Non-Fungible Tokens and Intellectual Property

Non-Fungible Tokens and Intellectual Property: The Intersection of Two Worlds

If you’ve heard the term NFT recently, you’re probably using the internet correctly – they are the latest cryptographic craze. Much like any other technological advancement, NFTs carry great promise whilst simultaneously carrying great risk for abuse too. NFTs have the potential to act host for a plethora of complex and novel IP, consumer protection and other legal issues. Here, we’ll aim to simplify NFTs and the legal issues that coincide.

WHAT IS AN NFT?

An Non-Fungible Token (NFT), like every other cryptocurrency token, is data on a blockchain. But the importance of NFTs comes from its non-fungible aspect. Bitcoin, for example, is fungible, Bitcoin A is worth the same as Bitcoin B, same as a £1 coin being worth the same as another £1 coin. Non-fungibles, however, are one-of-a-kind, non-repeatable and non-replicable tokens, and to that extent, unique.

NEED AN ANALOGY? THINK POKEMON.

When I was younger, many moons’ ago (!), I was a big fan of a cartoon called Yu-Gi-Oh, and on this show, they duelled using cards with different monsters on them (think Pokemon but a bit more dramatic). Being the excited child I was, I ‘invested’ all my pocket money on cards from this game.  As the official cards produced by Konami Bandai were very expensive, and so, as to save money, I purchased knockoffs from less-than-legitimate toy stores. The cards looked real, but they were just imitations. One day, I ‘duelled’ a friend at my school, after of course winning, he noticed that my stronger monster cards didn’t look right… I was of course adamant that my cards were real!

We were kids, but the problem that we faced was an issue faced often in real life. Knockoffs exist in many different elements of retail, art and technology as was discussed in our piece on Chinese IP Law. Rising prices in designer products have driven people into cheaper alternatives. Famous art pieces around the world can be easily replicated with technology or manual dexterity, and the only way we have of discerning whether its real or not are ‘art experts’ (who, if you’ve ever watched a heist movie, are very easily manipulated or coerced).

SO, WHO OWNS THE COPYRIGHTS?

People have overcomplicated and driven this conversation into ‘but I can see the piece of art on my screen at any time I want, what’s the point of an NFT?’ Yes, and you can walk into the Louvre at any time and look at the Mona Lisa, that doesn’t mean you have ownership of it. NFTs are simple, a receipt which says ‘I own this’ sat in your wallet.

In terms of intellectual property, essentially the author owns the copyright in their work unless and until they transfer these rights to someone else. Therefore, unless your NFT includes a transfer of copyright, you don’t own the copyright, you merely own a version of a work. Saying that, it is possible to transfer the copyrights through a written and signed transfer. The question is, how does one implement copyright’s ‘signed writing’ requirement in the context of digital wallets and anonymity? Effectively, it’s a whole new world which requires entirely new rules.

An example of the limits of NFT ownership is Decentraland (a virtual world where land is represented in NFTs), they claim that they are a ‘virtual world owned by its users’. However, according to Article 12.1 of its Terms of Use Metaverse Holdings Ltd owns ‘all title, ownership and Intellectual Property Rights’ on the site.

100 MILLION US DOLLARS AND COUNTING…

This fogginess surrounding buyers’ IP rights has not stopped users spending millions on NFTs. NFTs have skyrocketed in popularity and value over the last few years, and even more so in the last few months. Opensea, one of the leading NFT marketplaces, had cumulative sales rise to 100million US dollars by the end of March.

It’s hard as an average consumer to see why NFTs are so popular, but as a creator of any sort, it is very easy. Authenticity is a huge part of artwork, which is why often as an average Joe you see artwork go for millions of dollars and think, why is that worth that much? The creator of artworks is almost as important as the artwork itself, because in the art world, the name carries both weight and value.

Banksy produced a piece which was called ‘Morons,’ which was his satirical poke at auction rooms in which art is sold for incredible prices, it featured a canvas with the words ‘I can’t believe you morons actually buy this…’ This piece was purchased by Injective Protocol, a leading blockchain firm, for $95,000, then converted to digital art with an accompanying NFT. The original painting was then burnt in a livestreamed video, to ensure that the digital version with the NFT was the only version of the painting that ever exists. The painting was then sold for $380,000, but now the person who owns the painting has the peace of mind of the fact that his NFT is irreplicable, inimitable and cannot be forged.

WHAT USES CAN NFT OWNERS MAKE OF THEIR DIGITAL ASSETS?

NFT usage has only been in digital art, mostly due to the technology being in a very early stage of development. But the uses for it can be every day and practical.

For example, when purchasing Nike collectible sneakers, how do you ensure that the sneaker you purchased was legitimate? NFTs. Nike recently obtained a patent for “CryptoKicks”, which has not been rolled out yet, but it has been rumoured that the patent is for a system which allows for the physical sneakers to be linked to a transferrable NFT to ensure that official purchases have proof of legitimate ownership. On a more financial note, CryptoKitties (blockchain game on Ethereum) license allows NFT owners to make commercial use of their kitties as long as the use does not result in earning more than $100,000 per annum.

LEGAL ISSUES?

Of course, with a topic such as NFTs and cryptocurrency there is an incredible number of legal issues and questions that arise. It would be impossible to list them all in this article, but I will list a few. It is worth noting that currently creators, collectors and marketplaces are mostly located in the United States and so usually would fall under U.S. jurisdiction. Exceptionally, blockchain technology is not bound to any single jurisdiction and especially for international transactions, the applicable laws need to be assessed on a case-by-case basis.

Although, I don’t hold all of the answers it’s more than worth thinking about how IP Law may need to change:

1. How can consumers sincerely know what they are buying?

2. How does a consumer know if the item is really a NFT, a fake or an NFT tied to a different blockchain? There will need to be changes in consumer protection law to accommodate NFTs.

3. How can you transfer copyrights with written and signed contracts in an absolutely digital and anonymous world? The process of transferring copyrights will need to amend to survive in a completely new world.

4. How do copyright terminations work in a world of NFTs that is designed to last for eternity?

5. When ownership of an NFT is transferred, do the rights and privileges of the original NFT owner persist, disappear, or something in between?

6. Is there pricing transparency? Can someone sue a creator if an NFT drops in value as opposed to increasing in value?

7. Who’s collecting tax? Surely buying upwards of $2 million of art would result in tax being paid? A new fair assessment for this tax would need to be adopted.

8. How can platforms, issuers, and IP owners enforce their rights and remedies against NFT owners in violation of license terms and contractual restrictions?

It is apparent that with the growing popularity of NFTs regulations need to be amended and accommodating for the digital world that we now reside in. As of right now, there are hundreds of unanswered questions and a lot of uncertainty surrounding NFTs – yet that’s not stopping people spending millions!