Introduction to NFTs and Intellectual Property (IP)
NFTs (Non-Fungible Tokens) have emerged as a groundbreaking innovation in this digital era over the past few years. These are the digital assets that are allocated unique codes for identification to differentiate and provide a unique identity to them from other tokens and are stored and transferred in the form of metadata.
On bifurcating the term Non-Fungible Token, it accounts for Non+Fungible+Tokens which means tokens that are not fungible. Now, to understand what are Non-Fungible Tokens, let’s understand what it means by Fungible Tokens first.
Fungible tokens or assets are the ones that could be exchanged for money or other assets. For instance, I had $100 and I exchanged it for $50+$50, here both of them have the same value. Or, I exchanged my old laptop while buying a new one and the price of that old laptop has been deducted from the new one because that asset is fungible. Therefore, fungible tokens are the ones that are not unique and could be exchanged for the value of money.
Opposite to this, non-fungible tokens constitute assets like artwork, music, video, or even in-game items that are unique and cannot be exchanged. A popular example of this is the digital artwork “Everyday: the First 5000 Days” created by Mike Winkelmann who is professionally known by the name of “Beeple” which he associated with NFTs and sold for $69.3 million.
NFTs are associated with Intellectual Property as any kind of digital artwork be it a painting, music, video, logo, tech, etc., and are the creation of the mind of a person which is the result of his creativity and are therefore, protected under Intellectual Property Rights.
The transformative impact of NFT on digital ownership
NFTs have transformed the way digital assets are stored. It uses Blockchain Technology to create verifiable and unique ownership records for every non-fungible asset. It possesses verified authenticity by eliminating the risk of fraud, creating immutable records of ownership that cannot be altered, creating new opportunities for creators globally to monetize their works, and creating capabilities of Smart Contract which enables automatic royalty and other transactions. NFTs not only deal with artwork but have revolutionized finance and real estate as well and most NFTs are built on Ethereum blockchain which is the biggest blockchain system in the world.
Intellectual Property and its significance in the Digital Era
Intellectual Property is referred to as an idea, design, or invention of a person by his intellect which is protected by law and other people are not allowed to copy the same. However, protecting Intellectual Property in today’s digital era is posing a lot of challenges because it’s now easier for people to copy, reproduce, or distribute the creative work of others without permission.
Therefore, protecting Intellectual Property and rights associated with the same has been very important, and here are a few ways which could help protect the Intellectual Property Rights, listed hereunder:
- Registering the Intellectual Property with the appropriate Government Agency like, registering the Copyrights at the United States Copyright office.
- Using DRM Technology i.e., Digital Rights Management Technology.
- Using tools like Google Alert to monitor the internet for any kind of infringement.
Role of blockchain technology in NFT creation and validation
Blockchain is referred to as a list of blocks i.e., it is an appropriate database for maintaining the list of continuously growing records referred to as ‘blocks’. It is like a record book but in a digital format where every step is recorded with no chance of alteration in it. From blockchain technology comes the platform on which the NFT is based. NFT can be hosted on a single network only and cannot be duplicated, however, it can be transferred by a private key. It is also pertinent to note that due to the recording of transactions on the blockchain, the history of digital artwork and its source of origin can be assessed in the market.
Intellectual Property Primer and General Considerations with NFTs
Intellectual Property Rights refer to the ownership of a person or an asset be it in physical or digital form by Copyrights, Trademarks, Patents, and more. NFTs are digital assets that are protected by Intellectual Property Rights. Here the question arises- What is the effect of NFT Transaction on Intellectual Property Rights of the asset?
Therefore, it is important to consider the following points while taking into account the Intellectual Property Rights of NFTs. These are:
- Necessary rights for minting and selling the NFTs
- Mode of transfer of Intellectual Property Rights- (is it by sale or license)
- Terms of transfer of NFT
- Nature of Intellectual Property Rights transfer.
Here’s how NFTs are transferred and how those transfers are affected by Copyrights, Trademarks or Patents:
Minting of NFTs
The process of publication of NFTs on blockchain for purchase is known as Minting. Minting is done in the following steps:
- Creation of wallet by minter for storage of minted NFTs on the marketplace.
- Acceptance of payment by marketplace.
- Linking of NFT to underlying assets and storing it in a distinct location.
- Publishing of NFT which represents the ownership of an asset and placing that same in a minter’s wallet.
After this step, the transfer of NFTs can take place since IP owners possess the right to use, reproduce, sell, or distribute the asset.
Selling and Licensing of NFTs
In selling and licensing comes the concept of Smart Contract. It needs to be understood that the minter and owner of any particular NFT could be different because on selling the NFT, the ownership is transferred to the purchaser, however, that does not grant him the right to use, reproduce, sell, or distribute the asset as the Intellectual Property Rights remains with the original owner i.e, the minter. The purchaser is only entitled to own the copy of NFTs and not exclusive rights as the original IP Owner.
However, the buyer is entitled to sell their copy of NFT through a license. Therefore, it should be mentioned specifically in terms of selling NFTs as which rights are being transferred to the buyer.
NFTs and Copyright
NFTs have taken the world of art and technology by storm and anything can be made NFT which can be digitized. However, Copyrights have very little to do with NFTs as these are metadata files encoded by a work whose protection under copyright law may or may not be guaranteed since copyrights only protect artistic, musical, or literary works.
There is a key issue revolving around NFTs that buyers face by thinking that they are acquiring the rights associated with the work of art and can now reproduce or distribute the same but that is not the case. Buyers are just purchasing the metadata associated with NFTs. The confusion is due to the amount of money spent on purchasing NFTs which is in millions, like $69.3 million for Beeple’s digital artwork, $1 million for Pixel art, and more, so it’s not easy to digest that all the buyers is acquiring is a string of code and not the actual work.
Nevertheless, copyrights can come in handy for some NFTs like the Digital Rights Management Scheme, and while in most NFTs transfer of the intellectual property right is not involved, in a few cases the seller transfers the actual ownership of the original work by turning the token into actual copyright ownership.
NFTs and Trademarks
One of the best ways of protecting NFTs is by Trademarking it. It ensures that the personal brand is protected and is not copied by anyone else. It is a protection to an NFT’s name and design. Contrary to copyrights, trademarks are the intellectual property rights that protect the words, symbols, phrases, or designs that are used to recognize goods and services like Nike, Apple, Adidas, Amazon, etc. For protecting IP Rights, blockchain technology is being used by numerous Luxury Brands in creating NFTs and to authenticate their goods by providing serial numbers to their products. Using this authentication system, the trademark owners, i.e., the brands are able to analyze counterfeit goods and keep the quality of goods in check, thereby playing a significant role in protecting Intellectual Property Rights.
NFTs and Patents
With the increasing advent of technological inventions in respect of blockchain technology, cryptocurrencies, and more technological innovations, the growth of more Patent registrations can be observed since it is becoming of paramount importance to protect Intellectual Property Rights. It can be said that patents are like virtual shields in this virtual world to project NFTs and their innovative technologies, providing new avenues for growth to hold their specific place in the market.
For instance, Sony Interactive Entertainment which is a gaming console and entertainment giant has filed for Patent approval which would give gamers access to transferring in-game assets within devices like VRs, headsets, computers, tablets, or smartphones allowing users to have interpolable Web3 gaming experience.
Famous legal disputes involving NFTs and Intellectual Property
In the case of Nike v StockX, Nike sued StockX claiming that SoockX had minted its NFTs and utilized its trademarks without permission leading to infringement of its intellectual property rights. Nike asserted that StockX is selling their assets to customers at inflated prices by making them believe that the assets are warranted by Nike. To counter, StockX asserted that NFTs represent inventory and not digital sneakers or virtual products. It also asserted that every NFT was specifically attributed to the sale of a specific pair of Nike shoes on its platform without which it would not have accurately depicted physical shoes.
Another case dealing with NFTs and Intellectual Property Rights is Hermès v. Rothschild, where Hermès, a luxury brand filed a suit against Mason Rothchild, claiming that the collection of MetaBirkins by Rothchild is infringing its rights of the “Birkins” Trademark which Hermès owns in which the court held that the creation and selling of MetaBirkins by Rothchild is leading to trademark dilution and infringement, including cybersquatting of Intellectual Property Rights of Hermès and the motion is passed in favor of Hermès.
Future Prospects and Recommendations
As we are moving towards the Web3 world, it is becoming essential to navigate the intersection of intellectual property and NFTs. Navigating this is indeed complex but important because even after numerous challenges NFTs are providing creators a new way to monetize their work and establish more transparency in digital records of rights of ownership. If the right frameworks are used to govern the transactions, it will open numerous doors and alter our way of approaching Intellectual Property Rights with NFTs. Consequently, NFTs should ascertain issues like licensing agreements, taxation, fraud prevention, ownership rights, and dispute resolution.
Striking a balance between innovation, protection, and accessibility
NFTs are usually referred to as borderless transactions since these are digital assets and are available worldwide on trading platforms. Therefore, the conflict arises as to which laws, rules, or regulations would apply to the same. While numerous countries are in the process of drafting regulatory frameworks for NFTs, various nations have already taken preliminary steps to govern the trading of NFTs and platforms that facilitate their trade. Further, the NFTs have an open nature, which makes them more prone to fraudulent activities thereby raising demand for its regulations.
If we talk about the global perspective then:
- The United States (US) lacks specific regulation as its regulatory classification and legal status is undetermined.
- In the European Union (EU), the Markets in Crypto-Assets Regulation (MiCA) is expected to come into force in 2024.
- India has amended the Income Tax Act, 1962 to include “Virtual Digital Assets (VDA)” vide Finance Act, 2022.
- We also have the World Intellectual Property Organization’s (WIPO’s) 12th edition Nice Classification System and more.
Rarity always adds worth, and so is the case with NFTs. These are transferred by Smart Contract by giving ownership to the purchaser but keeping the intellectual property rights with the minter. It limits the use of NFTs since the purchaser won’t be able to use, reproduce, or sell the asset. Furthermore, it is important to understand how copyrights, trademarks, and patents protect the interest of intellectual property rights owners and different states dealing with the regulations with some important disputes dealing with NFTs and IP rights. The future of Web3 is with the protection of Intellectual Property Rights with respect to NFTs, posing a need for striking a balance between innovation, protection and accessibility.