession of a specific NFT. If you own an NFT in the Wassies by Wassies project - the associated artwork is yours. Nobody, not the project team or loom dart himself can take that away from you.
We still want to do stuff with that IP though so… license it to us maybe? Pretty please?
Thanks for reading this article. I have worked for months on this structure and would love to go into more detail about the possibilities that are unlocked but that may unnecessarily leak / spoil certain plans which the Wassies by Wassies project team has in the pipelines. Perhaps another post will come after the roadmap release…
Please also note that this is not legal advice. I have worked extensively with lawyers in multiple jurisdictions to set this up in order to achieve the specific objectives of the Wassies by Wassies project and a structure like this may or may not be suitable for another project.