A blockchain is effectively a list of transactions embodied in computer code. The code is run on a series of computers and the list is stored in “blocks” of data, which are also transferrable “rewards” for those who run the computers that back the network. A decentralized blockchain, like Bitcoin’s, is run in such a way that no single person, company or central authority is in total control. Decentralized blockchains operate in a peer-to-peer setting. Each subsequent block of data contains a history of all prior blocks and transactions. This allows the entire history of the blockchain, or the “ledger,” to be visible, secure and resistant to tampering or double-spending.
In additional to transfers of digital currency, some blockchains are designed to enable ‘smart contracts’ – a type of automatically executable computer program – to be executed on the blockchain. This enables a set of instructions to effectively self-execute on a public blockchain, instead of a private computer. In turn, this allows the creation of both fungible and non-fungible tokens (NFTs).
NFTs are ‘Non-fungible’ because they can represent unique specific items of property, including content which would be subject to intellectual property protections. The creator of the NFT is entirely in control as to whether that intellectual property is a one-of-one original, or a limited (or relatively unlimited) set. NFTs can represent almost any real or intangible property, including digital artwork, physical artwork, music, videos, collectibles, trading cards, video game virtual items, contract rights or even a debt or real estate. In sum, an NFT is the digital version of a certificate of authenticity, embodied in the blockchain.
By contrast, “Fungible” tokens (including Bitcoin or other payment-type cryptocurrencies), may be theoretically unique, but are interchangeable. Fungible tokens are like a dollar bill. If someone owes another person one dollar, they can pay with any dollar bill, or any four quarters. The dollar bill has a unique serial number, and in that sense the dollar bill is unique but the dollar is “fungible” — any equivalent amount of currency will settle the debt.
Like cryptocurrency, NFTs have taken the world by storm. Everything is being tokenized. NFTs, or “Non-Fungible Tokens” are digital files with a unique identity that is verified on the blockchain.
Bitcoin (or real fiat currency for that matter), can be thought of as entirely interchangeable (or “Fungible”). If you owe me five dollars, I wouldn’t care if you gave me five $1 bills or a $5 bill (even if they each have a unique serial number), so long as you pay me my money. Same with Bitcoin – it’s a commodity.
However, NTFs are ‘Non-fungible’ because each NFT is somewhat unique (at least in theory). NFTs can represent a 1 of 1 “original,” such as a unique work of art. NFTs can also represent one of a fixed number of copies in a limited series (For example #3,100 of 10,000 CryptoPunks, sold for 4,200 ETH, or $7.58 million on March 11, 2021).
In fact, NFTs can represent almost any real or intangible property, including artwork, music, videos, collectibles, trading cards, video game virtual items, or even real estate. In sum, an NFT is the digital version of a certificate of authenticity, embodied in the blockchain.
For that reason, unique NFTs are bought or sold in auctions, or in marketplaces based upon the principles of supply and demand, with a dash of cryptocurrency speculative fervor thrown in. Lately, these NFT marketplaces (such as OpenSea, Rarible, or NBA Top Shot) have gone crazy, with millions of dollars being paid for single digital collectibles. Even the esteemed auction house Christie’s has gotten on board with the sale of Beeple’s EVERYDAYS: THE FIRST 5000 DAYS for an astounding $69 million.
Some view this is an unhinged speculative market that will eventually come crashing down. Others perceive it as the new frontier of digital commerce and art. Only time will tell.
But when it comes down to it, what does it mean to sell or to buy an NFT? What do you really own? If you are a brand with valuable IP, how do you approach NFTs?
NFTs can be created on any number of blockchains. The most popular blockchain for NFT creation is Ethereum. Other popular options include Binance Smart Chain, and Flow by Dapper Labs.
Once you select a blockchain, most users would select a platform that operates on that blockchain to help create an NFT on that blockchain. Rarible is an example of a platform that operates on the Ethereum blockchain. In order to create an NFT, users deposit Ethereum to pay for the creation of the NFT as a smart contract on the Ethereum blockchain, accept the platform terms of service, and “mint” the NFT.
Depending on the platform and nature of the work sold, creating your NFT can include uploading an image, video, or music file, adding a name and description, and deciding whether to collect royalties for future sales of the NFT, theoretically including all future resales. Various options exist on different platforms, and undoubtedly, additional options will be developed in the future.
The basics of blockchain and cryptocurrency are beyond the scope of this article, and conversational knowledge is assumed.
NFTs can be created on one of any number of blockchains. The most popular of which is Ethereum, which has smart contract functionality (unlike Bitcoin). However, there are a number of alternatives, including: Binance Smart Chain, and Flow by Dapper Labs. On Ethereum, the Ethereum ERC-721 standard is the primary Non-Fungible Token Standard that powers the tracking and transferring of digital art and collectibles. This standard specifically contemplates tracking not only virtual collectables, but also physical property and “negative value assets” such as loans. https://eips.ethereum.org/EIPS/eip-721.
Once you have selected a blockchain, for ease of use you may want to select a platform that operates on that blockchain to help mint your NFT on that blockchain. For example, a popular NFT platform and marketplace running on the Ethereum blockchain is OpenSea, which has a section where you can ‘Create’ NFTs. You will deposit some ETH from your wallet to pay for the creation of your NFT on the Ethereum blockchain, accept the platform terms of service, and start creating the NFT.
Depending on the platform, creating your NFT can include uploading an image, video, or music file, adding a name and description. Additionally, NFTs allow the creator of the NFT to decide whether they will collect a royalty for future resales of the NFT, potentially an incredibly powerful tool that would allow a creator to profit from any future sale of the NFT. Various options currently exist on different platforms and additional options will undoubtedly be developed in the future.
Now that you have minted your NFTs, you can sell your NFTs to your fans. Choose a price and list it for sale or auction!
You can find a more step-by-step break down of this process in an article located here: https://www.coindesk.com/how-to-create-buy-sell-nfts
Copyright can be thought of as a ‘bundle’ of rights. Owners of a copyright possess the exclusive right to: (1) reproduce the work; (2) prepare derivative works based upon the original work; (3) distribute copies of the work to the public by sale, rental, lease, or lending; (4) perform the work publicly; (5) display the work publicly; and (6) in the case of sound recordings, to perform the work publicly. 17 U.S. Code § 106.
If an author chooses to sell their original work to a buyer, the author, by default, remains as the copyright holder and retails to original copyright in the work, even upon sale to a buyer; unless there is some deviation from the general rule. The buyer will own the physical copy and the related limited right to display that physical copy. However, the buyer does not necessarily have the right to make additional copies or make further commercial use of the underlying work. This right is generally retained exclusively by the copyright holder.
How do NFTs change this landscape? Potentially, significantly.
First of all, the minting of an NFT is effectively done subject to the terms and conditions of the NFT platform and the intent of the NFT creator. That platform’s terms may grant a total transfer of copyright to the buyer of an NFT, or may only convey a limited right of display. They may include a promise to limit production to a set number of NFTs, or may set no limit at all. The content creators themselves may promise to convey the NFT plus an original physical artwork, an NFT plus copyright ownership, an NFT plus a portion of ongoing royalties, an NFT plus a ticket to a live event, or just about anything else. The potential combinations are virtually limitless.
Even more significant is the ability to program ongoing royalties into the sale or transfer of the NFT itself. When creating an NFT, a content creator can require that a percentage of future sales must be paid back to the content creator’s designated wallet via a smart contract. The content creator thus gets around the “first sale” problem that movie studios couldn’t avoid back in the analog days of Blockbuster.
NFTs can effectively serve not only as a digital collectible, but as a certificate of authenticity. If a work comes with an attendant NFT, you can always evaluate whether that work is genuine by whether the owner of the work can demonstrate the ability to transact on the cryptocurrency wallet that holds the NFT that entitled them to that work. If you want to ensure your work is sourced from the content creator themselves, what better way than to buy it through a verified, imperturbable ledger?
It is this flexibility and degree of control that is so exciting. It is also what subjects content creators, owners and licensors to significant risk.
What rights are given when an NFT is minted on a platform with no terms and conditions or not on a platform? What happens when an NFT is sold without a platform at all? What happens when a content creator purports to assign its underlying copyright or royalties, but fails to record that assignment with the national bodies that track and regulate such assignments? What happens when a single creator of a joint work directs all proceeds to their individual wallet? What happens when unauthorized persons create an NFT of copyrighted work they don’t own? Can the purchaser of an NFT duplicate an NFT they’ve purchased to skirt royalty payments to the original creator? To take a darker turn, what happens if a terrorist acquires an NFT entitling the holder to royalty payments from all purchasers of certain songs or artworks? When anyone who can transact on a public and distributed blockchain can buy an NFT, almost anything is possible.
The market seems destined to split into smaller players and larger players who may be able to solve these optimistic risks, and also these potential risks, including AML/KYC (or “anti-money laundering” and “know your customer”) questions via differing means.
If you are an author of a work of art, who owns the copyright? At least from a US perspective, the default rule is that the author retains the copyright in their original creation. Although NFTs and other projects on the blockchain present numerous potential copyright minefields, there does not seem to be anything inherent about NFTs that would change this default rule as to copyright ownership.
The typical analogy is that copyright can be thought of as a ‘bundle’ of rights. For example, when an artist (or copyright “author”) sells a physical painting to a buyer, the artist/author is, by default, the copyright holder and will retain the original copyright in the work, even upon a sale to a buyer of the artwork, unless there is some deviation from the general rule. The buyer owns the physical copy and the related right to display that physical copy. The buyer does not have the right to make additional copies (that right is retained by the copyright holder), but the purchaser can of course resell his physical copy to a third-party without violating any copyright restriction. Indeed, the “first sale doctrine” limits the ability of copyright holders to control the further resale of their copyrighted works (and the application of the first sale doctrine to the digital era is already a bit of a gray area).
So, by analogy, if you were to create and sell an NFT which embodied your art, what does that mean for your copyright? Although these concepts have not yet been tested in Court, presumably, the author of the work still owns the copyright in the underlying work embodied in the NFT itself. That is, unless the author of that work specifically conveyed ownership of the copyright as part of the sale of the NFT (this is not likely, although presumably possible). As part of creating an NFT, you may sign up for a platform, and agree to further terms and conditions (likely including a grant of license to the platform to use your copyright to the extent required to create the NFT).
As a purchaser of an NFT, what are you receiving? The buyer of the NFT receives ownership of the NFT (with that ownership being recorded on the blockchain), and also presumably some implied right or license to make limited use of the underlying artwork embodied within the NFT in order to buy, own or sell the NFT.
By default, the purchaser of the NFT generally will NOT receive ownership of the underlying work of art embedded in the NFT, nor the right to reproduce, or transform that work of art. It is theoretically possible that this default rule could change, for example, if the work of art in question was issued pursuant to a creative commons license, or if the transfer of the underlying ownership were expressly stated in the terms and conditions governing the creation of the NFT.
Issues to consider:
How do trademarks fit with NFTs?
If you are creating NFTs, as a best practice you will want to avoid using any trademarks of another company embodied within your NFT.
If you are a brand owner, like any new technology, you may want to consider how your brand can or will be utilized in a new context, and how you can engage with the new technology to reach new audiences. The artists Deadmau5 and Kings of Leon each released NFT packages branded under their trademarked artist names. Similarly, LVMH (the owner of Louis Vuitton, Tiffany, and Dom Perignon) reportedly is using the AURA blockchain to allow consumers to use NFTs to trace the authenticity of their branded luxury goods.
NFTs present numerous open and potentially difficult questions for brand owners:
NFT patents are already here, and more are surely on the horizon. For example, Nike has obtained a patent for “generating cryptographic digital assets for footwear,” which would allow a buyer of a shoe to ensure that their shoe is authentic, and also enjoy a digital collectible version of their shoe in their wallet (otherwise known as Cryptokicks). In general, blockchain patents continue to show accelerating growth.
If you are a blockchain inventor on the blockchain, you should be considering whether what you are doing could possibly qualify for patent protection. While obtaining patents for blockchain-related items might be difficult, it is also possible. In the US, a patented invention must be patent eligible, new or novel, useful, and non-obvious. Thousands of blockchain patents are already being filed every year.
NFTs are undoubtably the next frontier in the “new media” landscape and IP license agreement. Licensees (or Licensors) who rely on older agreements to outline their permitted uses of a particular work are unlikely to have contemplated the ability to create a digital representation of the copyrighted work as a portion of a distributed financial ecosystem. On a going forward basis, any copyright attorney who drafts an intellectual property license agreement without contemplating the use of this technology is likely doing their clients a disservice.
Licensing agreements geared towards the NFT and cryptocurrency space must specify particular details about platform selection, blockchain selection, promotions and marketing, limitations, special rights, royalty payments, dispute resolution and more.
Artists or brands may choose to license their brands instead of creating NFTs themselves. For example, the National Basketball Association licensed the NBA brand and content to Dapper Labs to allow the creation of NBA Top Shot. NBA Top Shot is an application that allows users to trade, collect and showcase digital blockchain collectibles containing officially licensed NBA content, such as gameplay highlights. If you are a fan of the Miami Heat’s Tyler Herro and think he’s going to be the next NBA superstar, you can buy an NFT including a highlight of Herro as he “gets in the paint and nails the high-arcing floater over the outstretched arm of Anthony Davis during third quarter action of Game 4 of the NBA Finals.” Lowest asking price for a 1 of 43 edition? $22,500.
With NBA Top Shot, the NBA has a verifiable hit on their hands that can barely keep up user demand. Certainly, other brands will want to get in on the action. When they do so, like any other licensing arrangement, there are numerous considerations, including:
What do you do if someone has infringed your intellectual property in an NFT? The area of NFT copyright infringement, NFT trademark infringement, or NFT patent infringement is not fully developed, and the implications are unclear.
To the extent you can identify an individual company or individual that is infringing your intellectual property, you may be able to take action to enforce your intellectual property rights. However, it may be extremely difficult, impossible, or just not economically feasible to pursue random copycats duplicating your intellectual property within an NFT. Artists have already reported finding that their art has been stolen and sold as NFTs without their knowledge.
Some of the platforms, such as OpenSea state that they will work to “take down works in response to formal infringement claims and will terminate a user’s access to the Services if the user is determined to be a repeat infringer.” It is unclear to what extent the DMCA applies to NFT platforms, and how different platforms will respond to such infringement submissions. More decentralized platforms may not have appropriate avenues to make formal IP complaints.
There are potential limits to suing people for actions taken and recorded on the blockchain when their actions are decentralized, pseudonymous and international.
Like any other cryptocurrency investment, the value of an NFT is uncertain and ultimately is only worth what someone else is willing to pay for it. The current environment is likely somewhat of a bubble. An initial time and money investment is required and transactions creating NFTs carry fees that may not be recouped if no one buys your NFT. NFTs (at least for now) do not generate cash flow and are only worth what someone else would pay for them. This amount, like the price of Bitcoin, could presumably drop by 90% in a period of weeks.
The creation of NFTs is largely irreversible and the future implications of NFTs are unclear. If you make a misstep, it may lead to unintended consequences that may not be correctable. Like any other marketing or advertising campaign, things can go wrong. You could do harm to your brand and intellectual property if you don’t get things right the first time. For that reason, it is important to think through possible consequences and associated downside risks that may be caused by NFTs before pressing ‘mint.’
The maxim to live by in cryptocurrency is to “never risk anything that you are not prepared to lose.” Creators should abide by this same mindset when creating NFTs. NFTs present an exciting new opportunity to engage and find new fans in a new territory, and perhaps make some money in the process. As an artist or brand owner, you must be mindful that you are also putting your intellectual property at risk, with uncertain and undetermined consequences.
In the meantime, artists and businesses that are seeking to participate in these markets should do so carefully, and as always, be mindful of their risks when it comes to ownership of their intellectual property.
Wolf IP Law PLLC has the knowledge and experience necessary to guide you through intellectual property and cryptocurrency matters. To set up a meeting with one of our attorneys, please call (510) 655-9111 or contact us at: info@wolfip.com.
This summary is not legal advice and does not create any attorney-client relationship. This summary does not provide a definitive legal opinion for any factual situation. Before the firm can provide legal advice or opinion to any person or entity, the specific facts at issue must be reviewed by the firm. Before an attorney-client relationship is formed, the firm must have a signed engagement letter with a client setting forth the Firm’s scope and terms of representation. The information contained herein is based upon the law at the time of publication.
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