NFTs and Intellectual Property Law: The Craze, the Crux and the Questions

NFTs: An Introduction:

Another day, another crypto-token!

And so, we enter the era of the non-fungible token and witness yet another expansion in the world of crypto assets. NFTs have recently been brought to the fore of mainstream media by the sale of animations made by the infamous Grimes who sold $6 million (£4.3m) worth of these assets an impressive 20 minutes, and by Jack Dorsey, who sold his first ever tweet as a NFT for a sweet $2.9m (£2m). On top of this, the NFT frenzy has motivated people interested in Ethereum to purchase over $224m (£173.5m) worth of crypto collectibles so far in 2021 alone – and it’s only April! 

Clearly these NFTs are huge money spinners, but what are they? How do they work? And why are they so popular?

What Are NFTs?

Legal jargon would tell you that an NFT is essentially a unique cryptographic asset connected to an object. In simpler terms, however, NFTs are basically a method of tokenising an asset, where a token represents the digital unit of value recorded on a blockchain (like Ethereum). A blockchain is a decentralised model of the typical “central database” and stores encrypted data on ownership and transactional history of each individual NFT. 

Envision the NFTs as the crown jewels, and the blockchain system a high-tech sealed vault protected by knights – much easier to understand!

Therefore, NFTs can be seen as digital certificates that authenticate a statement of ownership over a certain asset and enable it to be sold or transferred, and the blockchain system protects and secures these certificates. 

As regard to form, pretty much anything of digital content can be transformed into an NFT: paintings, artwork, music, games, photographs, and so on. The possibilities are endless (even memes!). To date, the vast majority of NFTs are made on the Ethereum blockchain, but there are alternative blockchains that NFTs can be created on. (For example, the Flow blockchain where the NBA’s Top Shot NFTs are minted).

NFTs vs Cryptocurrencies:

The rise in NFTs has coincidentally developed alongside the sharp surge of investment in cryptocurrency, in particular the notorious Bitcoin. When you throw in complicated legal, economic, and technical jargon that surrounds these crypto tokens, however, the distinction between the two can become quite muddy. 

So, what is the difference? The primary difference between NFTs and typical cryptocurrencies is interchangeability (or absence thereof).

For example, one bitcoin in digital purse X, can be interchanged with another bitcoin in digital purse Y, as every bitcoin holds the same value and purpose. It doesn’t matter what exact pound, euro, or bitcoin, you purchase your asset with, they’re all the same and therefore, fungible.

Conversely, NFTs are one-of-a-kind, and each has its own unique ID code, as well as additional data that other tokens cannot duplicate. Therefore, NFTs cannot be exchanged with one another. This gives the NFTs originality, individuality and rarity that bestows great allure on the tokens and entices potential buyers, which may explain why some are selling for millions. 

However, while NFTs work to specially restrict and protect a unique claim over an asset, things get strange when you consider that most assets claimed by NFTs are digital, and so are ironically extremely copy-and-paste-able, accessible, and distributable (like JPEGs, films and PDFs). If anything, this highlights the exclusivity of the NFT trade and the high-profile purchasers that are willing to possibly overlook issues of replication in return for title of ownership over the asset in question. The purchase of Beeple’s artwork (“Everydays: The First 5,000 Days”) for $69m (£50m) proves this, as despite unique NFT ownership the artwork has been copied thousands of times – and the buyer was still willing to pay more for the work, all in the name of kickstarting the new era of digital art. 

The NFT frenzy thus far appears to be a classic case of exclusivity breeding desire.

NFTs and the Law:

With the explosion of interest in NFTs, some uncertainty surrounds how exactly they fit into existing legal frameworks that control the tech, finance, and cryptocurrency sectors, as well as their harmonization within the realm of Intellectual Property Law. So, lets break down the basics.

Digital Art “Work”:

A notable distinction is to be made between classic, traditional artworks and artworks sold with the use of NFTs. For NFTs, the “work” must be made in either a digital form (like the digital art by Beeple) or a digital copy or image of a tangible, physical work (like a sketch or painting). So, an NFT can be linked to a physical item but is not the actual item itself. 

Ownership:

The big issue surrounding ownership of NFTs is that the purchaser’s idea of what exactly they are getting may not exactly match the legal reality. Under Intellectual Property Law, buying and owning an NFT does not confer automatic ownership onto the buyer. Simply, it’s really just a digital certificate that verifies your ownership over an original work – you own that exclusive copy of the work. But despite exclusive ownership, often for a hefty price tag, NFTs can still be copied, shared, and downloaded by others. 

Analogy: Imagine a footballer signing a Match Attax card (remember those?! #throwback). There are thousands of his cards printed, but only one is a signed copy, and that is where the value lies. The value of NFTs work in the same way. Like in the case of the recently sold tweet, everyone can see, like, retweet and screenshot the tweet, but only the buyer exclusively owns the tweet. The devil is in the de(title). 

Minting:

This brings us nicely along to the notion of creating an NFT (or as crypto-legal jargon puts it, “minting”).

Once you create your digital art, you mint it by placing it upon the Ethereum blockchain, which is essentially a public ledger that is inalterable and secure. Akin to the way coins are minted before being put into circulation, NFTs are crypto-tokens that are also “minted”. So, when your digital art is successfully minted and now in the form of an NFT, it can be bought, sold, and traded within the market and digitally traced as its sold and resold in future. 

Minting can benefit the artists who create the NFTs, as they can choose to mint their NFT in accordance with different standards. For instance, if an artist mints their music and wants royalties for every time it is utilised, they’d simple choose a token-standard that set out provisions for the collection of royalties. 

This is done through the use of so-called “smart contracts” which are basically the software codes that NFTs are created with. These smart contracts set the standards by managing things such as NFT ownership verification and transfer capability. And so, each NFT operates under a certain standard and must obey the rules under that standard, similar to the operation of a contract. Where someone creates or “mints” an NFT under a certain they are essentially signing the smart contract that dictates the nature of the NFT, the rights of the purchaser and seller, and so on. 

Additionally, other people can mint NFTs of original works they did not create themselves. As you can imagine, this is a huge area of legal contest. A recent example is the use of DC Comics characters in artwork by an artist who made $1.85m from the sale of NFTs that contained these characters, which, as you can imagine, DC Comics did not like. 

Clearly, the replication and use of underlying artwork in the sale of other NFTs in absence of express permission from the copyright owner or original artist is a notable dilemma in Intellectual Property Law. While some virtual marketplaces, like OpenSea, have enacted policies to address these potential violations, Intellectual Property rights holders may also take legal action for copyright infringement. Artists must be careful about incorporating a third party’s Intellectual Property into their NFT work, as although there are myths about the law traditionally not affecting decentralized blockchain systems, artists are threatening to enforce their Intellectual Property rights against NFT creators who are using third party’s IP without license – which may lead to litigation. 

The Value of Authenticity:

The minting of NFTs, along with their unique nature, gives the digital art an aura of “authenticity” that works in favour of NFTs against the very copy-able, downloadable, shareable sphere that they belong to.

Their value stems from their: 

• Digital uniqueness
• Digital impenetrability on the blockchain (cannot be replicated by anyone else)
• Exclusive single-titled ownership & hence, individualism 
• The reputation of the artists within the marketplace. 

This may explain some of the bizarre price tags attached to recent NFTs, like the $2.7m (£1.8m) first tweet of Jack Dorsey and even a video of Banksy’s artwork being burned fetched an impressive $380,000 (£275,000). It appears their individuality and exclusivity paired with the notoriety of the artist are the qualities that drive the price of these NFTs up so high.  

However, while NFTs work to authenticate the work and verify chain of ownership, it is noted that where the original entry of the NFT onto the blockchain ledger has mistakes, NFTs by their nature will only cement these mistakes into reality and carry them through their sale or transfer. They cannot be amended. Therefore, it is hugely important that the artist confirms what is to be contained in the NFT, as once it becomes part of the blockchain, it cannot be altered. This is a notable downside to the operation of NFTs, and although attempts are being made to resolve this issue, the system is still slightly open to abuse and so care is needed until security checks are tamper-proof and consumer clarity on these issues improves.

But, to wrap it up on a positive note, NFTs do add an air of authenticity to digital artworks and they have provided great opportunity for digital creators and artists to generate new, original and never before seen types of performance art – such as the sale of a tweet and the video of Banksy’s work being set alight

While before, we probably would never have even considered the posting of a tweet or burning of an artwork as artwork in itself, NFTs have enabled expansion on what exact constitutes artwork outside of the typical realm of paintings, music and drawings. This can only be seen as a benefit, opening up a realm of possibilities to non-traditional, a-typical artistry, and the recognition and protection of their pieces in Intellectual Property Law. 

The Big Q: Can NFTs Be Protected by Intellectual Property Law?

Trade Marks and NFTs:

While it is unlikely that it will take off in fears of further adding to consumer confusion, if NFT artists did decide to assert proprietary names to the NFTs that they own, they could be protected under the shield of trade marks. Cryptocurrencies can do this currently. But, as noted, it’s rather unlikely. 

However, in the UK, graphic marks (including graphic files) have now become protectable, which indicates that perhaps this protection could be extended to any form of NFTs. Though until there are clear policies on the topic, the exact answer to this question is unclear. 

Patents and NFTs:

As for patenting innovation using NFTs, it is a possibility where the innovation fixes a technical problem. The English patent system allows for a wide interpretation of the term “technical problem”, which seems like a positive for the NFT-patent-hopefuls.

However, caution will be required patenting innovations that utilise NFTs as opposed to traditional considerations of physical, chemical, or biological sciences and a clear definition on how exactly the NFT solves the technical issues will be a necessity.

International Perspective: Across the pond in the US, NFT patents have already secured their place in Intellectual Property Law and their expansion is imminent. Nike recently secured a patent for the creation of “cryptographic digital assets for footwear”, which gives the buyer of Nike shoes assurance of authenticity of the shoes and also awards them a digital collectible version of the shoe, referred to as Cryptokicks (very catchy!). Blockchain patents are clearly on the rise, especially in the US. Who knows, perhaps this is a trend that will slowly infiltrate English and Irish IP law?

Reshaping Artists’ Rights? The Pros and Cons for NTF Creators:

What’s in it for the artists? Let’s have a look at the good and the bad.

The Pros:

• Decreased expenses: Provides artists with a much improved way of monetizing their artwork through selling NFTs virtually without a middleman (and his fees!).
• Extra source of revenue: Gives smaller artists, who may not usually feature in galleries or exhibits, a new source of income by selling directly to potential buyers online.
• Value momentum: Artwork has the possibility of gaining value fast due to the availability of an accessible online resale market.
• Resale Commission Clause: Artists can benefit from their work increasing in value if they incorporate a commission clause upon resale in the smart contract attached to the NFT that would allow them to receive a percentage of the profit each time the work is resold (this is common!).
• Copyright upheld: An artist can sell an NFT and keep the copyright and attached IP rights of the work, enabling further distribution, copy and replication of their artwork.

The Cons:

• Unlicensed use: Artists must be cautious about using third party IP in the digital content of their NFT, or face litigation threats from IP and copyright owners for unlicensed use of their underlying works.
• Artwork Imitation: Artists may have concerns over works that are very similar to theirs, though they aren’t identical copies. Considering how digital-era artists often borrow from alternative sources to create online content such as tweets, memes and even Tiktoks, this is to be expected. However, little can be done without resorting to litigation. 
• Artwork Theft and Fraud: There is a notable rise in thieves, hackers and fraudsters within the crypto-art scene, who falsely replicate, steal and con both artists and sellers through the NFT trade and wrongly profit from such behaviour.
• “Gas” Fees: If using Ethereum for transactions, fees must be paid known as “gas” that can add up quickly.
• Loss of account access: With NFTs, if login information needed to access a user’s “wallet” is lost or forgotten, all their money and artworks in the account are gone forever. This information isn’t simply retrievable.
• Increased Competition: Though you have access to a new marketplace to sell your content, you are still competing against thousands of other artists and must work to catch the attention of potential buyers and collectors. 

The Future: Application of NFTs Beyond Art?

The possibilities of using NFTs outside the world of digital art are endless. 

There is huge potential for these crypto-tokens in other industries, such as acting as an agent for tickets or memberships to in-person, physical events, like concerts or sports games. Unlock actually allows users to buy an NFT with a key to access membership to the Forbes website without ads (always a plus!), for example. 

Another possible application of NFTs in future is watermarking, where an NFT would be utilised for verification of authenticity of certain data, or in the field of steganography, which would use NFTs to hide data and information within other data and information. 

The NFT frenzy is still in its early days. While the world is trying is wrap its head around how to use these new crypto tokens efficiently, effectively and imaginatively (check out the Austrian CryptoStamp for a creative example), the true potential of NFTs is still somewhat unclear. This is especially so in the sphere of Intellectually Property Law, which must respond to the legal, cultural and technical boom of these crypto tokens. 

NFTs in the digital art trade can be a real win-win-win for artists, sellers, and buyers, but must be more clearly regulated if NFTs are here to stay. If not, I predict there will be a lot of displeased crypto-collectors (crying consumer protection), crypto-artists (crying copyright) and crypto-sellers (crying both!) somewhere in the future. 

Chantelle is a recent BCL graduate from the National University of Ireland Galway, and is currently undertaking a Masters of Law. Chantelle has a keen interest in intellectual property law, international business & human rights, and international public law. Chantelle intends to pursue her professional solicitor qualifications and has aspirations to work internationally in the field of business and human rights.