Recently, the Procuratorial Daily, a newspaper under the Supreme People’s Procuratorate of China, published an article titled “The Legal Nature and Risk Governance of NFTs in the Context of Digital Economy”  (hereinafter referred to as “the article”), which discussed various aspects of the legal nature and risk governance of NFTs. The article also explored the “royalty” sharing mechanism that is widely used in NFT transactions, and mentioned the concept of droit de suite, or the right of resale. This article intends to examine the royalty system in NFT transactions from the perspective of “copyright”.

What are “royalties”?

On overseas NFT trading platforms, the English term for royalties is “Creator earnings” (see below), and the rate is usually between 5% and 10%. However, this term has a different meaning from the Chinese legal concept of “royalties”.

The creator earnings in overseas NFT transactions are inspired by the artist’s resale right (ARR), or droit de suite, which means that in the secondary transactions of NFTs after their initial issuance, a certain percentage of the transaction price is paid to the issuer of the NFT as an economic benefit. In contrast, under China’s current law, the definition of “royalties” comes from Article 3 of the Measures for Payment of Remuneration for Using Literary Works implemented in 2014, which states that “royalties are remuneration paid by users to copyright holders in the form of book price x actual sales volume or print volume x royalty rate”, which is a common payment method in the international publishing industry (and other payment methods are also applicable to published art works).

Regarding the legal establishment of ARR, different countries have different legislations. Article 14 of the 1979 version of the Berne Convention for the Protection of Literary and Artistic Works (“the Convention”) stipulates the right of authors (or rights holders) to benefit from the resale of their works of art, but at the same time, it also stipulates that ARR is only protected within the scope prescribed by law when there is legislation in that country.

According to WIPO’s webpage on ARR, ARR has been implemented in more than 80 countries, but there are differences in the applicable conditions.

As can be seen from Table 1, although ARR is a statutory right in these countries, most of them have application thresholds. However, in NFT transactions, the royalty setting breaks through the limitations of legal conditions. Regardless of the country (region) or transaction price of the issuer/trader, the issuer of NFT can enjoy the benefits of resale rights without exception.

In addition, to ensure the realization of ARR, there must be a supporting system to ensure the tracking of secondary transactions. In the real world, for example, in France 4, professionals in the art market (whether auction houses, art galleries or second-hand dealers) have an obligation to register items (police books, livres de police), record relevant data (identity of declarant, nature, origin and description of item, purchase price and payment method, etc.) and keep them for 10 years to ensure inventory and traceability. In NFT transactions, however, this is easily solved by blockchain’s inherent traceability without any additional management costs. Based on this point, imagine that introducing NFT into property registration management system (including movable and immovable property) in the future may make management more efficient.

If “royalties” are not statutory rights, can they be created by contract?

In fact, the answer to this question can be inferred from above: Of course they can. As mentioned above, NFT royalties are inspired by ARR, but most NFT transactions may not meet ARR’s application threshold in terms of amount. Therefore, this is actually an agreement between both parties to a transaction and an innovative exploration in Web3 field for digital art transactions. In Web3 world, Code is Law. This agreement is confirmed and executed by smart contracts. Although China’s Copyright Law has not yet introduced artist’s resale right, but in civil law field, what is not prohibited by law is free. Article 130 of China’s Civil Code stipulates that “civil subjects shall exercise their civil rights according to their own will and according to law without interference”. As long as both parties agree to create an act that meets requirements for civil legal acts and does not harm national interests, social public interests or legitimate rights and interests of others then civil subjects’ rights shall be protected by law. Therefore, if China relaxes restrictions on secondary transactions of NFTs in the future, even if there is no corresponding legislation in copyright law field, according to Civil Code, it is still possible to create similar agreements.

Overall, artist’s resale right is a protection and recognition for artists. It acknowledges the lasting value of artists’ works and ensures that artists or their heirs can share the economic benefits brought by the increase in value of their works through system creation when they cannot participate in the resale of their works. NFT royalties, which are inspired by artist’s resale right, are an application of technology in system innovation.