The relationship between NFTs and intellectual property

Non-Fungible Tokens, commonly known as NFTs, are digital asset tokens that represent multiple tangible and intangible assets. The information and ownership of these tokens is stored in blockchains, which are digital blocks that record each and every transaction of the digital asset. The NFTs are stored in digital wallets that are connected to the blockchains, where these tokens are created. The most popular NFTs give the token holder ownership over popular jpg or png images, but they can also be used for any “collection” item.

NFTs were created around a decade ago, but their exponential boom in the past year has popularized them within months. Over the past few years, NFT’s sales have increased from $94 million (2020) to $25 billion (2021). The most notable sale of an NFT was one for $69 million of a digital collage by artist Mike Winkelmann, called “The First 5000 Days”, which shows several digital images merged into one. The emergence of NFTs and this new form of ownership has sparked interest in the Intellectual Property (IP) industry as to whether or not they should be regulated. More specifically, the World Intellectual Property Organization (WIPO) asked the following questions in their most up-to-date statement on this new digital invention: “Should IP Laws Adapt to NFTs, or Should NFTs Adapt to IP Laws?”

To answer this question, WIPO starts by reminding us that civil laws are concerned with the ownership of tangible assets (e.g. houses, cars, etc.), while IP laws are concerned with regulating and protecting intangible assets to creators, authors, etc. with trademarks, patents or authorship. This difference reminds us corpus mysticum (intangible assets that IP can regulate and protect) and corpus mechanicum (physical objects that do not concern IP). Therefore, WIPO says that, for example, as long as there is a copyright that gives exclusive rights to an NFT owner, if the image, sound or other creation in the NFT wants to be used or reproduced, users must first request a use authorization from the copyright owner. In that sense, WIPO says that NFT reproduction and trade should conform to applicable IP laws and principles.

Moreover, WIPO also states that the Berne Convention for the Protection of Literary and Artistic Works still applies to NFTs. The agreement mentions that reproduction of protected works in digital forms should be authorized in advance by the rights holder. Since NFTs are essentially digital creations, they are still subject to these copyright laws. For example, if the digital creator wishes to use the logo of a company in his digital artwork, he must first request permission from the owner of the brand to reproduce this image, regardless of whether the NFT will be digitally created by him.

Nevertheless, there are still unclear cases where the NFT creator should ask permission from the copyright owner. For example, WIPO highlights a case where a tattoo company sued the basketball video game NBA 2K for reproducing avatars that contained designs of tattoos owned by the company, and the court favored the video game authors by claiming that the use of the designs was minimal. used and present in the avatars. Although this case highlights exceptions where it was not necessary to request permission for the reproduction of protected creations, WIPO recognizes that these cases bring uncertainty to the Berne Convention Agreement. However, these matters are brought to the forefront of the discussion by the organization as it wants to clearly state that there are enough precedents to judge the use of protected creations in NFTs. Therefore, WIPO mentions that IP experts and field workers should not be confused with the need for new laws to regulate NFTs. On the contrary, WIPO is convinced that the current rules and exceptions for the use of protected digital inventions still apply to NFT’s inventions.

On the other hand, there are major challenges when it comes to ownership of copyright in the NFT industry (ie once the NFT invention has been reproduced). For example, when a buyer acquires NFTs, he gains the right to claim ownership of the token itself (similar to ownership of personal property). However, purchasing an NFT does not give you ownership of the digital asset, artwork or design. Acquiring an NFT therefore does not necessarily mean that you also acquire the intellectual property of the invention or creation.

The confusing question is who legally owns the copyright to NFT. The experts in the field say that unless the author transfers the copyright to the NFT buyer, legally the author still owns the intellectual property of the NFT despite the NFT transfer to the new owner. Therefore, by default, the intellectual property of the underlying invention or creation of the NFT can in principle always belong to the author if he never explicitly transfers the intellectual property to other people, despite the fact that the NFT ownership is traded in digital spaces.

These two separate ownership mechanisms (corpus mysticum with copyright to art, design, etc. to NFT and corpus mechanicum with the ownership of NFT per se) can confuse and complicate the transfer of NFT’s copyright ownership. Even if the NFT sale is made, the copyright in the NFT content will not belong to the NFT owner until the NFT creator writes and signs the transfer to the owner. Given that some NFT owners can be anonymous since the transfers happen between wallets without any associated human identity, experts say that many problems can arise in the transferability of signed copyright ownership, as it is currently impossible to transfer intellectual property rights to an anonymous entity. Therefore, IP experts predict that if NFTs continue to grow in popularity, this will be a major challenge that could lead to changes in IP laws for WIPO to resolve the dilemma.

Experts say that one way to solve this copyright transferability problem is for the NFT author to grant specific copyright licenses to the NFT owners. For example, the National Basketball Association (NBA) Top Show clarified in the NFT terms of purchase that the owner had a license that allowed him “to use, copy and display the designs of his NFT for personal use only”. Also, the Bored Ape Yacht Club (BAYC), one of the most famous groups of NFT creators, allowed NFT owners to commercially use the designs of their famous monkeys that were tokenized using NFTs, meaning that the NFT owner could sell any item that includes the designs of the NFT they purchased. However, the licensing solution still does not resolve the ambiguity of granting IP rights to NFT owners, whose wallets remain anonymous. Even if the license is granted to them, the NFT owner will not be able to prove his right to use these license terms, as he will not be able to prove that he owns the wallet that holds the NFT and thus gives him these licenses rights.

Another way that NFT creators can benefit from intellectual property rights to the NFT’s underlying creation, design or art is if they declare royalty terms for the NFT. For example, they could declare a royalty rate for every time the NFT is sold in the future, which would allow them to continue making money from their original designs. Royalties will be encoded in the blockchain (eg every time this NFT is sold and transferred to a new wallet address, give 2% to the creators) without any transfer of IP rights. On the other hand, some key IP consulting firms, such as Finnegan, have begun to strongly encourage clients to extend trademark registrations that also cover uses that include NFTs. For example, in 2021, Nike filed several trademark applications to begin making and selling virtual footwear, which protects the Nike brand from any unauthorized use of sneakers in NFTs.

The NFT revolution leaves untouched how IP laws and agreements protect the reproduction of protected content in these new non-fungible tokens. However, there are many unaddressed challenges to the transferability of IP rights within the NFT trading markets, as buying and selling NFTs does not mean acquiring or losing IP rights. Therefore, IP laws, particularly regarding the transfer of rights, will need to evolve to better address these new NFT needs and dilemmas.