With prices for NFTs going through the roof, there’s a gold rush to invest in these commodities, often without a thorough understanding of what’s being purchased. An NFT can be developed from any type of creative material and can present extremely profitable opportunities for both creators and investors, but it’s important to understand exactly what intellectual rights you’re entitled to for any NFT sale.TABLE OF CONTENTS
What’s an NFT?
The Rise of NFTs
Where is the Underlying Asset?
Licensing Rights to the Underlying Asset
NFT Subsequent Sales and Royalties
NFT and IP Infringements
Enforcing NFT Infringements
What’s an NFT?
NFT stands for a “non-fungible token” that’s produced, recorded, and traded on a blockchain. It’s similar to cryptocurrency because it’s authenticated and verified by publicly available data on a digital ledger, but that’s where the similarity ends.
Unlike cryptocurrency, NFTs are non-fungible, meaning that they are unique and cannot be replaced with an identical token. The closest analogy is a signed piece of original art that is authenticated by a signature or a limited-edition numbered print. Every NFT includes software code called a “smart contract” that spells out the details associated with the NFT. The smart contract will include the intellectual property rules and rights associated with the NFT, including what percentage the original creator will receive for any resale. The authentication is usually linked to the creative work in the following ways:
- Directly to the digital work in electronic form;
- A copy of the asset encoded in the NFT; or
- Hashing, which is encoding the NFT with information that links to the asset or to the asset itself.
If you’re the owner of creator material, are considering purchasing an NFT or advising clients about a sale, it’s important to understand exactly what rights have been transferred.
The Rise of NFTs
The first NFTs were launched in 2012, but they didn’t gain popularity until 2017 when Dapper Labs started selling NFT’s of cartoons called “CryptoKitties.” In just five years, the popularity of NFTs has skyrocketed and record-breaking sales are reported on a regular basis. Last October the NFT sale of Everydays – The First 5000 Days by Mike Winklemann, aka Beeple, broke a record at 69.3 million dollars last October. This record was broken again when the NFT of the work “The Merge,” by the artist going by the name of Pak, was sold for 91.8 million dollars in December. Etherium is the platform that launched NFT’s and where most of them still find a home, but NFT’s can be stored on any blockchain platform.
Caveat Emptor – “Let the Buyer Beware”
When you purchase an NFT, you should have a crystal-clear understanding of exactly what rights youare purchasing. Most NFTs are simply data about a property that’s added to a blockchain, not the asset itself, so it’s very possible to own an NFT without having any profitable rights. That’s why it’s important to understand what’s encoded in the smart contract that confers your rights to the underlying asset. It’s not so different than purchasing a traditional work of art. For example, when you purchase an original physical artwork or limited-edition print, you are purchasing the right to sell that work, but not the proprietary rights such as selling t-shirts and buttons with images of the work. There is a great deal of confusion about how this translates into NFT sales, with naive purchasers believing they have a great deal more rights to the underlying asset than they’ve actually purchased.
For example, the owner of Jack Dorsey’s tweet only owns an autographed certificate of the tweet, akin to the ownership of a jersey autographed by a sports celebrity. It does transfer any rights to the copyrighted tweet itself. If the intention of an NFT sale is to transfer intellectual property rights it must say so in writing either in the smart contract associated with the NFT or in a separate document. If this is not done, it will be presumed that no IP rights were transferred. It’s rare that the sale of an NFT includes the sale of the underlying asset, but it is possible for an NFT to be used as digital proof of the ownership of the asset. This type of NFT sale has been primarily used in the financial services industry for certain types of securities.
Where Is the Underlying Asset?
When purchasing an NFT, it’s important to be aware of who has possession of the underlying asset, especially if the asset is a piece of digital art. It’s also prudent to know where the digital file is being stored and who is responsible for maintaining the computer system that hosts it. If the digital file is hosted online, the NFT should contain the URL or URI of that webpage. There must be explicit assurances in the NFT smart contract and the bill of sale about the continued responsibility to host the file and a requirement that it cannot be altered in any manner.
Licensing Rights to The Underlying Asset
NFTs rarely transfer ownership rights, but licensing the intellectual property rights for specific limited purposes is common. Without explicit written terms, common law will grant only the narrowest type of license to the owner of an NFT to use or display it only for personal use. Some types of NFTs include limited commercial use up to a specific dollar amount. For example, CryptoKitties allows owners of a “kitty” commercial rights up to $100,000 for each “kitty” that’s owned. If you’re interested in licensing the intellectual property rights as part of a NFT sale, they must be negotiated as an addition to the sale of the NFT.
NFT Subsequent Sales and Royalties
NFTs can provide an excellent revenue stream for asset owners by virtue of the ability to encode smart contracts that make payments to the original asset owner every time they are sold. These royalties are usually a percentage of the price of each sale, creating an automatic income stream with vast possibilities. This scenario is particularly interesting for creators of video game content where ownership of in-game assets can spur expansion of in-game sales.
NFT and IP Infringement
IP infringement for NFTs are on the rise as their popularity increases, and it’s likely that disputes over the rights granted in NFT sales will become more common. For example, when Quentin Tarantino released his intention to sell NFTs of his handwritten script for “Pulp Fiction,” he got slammed with a lawsuit by Miramax claiming that Tarantino lacked the intellectual property rights needed to do so. Another issue on the horizon is trademark infringement when NFTs are linked to an asset without the owner’s permission.
Enforcing NFT Infringement
Even if you aren’t interested in buying NFTs, you should still be aware of how they function to protect the IP rights you own. These are some of the ways you can keep track of infringement of your rights:
- Monitor NFT marketplaces using the name of your business and relevant keywords;
- Monitor “minters” of NFT’s to see if they are linking to your assets online;
- Issuing take-down notices;
- Warning NFT owners that are not acting in accordance with their smart contract of breach of contract and IP claims; and
- Train staff at your business to recognize and monitor NFT infringement.
The upside of potential for creating and purchasing NFTs is huge, but success in this area hinges on clarity about the rights conferred in any particular sale. There’s no question that a clear written statement about the rights being transferred or licensed must be included in the smart contract for an NFT and in the bill of sale. Businesses that own IP rights should monitor the creation of NFTs that inadvertently or intentionally infringe on their IP rights.