IP rights in NFT

Any creative endeavor is capable of being monetized just in the form of “NFTs”. Record prices are being reached for the sale of NFTs. Talking about IP rights in NFT, the questions you should ask are: What is NFT? How are they created? Why are they so valuable? What does the buyer benefit? What rights do they confer? And finally, what does it have to do with IP rights?

Background of NFT

Let’s take you back to when NFTs started to exist. NFTs have been around since as early as 2012 just that people don’t know about it, and it gained Popularity in the crypto space in 2017 when a company, Called Dapper Labs, started selling NFTs linked to unique digital cat cartoons known as CryptoKitties and people went crazy for these cute digital kitties. People started joining the NFTs space around 2020, that was when it became really famous.

What is NFT?

You can easily say that NFT is a non-fungible token, but there is more to it than just non-fungible token. In other words, NFT is a blockchain-based unit of value or “tokens' ', with a unique ID linked to an underlying asset. These underlying assets could be in digital or physical form. The Ethereum blockchain is the most commonly used blockchain for an NFT, but NFTs are also held on other blockchains. 

NFTs are composed of software code in the form of a "smart contract”. The smart contract contains details of the underlying asset(s) to which the NFT relates. You can also call it the rules and rights that attach to the NFT (for example, a rule that the original creator of the NFT gets paid a percentage of any subsequent resale value).

Why are NFTs valuable?

Owning any digital content can be a financial investment, hold sentimental value, and create a relationship between collector and creator. Like a signed autograph on a football player’s jersey, the NFT itself is the player’s autograph on the football jersey, making it scarce, unique, and valuable.

The value in an NFT is derived from it being “non-fungible”, meaning that the token cannot be replaced with an identical token (giving its inherent scarcity) and can not be reproduced too. This is in contrast to the fungible nature of cryptocurrency or government issued fiat currency, where each unit of the currency is identical in value and therefore interchangeable with each other unit of the currency.  

The easiest way to understand an NFT is by using an analogy of a limited edition print of an artwork.  In the physical world, an artist would sign the physical print and include a print number (for example, one of five). The artist’s signature and the print number are not the artwork but a means of authenticating the artwork.  

On the other hand, in the NFT space;

An NFT Represents the digital form of the artist’s signature and the print number that is associated with the underlying asset.

NFT Is linked to the underlying asset by:  

• The digital work.

• Virtue of a copy of the underlying asset has  been encoded in the NFT. Which is not very common.

• NFT contains a code that links to, or can be used to identify, the digital copy of the artwork or the underlying asset. This is known as “hashing”.

What does it have to do with IP rights?

NFTs present opportunities and also risks for brands and companies. Before we go any further let’s find out the meaning of IP rights and types of IP rights.

Intellectual Property (IP)

Intellectual property (IP) right is an international legal arrangement to assign ownership and rights to non-physical goods. A wide body of federal and state laws protects creative property such as writing, music, drawings, paintings, photography, and films. Collectively, this body of law is called “intellectual property” law, which includes copyright, trademark, and patent laws, each applicable in various situations and each with its own set of technical rules.

When obtaining permission to use creative works, you’re concerned primarily with copyright law. However, trademarks, trade secrets, and publicity and privacy rights sometimes come into play when permission to use certain types of works is sought. Below is a summary of the various types of intellectual property laws that are relevant to the permissions process.

The idea of owning software or authorship rights of music is IP RIGHT. There are different types of IP rights but the two main types of intellectual property rights are: Copyright and Trademark.

1. COPYRIGHT: Copyright is automatically assigned, for free on any “creative work”. This gives rights to restrict the distribution of things like books, software, music and art. The Federal copyright law protects original creative works such as paintings, writing, architecture, movies, software, photos, dance, and music. A work must meet certain minimum requirements to qualify for copyright protection. The length of protection also varies depending on when the work was created or first published. 
2. TRADEMARK: Trademark is a very specific symbolic representation of a company or brand. Brand names such as Nike and Apple, as well as logos, slogans, and other devices that identify and distinguish products and services, are protected under federal and state trademark laws. Unlike copyrighted works, trademarks receive different degrees of protection depending on numerous variables, including the consumer awareness of the trademark, the type of service and product it identifies, and the geographic area in which the trademark is used.

What does NFT have to do with IP rights, which can be grouped into two different categories:

1. The monetisation of a brand’s intellectual property rights. 
2. The risk that a brand’s intellectual property rights will be misused.

Monetisation of IP: On the Sales of NFTs.

The obvious way that NFT can be monetized is by selling it to a third party. However, for the buyer, the reality of buying an NFT is often not as straightforward as buying a physical asset. While the owner of the NFT can prove it owns the NFT, it does not necessarily own anything more than that.

An NFT is essentially metadata about an asset which is added to a blockchain. This means that, while an asset is used to encode the NFT to make a unique representation of that asset, the NFT is not usually - unless there are terms to the contrary in the smart contract encoded in the NFT or in any associated terms of sale - the actual asset itself.  

To continue the analogy of the limited edition print of an artwork, if a collector owns a physical limited edition print, the collector would own the physical print itself but would not usually own any proprietary rights in the original artwork. This is an important part of NFTs that the media does not talk about which is very bad and misleading. Due to that people think when they own an NFT it means they also own the underlying asset. 

Let me use Jack’s tweet as an example. When Jack sold his first tweet as an NFT, he auctioned it on Valuables marketplace. Valuables characterize the purchase of an NFT as purchasing “an autographed certificate of the tweet” and make it clear in the terms of sale that any such purchase does not transfer the copyright in the tweet to the buyer.  

Therefore, even though the buyer of Jack’s tweet spent millions of dollars on the NFT, the buyer would not be able to use the tweet (e.g. by printing it on a shirt) without permission, as the copyright is still owned by Twitter and Jack.

Those buying an NFT should carefully consider what they are getting when they buy an NFT, most buyers don’t really consider this especially those that are new in the NFT space, as the owner of an NFT does not automatically give rise to any ownership rights in the underlying asset. 

Factors to consider 

Assigning intellectual property rights in an underlying asset: An NFT seller can transfer those intellectual property rights to the buyer. (Assuming the NFT seller is also the owner of any intellectual property rights in the underlying asset).

However, to do so, the intellectual property must be assigned in writing. Without express written terms stating otherwise in the smart contract, this will not happen automatically on the sale of an NFT. 

Selling an NFT and the underlying asset: I usually advise people to always read the description of any NFT they want to buy before buying it. An NFT seller can sell both the NFT and the underlying asset together. The NFT can then be used as a digital proof of ownership.

In this aspect there are two things to consider.

1. Ownership of the underlying asset. 

The buyer of the NFT should check who owns the underlying asset. Typically, the sale of  an NFT does not include the sale of the underlying asset or any intellectual property rights that vest in it.

However, there are certain examples where an NFT is to be sold together with the underlying asset. One interesting example is Nike’s patent, obtained in 2019, for a system called “CryptoKicks” where Nike could tokenize ownership of shoes by linking an NFT to a physical shoe.

This system reportedly allows designers/businesses to have control over their shoe design. For example, by limiting the number of copies that can be produced. With the prevalence of fake trainers on the market, this provides an innovative way to combat counterfeits.

It also has the benefit of offering a limited edition product, engendering brand loyalty between brand owner and the customer, and helps keep the business current and relevant. But I’m not sure if this system has been launched by Nike but it is an interesting concept.

2. Possession of the underlying asset.

The buyer of the NFT should also check who has possession of the underlying asset, particularly where the underlying asset is a digital file. For example, a digital piece of art. An NFT is linked to the underlying asset, either by the digital work being encoded in the NFT or by the NFT containing a code that links to, or can be used to identify, the digital copy of the artwork. 

The NFT will typically contain what is known as a “hash” of the digital file. The hash is produced by applying a cryptographic mathematical function to a digital file to get an alphanumeric string of characters, which acts as a unique identifier of the original file. 

The hash value is used to authenticate that the NFT relates to that digital file. It is not possible to separate the digital file from the hash, so the hash in the NFT does not give the buyer of the NFT the ability to possess the digital file that the NFT relates to. The buyer will still separately need a copy of the digital file in addition to the NFT.

The buyer should consider:

• Where the digital file will be stored and who will be responsible for maintaining it. In some cases, the digital file is hosted online and the NFT would then contain a URI or URL that points to the webpage where the digital file is hosted. 
• What assurances it has that the digital file is going to continue to be hosted on that webpage, and that the file that is hosted there is not going to be altered. This should be included in the smart contract encoded in the NFT so the seller would not manipulate the agreement. 

Licensing of intellectual property rights in the underlying asset: A more common approach is for an NFT seller and IP rights owner to license use of the intellectual property rights in the underlying asset to the purchaser of the NFT for certain purposes.  

Such a license should be set out in the smart contract or in a separate agreement between the NFT seller and buyer. The buyer’s use of the underlying asset can be as open or restrictive as the rights owner chooses.

For example, the license for CrytoKitties permits the owner of the NFT to commercialize the “kitty”, provided that such commercial use does not result in earnings of more than US$100,000 per year.  In contrast, the license for NBA TopShots grants the owner of ”the moments” a license to use, copy, and display “the moment”  but does not permit the owner to reproduce, distribute, or otherwise commercialize “the moment”.

Depending on the circumstances, in the case of an NFT relating to a digital asset, the license may be limited just to the right to use or display the underlying digital asset for personal use and for the purposes of resale of the NFT.

Monetisation of IP: Royalties on subsequent sale.

NFTs open up a potential new revenue stream for asset owners, as it is possible to code an NFT’s smart contract to make a royalty payment automatically to the original NFT seller on each onward sale of the NFT. The royalties are normally paid as a percentage of the secondary purchase price, and open up the possibility of infinite revenue streams. 

In conclusion, this aspect of NFTs is of particular interest to digital content creators within the gaming sector, where financial benefits to creators can incentivise game developers to record their ownership of in-game items and help to fuel in-game economies.