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Featured, NFT, Smart Contract

NFTs and Intellectual Property: What You Need to Know

The advent of NFTs date back to 2012. However, they made it to popularity charts in 2017 after an organization, Dapper Labs began selling NFTs linked to digital cat cartoons that went by CryptoKitties sending the world drooling and spending over them.

It wasn’t until recently that the NFT craze touched various industries and sent a section of the crypto community into an NFT-buying frenzy. Some instances that we have right before us include:

  • Beeple’s digital artwork, Everydays: The First 5,000 Days saw a record sale of US$69 million by Christie’s auction house.
  • Twitter’s CEO, Jack Dorsey, made an NFT of his first-ever tweet, which went for auction and sold for over US$2.9 million.
  • NBA Top Shot crossed the US$500 million mark, making it the biggest NFT marketplace as of the date of publication.

Understanding the NFT

NFTs are blockchain-powered units of value or “tokens”, carrying a unique ID representing an underlying asset.  NFTs are mostly created on the Ethereum blockchain, however, there are NFTs supported on other blockchains.

What drives NFTs is a software code called “smart contract”. The smart contract contains details of the underlying digital or physical asset(s) to which the NFT is tied. It also defines rights attached to the NFT. you may take, for example, a rule that the original creator of the NFT receives a percentage of any subsequent resale price. 

The value of an NFT comes from its being “non-fungible”, implying that the token cannot be replaced with an identical one (defining its inherent rarity). This stands in stark contrast to the fungible cryptocurrency or government-issued fiat currency. Each unit of the currency digital or fiat is identical in value and therefore interchangeable with every other unit of the currency.     

Also Read: Establishing Gender-Equality Riding the Crypto-NFT Wave

From the Intellectual Property Perspective

NFTs encase within themselves the opportunities and risks for businesses. These can be classified into two subheads, which we will explore in the following:

1. The monetization of your business’s intellectual property rights.

The foremost way of monetizing an NFT is by selling it to a third party. However, buying an NFT implies ownership of the NFT and nothing beyond it. An NFT in essence is the metadata on an asset that is added to a blockchain. This means that a person may own an NFT of a piece of art but he may not reproduce it in any form to derive money from it unless the original creator has so allowed it. Jack Dorsey’s auctioned tweet can only be sold for a profit to the next buyer who practically simply owns bragging rights to the tweet

The seller of an NFT (assuming the NFT seller is also the owner of any intellectual property rights in the underlying asset) may transfer the intellectual property rights to the buyer.  

However, the process requires the intellectual property to be assigned in writing. Without explicitly written terms stating otherwise, either in the smart contract or elsewhere, this will not happen automatically on the sale of an NFT.  

2. The risk your business’s intellectual property rights will be misused.  

Trademark infringement may arise in places where an unauthorized party mints an NFT connected to the underlying asset, without the asset owner’s permission, and advertises, offers for sale, and/or sells the NFT using the asset owner’s registered trademarks.

The key point to consider here is if the business owns registered trademarks that cover NFTs or similar goods/services. In the case that it does, then there may exist a relatively straightforward case for trademark infringement under trademark law.

 However, even when the asset owner does not hold any trademarks for relevant goods/services, this does not automatically point to the end: it may be possible, in certain circumstances, to argue that the use of the same or similar mark for dissimilar goods takes unfair advantage of the reputation of the asset owner’s registered trademark and therefore amounts to infringement.  

Finally

NFTs present countless opportunities not inseparable from potential risks for businesses. Clear segregation of what is permitted from what is not with respect to IP rights should be laid down in the terms of sale of the NFT and/or the smart contract encoded in the NFT. This will best allow a business to control its IP as well as monetize it.

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