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New Form of Trading? Getting to the bottom of NFT.

Posted on 16 March 2021

Non-Fungible Tokens (NFTs) are booming. Partly helped by the recent sale of the first NFT digital artwork Beeple's "Everydays: The First 5000 Days" for US$69 million, people bidding on the world's first Tweet and Kings of Leon's  newest album which was dropped via NFT. However, discussion of NFTs in the press can be confused – in particular, suggestions that NFTs provide 'ownership rights' over digital art, when this is not necessarily the case. As more and more people seek to use NFTs to extract value from digital assets, we explore a few intellectual property issues related to NFTs.

What is an NFT?

As we discussed in a previous article, an NFT is a unique, non-divisible token, often linked to an object (e.g. a collectable, digital art or in-game asset) which uses blockchain technology to record ownership and validate authenticity. Fungible tokens, such as Bitcoin, are not unique and therefore do not qualify as an NFT. Examples of NFT tokens include Ethereum's ERC -721 and new standards such as ERC 888, ERC 998 and ERC 1155.

It is important to note that the NFT is not the digital asset itself, but an electronic record representing ownership of the asset. When an NFT is bought, the purchaser holds the right to claim ownership of the NFT (think of it as a receipt or proof of purchase). Absent terms stating otherwise, ownership of an NFT does not entitle the purchaser to ownership of the underlying asset.

Is there copyright in an NFT?

As a brief overview, copyright protects the expression of an idea, but not the idea itself. This means that someone who takes a photo, for example, will be the author and first owner of copyright in that photo (provided the relevant criteria are met for protection). As the copyright owner, they can license their rights or assign (i.e. transfer) ownership of the copyright to someone else.

As noted above, an NFT is simply a record of ownership on a ledger which links to an underlying asset. In itself, an NFT is unlikely to constitute an 'original' work of authorship and therefore qualify for copyright protection. This may be different if the underlying asset is embedded in the NFT itself "on chain".

Who owns the copyright in the underlying asset of an NFT and can that copyright ownership be transferred?

As detailed above, the author (e.g. an artist) of the underlying asset will be the first owner of any copyright in the asset (e.g. a digital artwork). An NFT owner will acquire the copyright in or a licence to the digital asset. If the artist wished to transfer copyright ownership to another person, it would need to do so by a written agreement, signed by the artist. This can get rather complicated in the context of blockchain, with issues arising from the use of digital wallets, for example.

If using a smart contract which is recorded on an immutable blockchain, further issues may arise when wishing to amend the terms. While an on-chain contract can be amended, with an off-chain variation, the original smart contract will still execute according to its original terms. If using a smart contract, parties should consider at the outset how they are going to make amendments to their contracts to ensure that the code provides a sufficient degree of flexibility.

What can NFT owners do with their digital assets?

This will be determined by the terms governing the NFT. To take Cryptokitties as an example, NFT owners may commercialise the use of their kitties under a licence provided that such use does not result in the NFT owner earning more than US$100,00 in gross revenue each year. Confusion arises when the terms are contradictory. For example, Decentraland (a virtual world where land is represented in NFTs) states that "it is virtual reality platform" "owned by members of the community" but Article 12.1 of its Terms of Use notes that the Decentraland Foundation owns "all right, title, ownership and Intellectual Property Rights in and to the Site" and the "Tools are owned exclusively by the Foundation or its licensors".

Parties will need to ensure that the terms which accompany an NFT are accurately drafted to determine the rights of an NFT owner and ensure that consumers are clear as to exactly what they are buying.

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