Relationship between NFTs and Intellectual Property

August 2022

Non-Fungible Tokens, commonly known as NFTs, are tokens of digital assets that represent multiple tangible and intangible assets. The information and ownership of these tokens are 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 grant the token holder ownership over popular jpg or png images, but they can also be used for any “collection” items.

NFTs were created around a decade ago, but their exponential boom in the past year has popularized them within months. In the past few years, the NFTs’ sales 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 the artist Mike Winkelmann, called “The First 5000 Days”, which shows multiple digital images merged in one.  The rise of NFTs and this new form of ownership has sparked interest in the Intellectual Property (IP) industry about whether or not to regulate them. More specifically, the World Intellectual Property Organization (WIPO), posed the following question in their most up-to-date statement about this new digital invention: “should IP laws adapt to NFTs or should NFTs adapt to IP laws?”

To answer this question, the 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 to regulate and protect intangible assets of creators, authors, etc. with trademarks, patents, or work of authorship. This difference reminds us of the corpus mysticum (intangible assets that IP can regulate and protect) and corpus mechanicum (physical objects that don’t concern IP). Hence, the WIPO states that for example, as long as there’s a copyright that grants exclusive rights to an NFT owner, if the image, sound, or any other creation in the NFT wants to be used or reproduced, the users will need to first request use authorization to the copyright holder. In that sense, the WIPO states that the NFT reproduction and trade should adapt to the current IP laws and principles.

Moreover, the WIPO also states that ​​the Berne Convention for the Protection of Literary and Artistic Work still applies to NFTs. The agreement mentions that the reproduction of protected work in digital forms should be previously authorized by the copyright holder. Since NFTs are in essence digital creations, they’re still subject to these copyright laws. For example, if the digital creator wants to use the logo of a company in its digital artwork, he will first need to request permission from the owner of the mark to reproduce that image, regardless of whether the NFT is going to be digitally created by him.

Yet, there are still unclear cases in which the NFT creator should request permission from the copyright owner. For example, the WIPO highlights a case where a tattoo company sued the basketball video game called NBA 2K for reproducing avatars that contained designs of tattoos owned by the company and the court favored the video game authors by arguing that the use of the designs was minimally used and present in the avatars. Even though this case highlights exceptions regarding when it wasn’t necessary to request permission for the reproduction of protected creations, the WIPO acknowledges that these cases bring uncertainty to the Berne Convention agreement. However, these cases are brought to the front of the discussion by the organization as it wants to clearly state that there are enough precedents to properly judge the use of protected creations in NFTs. Hence, the WIPO mentions that IP experts and field workers should not be confused that new laws are required to regulate NFTs. On the contrary, the WIPO is confident that the current rules and exceptions for the use of protected digital inventions are still applicable to NFTs’ inventions. 

On the other hand, there are great challenges regarding the ownership of copyrights in the NFT industry (i.e., once the NFT invention is reproduced). For example, when a buyer acquires the NFT, he receives the right to claim ownership of the token itself (similar to personal property ownership). However, buying an NFT doesn’t grant you ownership of the digital asset, artwork, or design. Hence, acquiring an NFT doesn’t necessarily mean you’re also acquiring the intellectual property of the invention or creation.

The confusing question is who then legally owns the copyright of the NFT. The experts in the field say that unless the author transfers copyright ownership to the NFT buyer, it’s legally still the author that owns the intellectual property of the NFT despite the NFT transfer to its new owner. Hence, 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 intellectual property ownership to other people, despite the NFT ownership being traded in digital spaces.

These two separate ownership mechanisms (corpus mysticum with the copyright ownership of the art, design, etc. of the NFT and corpus mechanicum with the ownership of the NFT per se) can confuse and complicate the transfer of NFTs’ copyright ownership. Even if the NFT sale has been done, the copyright of the NFT content won’t 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 occur between wallets with no linkable human identity, experts say that many issues might arise in signed copyright ownership transferability as it is currently impossible to transfer intellectual property rights to an anonymous entity. Hence, IP experts predict that if NFTs keep rising in popularity, this will be a great challenge that might cause changes to IP laws for the WIPO to solve the dilemma.

Experts say that a way to solve this copyright transferability issue is that the NFT author grants specific copyright licenses to the NFT owners. For example, the National Basketball Association (NBA) Top Show clarified within their NFT purchase terms and conditions that the owner had a license that allowed him “to use, copy and display the designs of his NFT only for personal use”. Moreover, the Bored Ape Yacht Club (BAYC), one of the most famous groups of NFTs’ creators, allowed NFT owners to use commercially the designs of their famous apes that were tokenized using NFTs, meaning that the NFT owner could sell any merchandise that includes the designs of the NFT they purchased. However, the licensing solution still doesn’t solve the ambiguity of granting IP rights to NFT owners, whose wallets remain anonymous. Even if the license is granted to them, the NFT owner wouldn’t be able to prove his right to use those licensing terms as he wouldn’t be able to prove that he owns the wallet that has the NFT and thus grants him those license rights.

Another way in which NFT creators can take advantage of intellectual property rights of the NFT underlying creation, design or art is if they declare royalty terms for the NFT. For example, they can declare a royalty rate for every time the NFT is sold in the future, which would allow them to keep monetizing on their original designs. The royalties would be coded in the blockchain (e.g., every time this NFT gets sold and transferred to a new wallet address, give 2% to the creators) without any IP rights transfer. On the other hand, some important IP consultancy firms, such as Finnegan, have started 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 start making and selling virtual footwear, which protects the Nike brand against any unauthorized use of its sneakers in NFTs.

The NFT revolution leaves untouched how IP laws and agreements protect the reproduction of any protected content in these new non-fungible tokens. However, there are many unaddressed challenges to IP rights’ transferability within the NFT trade markets, as buying and selling NFTs doesn’t mean acquiring or losing IP rights. Hence, IP laws, especially regarding the transfer of rights, will need to evolve to better tackle these new NFT needs and dilemmas.

Margarita Guerrero

Patents Specialist Engineer

References

https://www.wipo.int/wipo_magazine/en/2022/02/article_0002.html

https://www.finnegan.com/en/insights/articles/demystifying-nfts-and-intellectual-property-what-you-need-to-know.html

https://www.lexology.com/library/detail.aspx?g=d96ed012-8789-4e87-bc1d-70ba76569c0f