NFTs Explained

Non-fungible tokens “NFTs” are a type of digital token or asset, much like baseball trading cards are a “real world” asset that holds a specific value. To understand the uniqueness of an NFT, it is essential to know how it is defined. First, non-fungible means that it cannot be changed once it is created and must be distinguishable from another thing. A token, as defined by Liechtenstein’s government in their Token and TT Service Provider Act, is “a piece of information…which can represent claims or rights of memberships against a person, rights to property, or other absolute or relative rights…” An NFT is a token that does not change over time and is generally represented by digital media files. In a more technical sense, an NFT is a piece of data that is owned by a specific address. The address is secured by a “seed phrase or mnemonic phrase,” which is a unique series of common words auto-generated to import or recover digital wallets. The person who has a “seed phrase” to a specific address owns that piece of data (i.e. NFT). This data can then be bought and sold to different addresses. It is important to note that when you purchase an NFT, you own the specific piece of data and not the image or GIF.

In general, NFTs have become collectors’ items that hold an individually perceived amount of value for investors. However, there are more specific reasons that make an NFT valuable. For instance, purchasing the first NFTs by a creator or business adds value to that NFT. Many creators or businesses will refer to their first NFT as a “Genesis” piece or “Genesis” collection. Another quality that adds value to an NFT is utility, which is the real-world benefits that an individual receives for owning a specific NFT. Many NFT collections provide luxury amenities or exclusive merchandise for their NFT “holders.” For example, the Bored Ape Yacht Club, a popular NFT collection and social club, provides exclusive membership benefits to its NFT holders. Lastly, NFTs can be valued based on their uniqueness or rarity. Many collections will include specific descriptions of the quality of each NFT called ”traits”. NFTs that are described as having some type of uniqueness or rarity from the others in the collection add value to that specific one.

NFT ownership is simplified by blockchain technology. Blockchain is an immutable (unchanging) digitally distributed decentralized public ledger. As such, all data that is minted on the blockchain is verified on the blockchain. This form of verification results in the ability to track the ownership history of an NFT at any time. While the blockchain provides this functionality to track ownership of an NFT, it does not provide a function to protect intellectual property rights for creators.

Intellectual Property “IP” and its Relevance in NFTs 

In simple terms, intellectual property is an original creation of one’s mind. The most commonly recognized types of intellectual property are copyright, trademark, and patents. In the NFT market, copyright and trademark are the most relevant; so this article will focus on these two types of intellectual property. To understand the relevance of copyright and trademark in the NFT market, it is important to provide a cursory review of both.

What is a Copyright? 

The World Intellectual Property Organization “WIPO” defines copyright as follows:

Copyright (or author’s right) is a legal term used to describe the rights that creators have over their literary and artistic works.

Work must be original to qualify for copyright protection. As defined by WIPO, original work is “one that is independently created and not copied from the work of another or from materials in the public domain.” WIPO also articulates that “originality relates to the form of expression…”  

Some countries have expounded upon the criteria established by WIPO in determining qualifications for copyright protection. For instance, United States copyright law requires that a work be fixed (captured in a permanent medium) and be in a tangible form of expression (written on paper, painted on canvas, or recorded) in addition to the work being an original work of authorship. 

Copyright law covers several different types of creative works, including video games, photography, literature and other literary works, art, music, song lyrics, software, graphics, and much more.

So, who owns the copyright, and what rights does it afford?

A copyright owner can be anyone. For example, if you were to take a photograph of a lemon, copyright ownership of that photograph vest with you. The photograph is an original work that is in a fixed, tangible form of expression. But, what rights does this copyright afford you?

WIPO articulates that copyright affords two significant rights–economic rights and moral rights. Economic rights afford copyright owners the ability to derive financial benefits from the use of their works, while moral rights permit the copyright owner to claim authorship and prohibit the use of a work if it conflicts with the owner’s reputation.  

Next, it is important to understand when copyright protection exists. The Berne Convention established that copyright protection is obtained once an original work is created and does not require registration or other formalities for owners to acquire copyright protection. Many countries honor this standard as well. Despite this overarching standard, most countries have established systems to permit copyright registration. Registering your copyright can aid in the prevention of copyright infringement, aid in resolving copyright disputes, and can serve as public notice of copyright ownership.  

The economic rights afforded copyright owners have time limits. The length of copyright varies by country and can vary based upon when it was created. For members of the Berne  Convention, copyright protection “should be equal to or longer than 50 years after the creator’s death.” It is important to consult with national laws to determine the time limits of copyright in each area you register or desire to acquire a copyright. 

What is a Trademark?

A trademark is another type of intellectual property that protects a business name, logo, or other commercial identifier used to identify its products or services in commerce. WIPO provides that a trademark “is a sign capable of distinguishing the goods or services of one enterprise from those of other enterprises.” Similarly, the United States Patent and Trademark Office “USPTO” provides:

A trademark can be any word, phrase, symbol, design, or combination of these things that identifies your goods or services. It’s how customers recognize you in the marketplace and distinguish you from your competitors.

Trademark law protects both trademarks and service marks. Distinguishably, a trademark is used for goods while a service mark is used for services.                      

       

          Trademark                                                           

          

        Service Mark 

Attribution of both marks by Google Images

Similar to copyright law, a person owns a trademark as soon as they start to use the trademark with goods or services. Registration of a trademark is not required. The rights of a trademark are established upon its use. However, if the brand is not registered, its use is limited to the geographic area where you are providing goods or services. Registering a trademark grants national recognition and provides broader rights and protections. 

A trademark can be registered at a national and international level. National trademark registration requires the filing of an application and payment of the required fees. International trademark registration requires the filing of an application in each country where one desires to obtain trademark protection or filing the trademark through WIPO’s Madrid System. WIPO’s Madrid System is an international filing system that permits the filing of one application and payment of a set of fees for protection in up to 127 countries. 

Trademark registration confers the exclusive right of use of the trademark. This means that the owner of the trademark can exclusively use the trademark or license its use to another party. A trademark register also can serve as proof of ownership in litigation or any trademark dispute.  

So, how can you distinguish a trademark from another form of IP? Symbols can be used to indicate you are asserting a trademark. In the United States, for instance, a trademark can be identified by the symbol “TM” whether it is registered with the United States Patent and Trademark Office or not. Similarly, service marks are identified by “SM.” Once a trademark has been registered, the symbol ® can be used with your trademark.   

As with copyright, trademark protection is subject to time limits. WIPO establishes that trademark protection can vary, but generally lasts for 10 years. It is significant to note that trademark protection can last for an indefinite term with the payment of the required fees. 

So, why is IP relevant to NFTs?

The NFT market is fundamentally a haven of IP. For example, if an artist creates an original piece of art and makes a digital replica of that art to be sold as an NFT, copyright protection is invoked. Originality is also relevant for the buyer as it influences the value of the work. Similarly, as individuals form organizations within the NFT market, trademark law becomes relevant as these businesses build their brands. As a result, IP is a topic that should be discussed.

IP Solutions for NFTs

NFTs pose a unique dilemma for IP. For instance, some NFT marketplaces have been vulnerable to the creation of replica NFT collections. While these marketplaces are diligent in flagging such accounts, NFT artists are exposed to the dangers of infringement of their intellectual property. To remedy issues of this nature, it is necessary to think of practical ways in which IP can successfully be integrated into the NFT market.

  • Providing IP declarations on NFT marketplaces:

An artist should be encouraged to place disclaimers regarding their copyright and/or trademark in project descriptions on NFT marketplaces before making their art public. The project description is an important field that artists utilize to provide content about their specific projects.

Many collectors review the project description before purchasing or supporting an NFT collection. Placing IP disclaimers in the project description can serve as public notice that this artist is asserting certain IP rights to their creative work. Additionally, collectors can review this disclaimer to gather if the artist is permitting the use of certain IP rights as a utility component to the project. 

  • Pairing Smart Contract to Legal Agreement:

The blockchain has introduced a new form of contract—the smart contract. A smart contract essentially has the same function as a traditional contract, such that it is an agreement in essence. A smart contract, however, is digital. Smart contracts are self-executing contracts that contain lines of code stored inside a blockchain. Due to the fact that the contracts are stored on the blockchain, these contracts inherit two unique qualities; they are immutable (unchanging) and distributed (output is validated by the network). Thus, smart contracts are the contracts of blockchain. So, is it possible to convey IP rights within a legal agreement that has an effect on the blockchain as well?

Pursuant to an article published by Blockchain Patterns entitled Legal and Smart Contract Pair, the solution to the question posed is simple–pair an on-chain smart contract with an off-chain legal agreement. The proposed solution entails creating a smart contract that enforces all or parts of the condition of an off-chain legal agreement. The on-chain smart contract would also contain the hash value of the legal agreement that could be updated to link to the legal agreement itself. In turn, this off-chain legal agreement would contain the on-chain smart contract address to link the two agreements together. 

In theory, off-chain legal agreements can convey the IP rights and details regarding the potential commercial rights of collectors for an NFT project that is then established by a corresponding on-chain smart contract. The pairing of the two agreements would eliminate any element of doubt regarding ownership of IP rights or the conveyance of such rights to collectors. Further, the off-chain legal agreements can be uploaded and stored on the InterPlanetary File System “IPFS,” which is a decentralized data storage. The IPFS can be monitored and governed by the NFT artist, NFT company, or a third-party entity.     

  • Creation of IP Legal DAOs: 

Another plausible solution would be to create IP Legal DAOs on different blockchains. According to the article, The Legal Basics of DAOs, published by the Near Legal Guild, DAOs (Decentralized Autonomous Organizations) are:

 … organizations that operate under the same basic concepts of a traditional company but where no traditional managerial hierarchy exists. In its place instead is a flat hierarchy where all members are given a right to vote on strategic decisions usually reserved for management.

These organizations are run by smart contracts making the whole organization self-sustainable (i.e., autonomous). 

Despite the lack of a traditional hierarchy, DAOs are governed by defined protocols that involve proposal submissions and votes by DAO members. Many DAOs issue governance tokens to their members that convey certain rights permitting the submission of proposals and establishment of the voting power. Thus, DAO members can utilize their governance tokens to submit proposals and participate in community votes. 

The proposed Legal DAOs would serve as the governance body for IP disputes in the NFT market. They would implement grievance protocol and vote on how IP disputes are addressed and resolved. In theory, the Legal DAOs would contain board members (non-voting members and governing council) and DAO members (voting members). The board members would serve as the body that reviews IP disputes and issue proposals addressing resolutions. The DAO members would serve as the voting body. Upon the decision of the voting body, the board members would issue a briefing of the vote. This process could serve as an on-chain IP dispute resolution. It would be highly beneficial for the members of each DAO to be a mix of legal professionals versed in IP, transactional, and data protection and privacy law who are participants in the NFT market, NFT artists, and community members.

Conclusion

NFTs are revolutionizing IP law. In particular, NFTs have impacted the way in which IP rights are implemented and enforced in this digital space. This shift has created a unique opportunity to reflect on solutions as technology and law continue to intersect. 

Arisa Forest
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