Bitcoin NFTs raise unique legal issues. Here’s what you need to know

While non-fungible tokens (NFT) originally gained popularity on smart contract platforms such as Ethereum and Solana, creators can now create and transfer digital artifacts on the Bitcoin blockchain. But while all of these NFTs outwardly appear similar, the differences in how these digital assets are characterized raise different intellectual property legal questions—particularly regarding the patent eligibility of applications related to NFTs.

Both investors and NFT creators and buyers should be aware of these differences, to ensure they are protected by IP laws, as well as watch for restrictions, to reduce the likelihood that a potential infringer can avoid liability.

Differences between Bitcoin and NFTs with smart contracts

Bitcoin NFTs are created in a much different way than NFTs on other blockchains. For example, NFTs can be entered into the Bitcoin blockchain as Ordinals. To enter an Ordinal, a user sends a transaction to a Taproot address and includes an asset/digital artifact such as text or an image in the witness data portion of the transaction. The witness data section can store up to 4 MB of data, which is usually large enough for most images and other digital artifacts.

But Ordinals are not the only way to create NFTs on the Bitcoin blockchain. Alternatively, users can create NFTs using the STAMPS (Secure Tradeable Art Maintained Securely) protocol, which stores digital artifacts in the UTXO (Uspent Transaction Output) portion of the transaction. Proponents of the STAMPS protocol argue that because witness data can be pruned over time, ordinals are not immutable. By including an encoding of a digital artifact in the UTXO portion of the transaction, the digital artifact cannot be pruned from the Bitcoin blockchain. Instead of using the order in which a Satoshi was mined as a unique identifier for the digital artifact, the STAMPS protocol includes an asset identifier in the UTXO with the digital artifact. When the asset identifier is transferred to another user, the user assumes ownership of the digital artifact.

The story continues

The user also sends a Satoshi (1/100,000,000 part of a Bitcoin) in the transaction, where each Satoshi is numbered in the order in which it was mined. For example, the first Satoshi ever mined is Ordinal Number 1, the millionth Satoshi mined is Ordinal Number 1,000,000, and so on. The satoshi (identified by the serial number) is then associated with the digital artifact, so that the serial number acts as a unique identifier on the Bitcoin blockchain for the digital artifact. So when the user transfers the satoshi, the recipient becomes the owner of the digital artifact.

Bitcoin NFTs are also structured differently than other types of NFTs. For example, other types of NFTs are typically created with a unique token identifier and an associated set of properties, such as a name, a link to a digital image, etc. On the other hand, a user does not create a unique token identifier or a token at all when entering an Ordinal. Instead, the digital resource is inscribed to an existing Satoshi.

Satoshi probably does not have a unique token identifier, since it is originally mined as a fungible token that then takes on some non-fungible properties by being numbered in the order it was mined. Recently, developers created a protocol that uses Ordinals for BRC-20 tokens, which is a reference to Ethereum’s ERC-20 tokens. These BRC-20 tokens are fungible tokens created and transferred using Ordinals, thus adding further confusion when determining the fungibility of a Satoshi used to inscribe fungible tokens.

Satoshi also does not have off-chain metadata like an NFT on other blockchains, which includes a set of properties of NFTs. Instead, the digital artifact is written directly into the witness data section (or UTXO section in the STAMPS protocol) of a transaction.

Legal consequences of these differences

Patents that only describe NFTs as they exist on smart contract platforms (eg have a unique identifier and a set of properties describing the digital artifact they represent) may be vulnerable to a design around a potential infringer who modifies their software so that that digital artifacts are minted and transferred on the Bitcoin blockchain rather than on Ethereum, Solana or another smart contract platform. If the patent claims any use of NFTs, the potential infringer may argue that their digital artifacts on the Bitcoin blockchain are not NFTs since they may not have a unique token identifier, may not be represented by a non-fungible token, and/ or does not have off-chain metadata.

Consequently, it is important to consider including a description of Bitcoin NFTs as well as NFTs for smart contract platforms in the patent description. For example, NFTs can be defined to include any digital artifact stored on a blockchain or referenced by a blockchain (in the case where a smart contract platform NFT includes a link to the digital artifact) regardless of whether it is associated with a token or a unique token identifier.

Addressing these legal ramifications in the patent description may also have some benefits later when the US Patent and Trademark Office decides whether to grant the patent. For example, US patent law requires that patents claim eligible subject matter. In some cases, patent claims – especially when they involve software – may fall under a legal exception to patent eligibility, which can be very difficult to overcome. However, a claim is patentable if, for example, the claim improves a technical field. By describing Bitcoin NFTs and their technical merits, the legal team for NFT creators can have the right ammunition to overcome these eligibility concerns.

For example, Bitcoin NFTs improve on NFTs for smart contract platforms by including the digital artifacts directly on the blockchain instead of including a reference or pointer to the digital artifacts. Because the Bitcoin blockchain is immutable, the digital artifacts stored on the Bitcoin blockchain are likely to remain on the blockchain forever unchanged. Bitcoin NFT owners do not have to worry about a centralized entity taking down or altering the digital artifacts so that they no longer have proof of ownership of the original. This also reduces the possibility of fraud by selling an NFT that the seller claims refers to a particular digital artifact in a centralized storage system or decentralized file storage system, but does not actually refer to that particular digital artifact. Instead, users can verify an inscription or STAMP on the public blockchain.

Conclusion

The advent of Bitcoin NFTs may create some additional work for NFT creators and their lawyers to ensure that potential infringers are unable to circumvent patents by launching their NFTs on the Bitcoin blockchain. However, with this extra work comes an increased likelihood of successfully obtaining remuneration on patent applications describing NFTs by being able to highlight the new technical advantages of Bitcoin NFTs.

While NFT thieves may still have other ways to avoid liability for infringement, attorneys specializing in blockchain intellectual property and patents should do their best to stay current with the latest in this fast-moving and ever-evolving technology so that creators can enjoy the full protection under the law, whatever the innovation.

DISCLAIMER: The information in this article is for informational purposes only and is not legal advice or a substitute for obtaining legal advice from an attorney. Views expressed are those of the author and should not be attributed to Marshall, Gerstein & Borun LLP or any of its past, present or future clients.