User-Generated NFTs: A Legal Innovation for Decentralized Intellectual Property Ownership

Executive Summary

Traditional Non-fungible Tokens (NFTs) failed to address the reality of copyright laws. NFTs remain centrally owned: founders retain intellectual property rights. This centralization creates regulatory vulnerabilities and unclear rights structures, undermining the core principles of decentralization.

This article examines how copyright law governs NFTs and analyzes current licensing approaches. It introduces User-Generated NFTs (UG-NFTs) as both a legal and technical innovation. By making token holders the creators—and thus copyright owners—of their NFTs, UG-NFTs align blockchain technology with established intellectual property frameworks.

While challenges remain, UG-NFTs offer a new perspective on decentralized digital asset ownership, applicable even beyond the blockchain space.

Introduction

Innovation in the blockchain space focuses on its technology. Despite the technological advances, the impact of blockchain transactions on the “off-chain” world remains limited.

Why? Blockchains have no “connection” to the rights to real-world assets.

Only law or contract can establish such a connection. The most significant barriers to widespread blockchain adoption are therefore not technological, but legal.

If we want blockchain transactions to influence real assets, the next wave of innovation must come from aligning and connecting tech with legal systems.

NFTs and the Intellectual Property Challenge

Current image-based Non-fungible tokens (NFTs) exemplify this perfectly. NFTs promise digital ownership secured by blockchain technology. Yet, intellectual property (IP) ownership is determined by law, not code.

IP laws evolved over centuries to govern the creation, transfer, and licensing of IP. By focusing on technology, the NFT industry glossed over the property rights in the actual asset: the image.

When someone buys an NFT, they do not buy an image; they buy a license to an image owned by someone else. This disconnect between technological promise and legal reality results in confusion, litigation, and regulatory scrutiny throughout the NFT market.

Article Overview

This article examines IP laws as they apply to NFTs. It analyzes how NFT projects navigate copyright law through licensing agreements. Finally, it introduces User-Generated NFTs as a way to align IP ownership with token ownership.

By making token holders the creators of their NFTs, they decentralize ownership to the community. Such an innovation could influence other industries, such as gaming and metaverses.

Intellectual Property Laws

IP law encompasses multiple forms of intangible property rights: patents protect inventions and processes; trademarks protect brands and commercial identifiers; trade secrets protect confidential business information; and copyrights protect original works of authorship.¹⁾Hickey, Kevin J., “Intellectual Property Law: A Brief Introduction,” (U.S. Congress, In Focus, IF10986, 04/13/2022), accessed on Dec 24, 2025, https://www.congress.gov/crs-product/IF10986.

Copyright law specifically governs literary, artistic, musical, and other creative works. Unlike patents and trademarks, which require registration for protection, copyright protection arises automatically upon the creation of an original work fixed in a tangible medium.²⁾Ibid: “Copyright attaches once a work is created and fixed in a tangible medium of expression (e.g., recorded in a computer file or on a piece of paper). Unlike patents and trademarks, the copyright holder does not need to apply with the government to obtain a copyright. To sue in federal court, however, American copyright holders must first register their copyright with the U.S. Copyright Office.”

This automatic protection of created images makes copyright laws relevant to NFTs.

Requirements for Copyright Protection

The threshold for copyright protection varies somewhat across jurisdictions. However, common principles exist.

In the United States, copyright protection requires an original work of authorship fixed in a tangible medium of expression.³⁾“17 U.S. Code § 102 – Subject matter of copyright: In general,” https://www.law.cornell.edu/uscode/text/17/102, (a): “Copyright protection subsists, in accordance with this title, in original works of authorship fixed in any tangible medium of expression.” Originality does not require novelty or artistic merit—merely that the work is independently created and possesses at least minimal (a “modicum”) of creativity. A simple digital image drawn by hand meets this threshold.

In the United Kingdom, copyright is an automatic right. It arises whenever an individual or company creates a work. To qualify, a work should be regarded as original, and exhibit a degree of labour, skill, or judgement.⁴⁾“Fact sheet P-01: UK copyright law,” (UKCS, Face sheet P-01, issued: April 2000, last amended: 2nd August 2020), accessed on Dec 24, 2025: https://copyrightservice.co.uk/copyright/p01_uk_copyright_law.

The European Union’s copyright framework emphasizes that copyright protection arises automatically from the moment of creation, requiring no formal application process.⁵⁾“Copyright, Your Rights” (EU, Your Europe), accessed on Dec 24, 2025: https://europa.eu/youreurope/business/running-business/intellectual-property/copyright/index_en.htm: “[you] automatically have copyright protection, which starts from the moment you create your work, so you don’t need to go through any formal application process.” Copyright, as a form of intellectual property, is intangible property resulting from “creations of the mind.”⁶⁾“Intellectual Property,” (EUR-Lex, glossary of summaries), accessed on Dec 24, 2025: https://eur-lex.europa.eu/EN/legal-content/glossary/intellectual-property.html

Across these jurisdictions, a key principle remains consistent: the creator of an original work automatically owns the copyright to that work.

International Copyright Protection

While individual nations’ laws govern copyright, international treaties harmonized the practice.

The Berne Convention for the Protection of Literary and Artistic Works, established in 1886 and now encompassing over 180 countries, requires member nations to provide automatic copyright protection to works created by nationals of other member countries.⁷⁾“Berne Convention for the Protection of Literary and Artistic Works (as amended on September 28, 1979),” (Wipo, Geneva, Switzerland), accessed on March 12, 2024, https://www.wipo.int/wipolex/en/text/283698: Article 1

This means a work created in France receives protection in the United States, Japan, and other member nations without registration.

The World Intellectual Property Organization (WIPO) Copyright Treaty further extends these protections to the digital environment, addressing the distribution and communication of works online.⁸⁾“Summary of the WIPO Copyright Treaty (WCT) (1996),” (Wipo), accessed on May 16, 2023, https://www.wipo.int/treaties/en/ip/wct/summary_wct.html

These international frameworks have proven relatively effective at copyright enforcement on the internet, with platforms like YouTube, social media networks, and NFT marketplaces able to share copyrighted work and implement content filtering to comply with copyright law across jurisdictions.

The Fundamental Copyright Principle: Creators Own Their Work

The cornerstone of copyright law worldwide is straightforward: whoever creates an original work, owns the copyright to that work. This ownership is inherent in the act of creation and requires no registration, no notice, and no formal declaration.

When an artist creates a digital image, they automatically and immediately own all rights to that image. These include the rights to reproduce it, distribute it, display it publicly, and create derivative works.⁹⁾“17 U.S. Code § 106 – Exclusive rights in copyrighted works,” (LII), accessed on Dec 24, 2025: https://www.law.cornell.edu/uscode/text/17/106

Copyright owners can transfer their ownership rights to others, but such transfers must meet specific legal requirements. In the United States, for example, such transfers need to be formalized in an instrument of conveyance and signed by the owner.¹⁰⁾U.S. Copyright Office, “Circular 12 – Recordation of Transfers and Other Documents,” (U.S. Copyright Office, Washington, revised: 09 / 2016), accessed on March 20, 2025, https://www.copyright.gov/circs/circ12.pdf, page 2. “A transfer of copyright ownership, other than by operation of law, is not valid unless an instrument of conveyance (for example, contract, bond, or deed) or a note or memorandum of the transfer is in writing and is signed by the owner of the rights conveyed or the owner’s duly authorized agent. See 17 U.S.C. § 204(a)”

Similar formalities exist in other jurisdictions to ensure clear chains of title for intellectual property. Copyright law thus sets strict restrictions upon the transfers of ownership of, for example, an image. How does this relate to NFTs?

Copyright Law in Relation to NFT Collections

Understanding the legal issues with NFTs requires understanding of how they work. In the most popular NFT collections, a project founder creates a set of digital images by using generative algorithms that combine various traits to create thousands of unique variations of the same image.

The founder, as creator, automatically owns the copyright to all these images under the principles discussed. These images are then uploaded to a file storage system like IPFS or Arweave. After that, the founder creates a smart contract on a blockchain that generates a set of Non-fungible Tokens (NFTs).

Each NFT represents a unique token, and ownership of this token can be proved with a digital signature on the blockchain.¹¹⁾Antonopoulos & Wood (2019), ERC721: Non-fungible Token (Deed) Standard, page 247. Each token contains metadata pointing to one of the stored images via a hyperlink.

When someone purchases an NFT, they acquire ownership of the token on the blockchain. However, the copyright to the underlying image remains with the original creator. The token holder owns the token, but the founder still owns the image.

Copyright Transfer Requirements Not Met by P2P Trading

Current peer-to-peer blockchain transactions do not comply with copyright law’s transfer requirements. When someone purchases an NFT on a marketplace like OpenSea, the transaction executes through a smart contract: cryptocurrency is exchanged for token ownership.

But such transactions do not include a written instrument signed by two parties, which U.S. law requires for copyright transfer. They do not include the documentation European law requires.

Regardless of intentions, the technical mechanisms of blockchain transactions do not satisfy the legal formalities required for copyright transfers. The blockchain records token ownership, but copyright ownership remains unchanged.

So what is transferred?

NFTs Convey Licenses, Not Ownership

What NFT buyers receive depends on the terms and conditions established by the copyright owner (the founder). These terms typically grant a license to NFT token holders: permission to use the copyrighted work in certain ways, subject to specified conditions.

NFT holders are licensees, not owners, of the underlying creative works.

The license might permit personal display of the image, commercial use up to certain revenue limits, or creation of derivative works. The copyright remains with the licensor, who retains the right to modify the license terms (unless specifically contracted otherwise), enforce restrictions, and maintain ultimate control over the IP.

Admitted, there is nothing inherently wrong with licensing agreements. They power the internet and almost all software people use daily. They come with downsides, though, especially in the case of NFTs.

How Various Projects Addressed Licensing

NFT projects vary in their approach to licensing. This reflects an evolution in understanding of these issues. CryptoKitties, one of the earliest major NFT projects issued by Dapper Labs, established a licensing framework that granted token holders almost no rights.¹²⁾Author: I have read the first version of the license but did not make a backup. I searched for it in 2024, but could not find it. I inquired with Dapper Labs if the license can still be found online, but the person replying was not aware of the previous licensing arrangement. The terms and conditions of this and other NFT collections have been updated since.

DraftKings similarly offered minimal rights, with a revocable license to “view” the image and an NFT tradable only on a marketplace itself managed.¹³⁾Dufoe v. DraftKings Inc., et al., 1:23-cv-10524-DJC, U.S. District Court for the District of Massachusetts, Class Action Complaint for Violation of the Federal Securities laws: “DraftKings, for itself and on behalf of its licensors, grants you a limited, non-exclusive, non-transferable (except pursuant to a Secondary Sale in accordance with these DK Marketplace [Legal Notice]), revocable, non-sublicensable license to the Intellectual Property Rights practiced by, incorporated, or embedded in your purchased DraftKings NFT solely for purposes of you using, accessing, and/or holding such purchased DraftKings NFT, including viewing the Content associated with such purchased DraftKings NFT (the foregoing license in this subsection ‘NFT License and Intellectual Property’, the ‘NFT License’).”

These restrictive licenses aimed at protecting the founders. But by limiting the rights of their NFT holders, both companies attracted lawsuits that they were forced to settle at high cost.

The Bored Ape Yacht Club took a dramatically different approach. They granted token holders “all” rights to their specific NFT images, including the right to create and sell derivative works.¹⁴⁾“LICENSES, Here you can find all the information about the license terms of BAYC, MAYC, and HV-MTL collections,” (Bored Ape Yacht Club, Yuga Labs LLC), accessed on March 13, 2024, https://boredapeyachtclub.com/licenses/bayc: “Subject to your continued compliance with these Terms, Yuga Labs LLC grants you an unlimited, worldwide license to use, copy, and display the purchased Art for the purpose of creating derivative works based upon the Art (“Commercial Use”).” Unfortunately, even these good intentions led to legal disputes, when two Bored Ape Yacht Club NFT holders created a copycat collection.¹⁵⁾YUGA LABS, INC., v. RYDER RIPPS; JEREMY CAHEN, No.24-879, United States Court of Appeals for the Ninth Circuit, District of California.

The success of the latest big NFT hit, Pudgy Penguins, can be partially attributed to its licensing innovation. The project distinguishes between original purchasers (who received broader commercial rights to their images) and secondary market buyers (who received more limited rights as ordinary NFT holders).¹⁶⁾IP Rights, (Pudgy Penguins, Last updated: December 2022), accessed on Dec 24, 2025: https://www.pudgypenguins.com/ip-rights.

While this is in itself a good approach, it does not change the fact that Pudgy Penguins owns all images.

Problems with Centralized IP Ownership

Problems with NFT ownership are not merely academic. Legal disputes are common between NFT holders and project founders over the scope of granted rights.

Disputes go beyond IP itself to include its proceeds.

Solana NFT project Monkey Business and the community-run MonkeDAO became embroiled in such a dispute over royalties and funding. MonkeDAO members considered “wrapping” their NFTs in a new smart contract to circumvent the original royalty model.¹⁷⁾Andrew Hayward, “Monkey Business: Why Solana NFT Project SMB and Its DAO Are Battling Over Its Future,” (Decrypt, feb 17, 2022), accessed on Dec 22, 2025: https://decrypt.co/93193/solana-monkey-business-monkedao-battling-over-future. The project eventually settled with the community-run MonkeDAO buying the IP of the project.

The last case teaches another lesson: central IP ownership creates counterparty risk.

NFT holders’ rights remain dependent on a central entity’s decisions and continued operation. This has attracted the attention of regulators. U.S. regulators may view such arrangements as securities offerings, with the token holders’ financial success depending on the efforts of the central team developing and promoting the IP. This regulatory scrutiny has led to enforcement actions¹⁸⁾James G. Gatto, Maxwell Earp-Thomas, Sheppard, Mullin, Richter & Hampton LLP, “NFT Legal Issues,” (National Law Review, Law of the Ledger, December 31, 2024), accessed on Dec 24, 2025, https://natlawreview.com/article/nft-legal-issues. and, in some jurisdictions, restrictions on offering NFT collections.¹⁹⁾REGULATION (EU) 2023/1114 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL, of 31 May 2023, on markets in crypto-assets (MICA), and amending Regulations (EU) No 1093/2010 and (EU) No 1095/2010, and Directives 2013/36/EU and (EU) 2019/1937, (11): “The fractional parts of a unique and non-fungible crypto-asset should not be considered unique and non-fungible.
The issuance of crypto-assets as non-fungible tokens in a large series or collection should be considered an indicator of their fungibility. The mere attribution of a unique identifier to a crypto-asset is not, in and of itself,
sufficient to classify it as unique and non-fungible.”

Comparable Issues: Metaverse and Gaming

This issue is not confined to the NFT market. The same applies in other digital areas, most notably games and metaverses. In many games, users spend hundreds of hours building characters, designing items, and creating worlds without owning any of it; one central company does.

There are, however, exceptions. Roblox, a wildly popular world-building game offers creators the opportunity to create “user-generated content” on its platform to which the creator holds the IP and the ability to monetize their creations.²⁰⁾“Roblox Terms of Use, (2) Intellectual Property, (b) User-Generated Content (UGC),” (Roblox, Effective Date: December 19, 2025, Last Updated: January 7, 2026), accessed on Jan 9, 2025, https://en.help.roblox.com/hc/en-us/articles/115004647846-Roblox-Terms-of-Use: “Creator retains all copyrights that Creator may hold in any UGC that Creator has ever created or will create (whether alone or with others) and Publishes or makes available on the Services…”

Similar terms apply to Decentraland, a popular metaverse offering a virtual world built and owned by its community.²¹⁾“Terms of Use, 12.4 Ownership and management of LAND, Non-fungible tokens (NFTs) and Content created by users,” (Decentraland, undated), accessed on Jan 9 , 2025, https://decentraland.org/terms/: “Content: All title, ownership and Intellectual Property Rights over the Content created by users belongs to the users who created said Content.”

The main question is: can NFT collections replicate these examples?

User-Generated NFTs: The Focus on Creation

The key insight into decentralized IP ownership lies in copyright law fundamentals: creators own their works.

If NFT holders could be the creators of their NFT images, they would automatically own the copyright.

No licensing agreements or formal transfer documents are needed. The act of creation itself vests copyright ownership in the token holder.

Such an approach asserts agency within IP law rather than remaining its passive victim. It consciously distributes IP ownership to a community of NFT holders, decentralizing ownership instead of centralizing it.

There are, however, technological and legal challenges.

Technological Challenges to Overcome

The first hurdles are imposed by the nature of blockchain technology and the way this industry currently operates. Blockchain transactions are final and immutable. NFTs, when minted, must include a link to the artwork.

This means that the image, or at least the location of its storage, must exist at the time of minting. If only the location is stored at the time of minting, but not the image, all service providers across the web3 ecosystem display a blank image.

In addition, many providers index and cache NFT images once and do not update afterwards. Users would not be able to display their NFT across the web3 space, providing a poor user experience. This creates a practical reality: the image must be created before minting.

However, in this case the user, and not the founder, creates the artwork. This means that images do not exist at the time the founder uploads the smart contract.

The question then becomes: how does one create an NFT smart contract with non-existing images?

Next, how does a user mint an NFT and simultaneously create, store, and render an image in the same transaction?

Web3 apps do not render images directly from the blockchain: they follow a link to a stored image. This requires a renderer that pulls the image from the blockchain data and stores it at the location the Token URL points to.

Legal Challenges to Overcome

Copyright laws demand real creativity to offer their protection. This eliminates image generators previously used in NFT projects. While such tools produce unique images by default, they do not require any creativity on the part of the end-user.

U.S. case law, for example, establishes that when software does the “lion’s share” of the creativity, the work would fail to meet the minimum threshold of originality.²²⁾Torah Soft Ltd. v. Drosnin, 136 F. Supp. 2d 276 (S.D.N.Y. 2001), U.S. District Court for the Southern District of New York, accessed on Dec 24, 2025: https://law.justia.com/cases/federal/district-courts/FSupp2/136/276/2579869/. The U.S. Copyright Office specifically denies copyright registrations without any creative contribution from a human actor (for example for images generated with AI).²³⁾THALER v. PERLMUTTER et al, No. 1:2022cv01564 – Document 24 (D.D.C. 2023), United States District Court for the District of Columbia

Law aims for neutrality but adapts to the cases before it. Most copyright case-law revolves around parties seeking to enforce their ownership rights. Parties deliberately “decentralizing” their IP are not the norm. Any solution must align with this fact. Simply said: a mere intention is not enough.

Those aiming for their users to obtain defensible copyright must offer the utmost freedom of creative expression and artistic liberty.

Fortunately, this is nothing new. Prime examples include text editors such as Microsoft Office. Obviously, Microsoft does not own the copyright in the books its users write with their software.

Introducing User-Generated NFTs

User-Generated NFTs address these challenges through a novel technical and legal structure. Instead of purchasing pre-made images, users use a pixel art editor that directly stores their image on the blockchain.

The user starts with a completely blank canvas. The minting interface allows users to design 24×24 pixel images through direct manipulation of individual pixels and color choices. They draw their NFT and give it a unique name and description.

This tool forces the user to make the creative choices that result in an original work—their work. Under copyright law, they are then the creator and therefore the copyright owner of that image.

The NFT token serves as a permanent, blockchain-verified record of their creation and ownership. These NFTs are then tradable as any other NFT on the same marketplaces.

UG-NFTs solve the image rendering problem by having a Cloudflare worker instantly pull the image information from the blockchain and render the image at the URL stored in the smart contract. This ensures the image renders instantly across the web3 ecosystem.

After the final NFT is minted, the collection migrates to Arweave. At that point, it is the most decentralized NFT collection possible: images stored on-chain, rendered from decentralized storage, and IP owned in a decentralized manner.

Benefits of UG-NFTs

UG-NFTs provide several benefits. First and foremost, absolute ownership: the minter owns the copyright to their created image under established (international) copyright law. With thousands of individual creators each owning their specific work, this eliminates centralized ownership and regulatory concerns.

UG-NFTs are genuinely unique, each reflecting their creator’s vision. From a collectors’ point of view, this could result in real creative, high quality gems and actual rarity (in fairness, the opposite is also possible). From a web3 and gaming point of view, it opens up a wide variety of new possibilities for people to create and own their own characters.

The smart contract tracks both current owners and original creators separately. This enables novel governance structures where IP owners can have voting powers combined or separate from NFT holders.

Engagement within User-Generated NFT communities could deepen as minters gain true ownership stakes rather than limited license rights. Gaming and metaverse platforms could follow this example and integrate tools for their users to create works they own the copyright to. Users could simply demand it.

It must also be noted that this would, to the authors’ knowledge, be the first example of any kind of off-chain asset being decentralized and tokenized based on law instead of contract.

Demonstrating the broader principle opens up possibilities for tokenizing other forms of (intellectual) property.

Remaining Challenges and Future Directions

The attentive reader realizes that a decentralized IP licensing structure, by default, increases legal complexity. Instead of one centralized IP license, there are now thousands of individual ones.

Now, this is nothing new. Every major online platform, such as YouTube or Facebook, deals with the sharing and distributing of individual IP.

Still, the decentralized ownership of IP without a central publishing body might result in enforceability issues.

In addition, those buying UG-NFTs on the secondary market still hold a license. However, this is inherent in any NFT collection as explained, and thus not an argument against UG-NFTs.

UG-NFTs deal with these issues through a strong licensing agreement, forcing each minter to issue irrevocable rights to NFT holders. In addition, the image is stored on-chain with the NFT, thus being both technologically and legally linked to it. UG-NFTs offers much clearer rights than most other NFT collections.

Areas for Further Research into UG NFTs

New marketplaces could emerge focused on trading actual IP rights rather than mere licenses. With the correct legal framework, smart contracts may one day facilitate actual copyright transfers. This needs better legal frameworks and more advanced marketplaces, though, and likely a little help from governing (international) law.

Royalty structures could evolve to benefit decentralized IP owners instead of project founders, enabling creators to capture value from their work in innovative ways. While possible from a smart contract point of view, this requires efforts from marketplaces.

Defending the interests of a collection of property owners requires a new way of thinking as well. A consensus-based jurisdiction administered through a DAO or DAA²⁴⁾W. Thysse, “The Decentralized Autonomous Association (DAA): A New Paradigm for DAOs,” https://github.com/decentralized-law/daa could allow NFT community members to collectively regulate, adjudicate, and protect their interests.

Another interesting area for research is the application of the user-generated approach to more complex digital assets—3D models, music, interactive experiences, games, metaverses, and other areas that now by default assign copyright to their respective founders.

It could result in another wave of democratization of copyright ownership, similar to what open source licenses have done.

Another area of research is the regulatory aspects. Regulatory regimes have sprung up to address the current way of doing NFTs. This new way of doing NFTs results in a different set of rights and duties, and no central custodial party. It forces regulatory bodies to revisit their guidance, and take a stance on facilitating actual decentralized asset transfers.

User-Generated NFTs: Conclusion

The development of User-Generated NFTs is a first step in a new kind of blockchain innovation: aligning technology with the legal reality.

By making NFT holders the creators—and thus copyright owners—of their digital assets, UG-NFTs align smart contracts with centuries of intellectual property law.

This alignment provides genuine ownership, reduces regulatory risk, eliminates centralized control, and enables new forms of digital creativity and commerce.

The blockchain space must mature from technological experimentation alone and confront fundamental questions about property rights, ownership, and the legal structures necessary to support digital economies.

User-Generated NFTs represent a first solution that respects existing legal frameworks while advancing the core blockchain principle of decentralization.

Welcome to the next phase of NFTs!

First User-Generated NFT collection now live!

This is not just a theoretical innovation. A first NFT collection has been created under these principles:

Visit the webapp of the first UG-NFT collection: CryptoBeings.club

Or learn more with the official landing page on the commercial part of Decentralized Law universe: Delaw Labs.