NFTs: A Revolution in Digital Asset Ownership or A Wild Western World of Financial Risk
Non-fungible tokens (NFTs) are the latest tidal wave to hit the investment world. This peculiar world of monkey JPEGs, x-rays of William Shatner’s teeth, and celebrity trading cards seems, on the surface, to be nothing more than an exchange of overvalued artwork between LA’s richest. But as this area evolves, brand owners and owners of other intellectual property assets will need to make sure that they protect their investments. What is an NFT?
NFT stands for ‘non-fungible token’, a unique and non-replaceable token. The value of an NFT is due to its ‘non-fungible’ nature, it cannot be simply replaced with another. Each NFT is formed of blockchain-based units which have a unique ID linked to an underlying asset. The composition of the units forms a ‘smart contract’ which provide the details of the linked digital or physical asset. NFTs have a digital signature encrypted into them which gives a ‘non-fungible’ nature.
What can be an NFT?
The NFT is uniquely linked to a digital asset which could be a proxy for real property, for example buying an apartment or a handbag or a car a sculpture or a painting in a virtual online world, or which could be a proxy for something which would be an intangible asset in the real world, such as a song, a digital artwork, a film, or other intangible asset.
The most notable examples of NFTs have been from the Bored Ape Yacht Club collection, which to the unfamiliar eye appears to be nothing more than digital artworks of apes in a variation of outfits; some of these apes being valued at tens of thousands of dollars. However, NFTs can be formed out of any type of easy-to-replicate digital file, minting a file as an NFT allows the original file to be identified from copies produced at a later time.
What problems do NFTs solve?
Digital artwork, video creations, photography, music; these are all examples of things that can be NFTs. The digital artwork industry has suffered from many issues caused by being a purely digital industry. For example, if you went to an LA art gallery and purchased an original Jackson Pollock, you would have many ways of proving authenticity including:
• A signed statement of authenticity from the artist or an expert on the artist
• An original gallery sales receipt
• Receipt directly from the artist
• An appraisal from an expert in the era
Some dispute of authenticity cases has even led to radioactive carbon dating being used to prove a physical piece of artwork is the original.
The digital artwork community can have as many signed statements and receipts for a piece of art as it likes, but as there is no physical copy, how do you prove a file is original and not something simply copied. And this is where NFTs become useful, through the digital signature encrypted into it, an original digital artwork piece can be minted and sold as an NFT which serves as proof to the owner and any viewer than the file is the original.
Why does any of this matter?
The most common issue found with NFTs is in relation to copyright, does the consumer of an NFT have the copyright to the underlying asset the NFT is of, or is that held by the NFT seller, or is the buyer only given specific use rights as specified by a contract? In short, it is the last option. The usage of an NFT is determined by the contract signed between the seller and the buyer.
When a buyer purchases an NFT from a seller, the nature of what is sold is determined by the terms of contract. The most common occurrence is that a buyer will take ownership of the NFT but not the underlying asset and not the copyright to the underlying asset. This can leave buyers at risk to copyright infringement. To use another art example if you bought a limited-edition physical print of a Mark Chagall, you would have the proprietary rights to the print, not the original artwork. The smart contract encoded into NFTs can dictate how the NFT you have purchased is used; it is of grave importance you are familiar with the terms of purchase before buying an NFT.
Should you wish to have the intellectual property rights of the underlying asset of an NFT assigned to you through the purchasing of an NFT, then this is possible if clearly stated in the terms of the contract.
It is advisable to seek legal advice before investing into an NFT to ensure the investment meets your expectations.
What should businesses do to protect their intellectual property?
Firstly, you should protect your brands for classes of goods and services which include online delivery or online goods. The goods of electronic tokens are proper to class 09 according to the Nice international classification of goods and services. Infringement of a registered trade mark includes use for the identical mark on identical goods or services, and use of a sign identical or similar to the registered sign on goods which are identical or similar to those for which the mark is registered and where there exists a likelihood of confusion. But what actually are the goods being traded online? They are not real goods, for which the owner’s marks may be registered, but are digital representations of those goods. The actual physical goods are not being sold. The International classification of goods and services does list the goods of an electronic token in class 09, but is the user actually providing a token or is the token something that attaches to the virtual representation of the real goods?
Careful thought needs to be applied in drafting the specification of goods and services to make sure that the NFT is covered.
Careful thought also needs to be made as the representation of the mark itself. For items such as handbags for example, a registration where the mark is a picture of the handbag itself could be infringed by an NFT handbag in a virtual world, provided the specification of goods were adequately chosen.
The issue of trade mark use by the owner
In the UK and elsewhere it is a defence to registered trade mark infringement that a registered mark has not been used by or with the authorisation of the owner for a fixed period – often five years. If a brand owner is using a mark on real goods only but registers their mark to protect NFT’s and online representations of their mark, then the owner is not actually using the mark on an NFT only on real goods and so there is a potential lack of enforceability of a mark in use on real goods against an NFT even when the mark is registered with a specification of goods which covers NFT’s. That situation only occurs after the fixed period and so recently filed registered trade marks less than five years old would not suffer from this weakness. It is important to keep refreshing trade mark registrations for NFT’s at fixed intervals.
What about copyright?
Copyright will protect a digital work just the same as any other type of original work and so copyright law gives some protection against online copies of real-world copyright works. Copyright works include artistic works, literary works, sculptures, photos, songs and the like which are primarily artistic creations. But there are limitations to copyright. For example, it would not protect a word – such as a well-known word trade mark. In general, it would protect NFT protected original digital artworks. But it may not always protect a computer representation of particular goods e.g., an item of clothing, where that item is not itself an original copyright work.
Every case needs to be taken on the individual facts and its own merits, which will differ from case to case.
In most countries copyright is not a registrable right, but it is possible to register copyright in the United States, so owners of original works should seek to protect their copyright by a US registration. Even if you do not object to use of your original work being used in an online NFT in a virtual world, the subsistence of copyright can potentially be used as the basis for striking a licence agreement with the NFT creator to gain some benefit from the existence of the NFT.
What about the purchaser of an NFT?
A purchaser of an NFT may be buying goods (virtual / electronic goods) that they do not have the legal right to enjoy, because the NFT protected item is an infringement of the trade mark or copyright or other right of the originator of the physical goods represented as an NFT. In extremis there is the possibility that the NFT is not authorised by the person who owns the rights in real world physical goods and therefore the owner of the rights in the real-world goods could obtain an order for delivery up or destruction of the NFT. The buyer of the infringing NFT could be left with little come back on the seller, especially if the seller is not known and the transaction has occurred using untraceable electronic cash i.e., cryptocurrency.
Is it all bad news?
No, not necessarily. NFTs in theory have the potential to solve the digital art market’s issue with proving authenticity of original digital pieces and has also been used in luxury markets like watches and wine to provide digitally verifiable proof of authenticity in respect to limited edition watches or bottles of wine. Breitling now provide a digital passport system with their new watches that uses the NFTs to help resolve authenticity issues between sellers and buyers when a watch is sold.
In short, the NFT world is rapidly developing and ever changing, there is a lot of money to be made from it if you make the right choices. However, be warned that although enforcement is catching up with the NFT world, it remains to be a bit wild west in nature. February 2022 saw the first seizure of an NFT in the UK, with HMRC seizing three NFTs in a £1.4 million fraud scandal involving over 250 fake companies. News reports such as this reinforce the importance of being familiar with how NFTs function, and if in doubt, seeking legal advice to review contracts before purchasing NFTs.
For more information on the intellectual property aspects of purchase or use or protection of NFTs please contact:
Luke.Franks@franksco.com
The opinions expressed in this article are for general awareness raising of the issues described and should not be relied on as legal advice. For specific legal advice please contact us.
Article Published February 16th, 2022
