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It's possible to store data in smart contracts, and with the recent explosion of NFTs this is happening a lot. A couple of hundred kB is more than enough to encode copyrighted material - e.g. the text of a novel, a photo, or a short song.

My understanding is that every full node replicates the entire blockchain, including any stored data, and makes it available to its peers. So once a valid transaction including a copyrighted file has been added to the blockchain, every node will become a possessor and distributor of that file.

In many countries distributing copyrighted data without permission can lead to large statutory damages. I'm unaware of any law or doctrine that would protect or exempt blockchain use from ordinary copyright law. So potentially anyone running a full node could be on the hook for damages.

There's additional danger when considering data that carries criminal liability just for possessing it; for example privacy violations, child pornography, or classified information.

I can't find any real discussion of this issue. There's this question, but it was closed as a duplicate of three other questions, none of which address the issue. There's this question about illegal smart contracts, but that deals with who's liable for what a smart contract does rather than the liability that can arise just from storing and distributing it.

Is there a legal or technical fix for the issue of copyrighted or illegal material stored in the blockchain creating liability for node operators?

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Although this is more a legal discussion rather than a technical issue (perhaps the question is closed), I can give my 2 cents about this.

Short answer is that legal actions will always depend on the geographical jurisdiction, so you will hardly find a yes or no answer to this problem. Therefore, nothing prevents node operators from being sued by copyrighted or illegal content if a country decides to do so when the operator is hosted within its region.

Why this is not currently happening? as you saw from previous questions, the cost of storing data in Ethereum is huge (and increasing), so the common pattern is using the blockchain as a pointer to external data repositories, where the law can act by pursuing the owners of such repositories. Well, if we talk about IPFS, we might have a similar debate again.

I see this legal issue a potential thread for alternative blockchains (e.g: Polkadot, Cardano, etc) where the gas fees are far less expensive, which can incentivise to store illegal data at a reasonable cost.

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