Words by Law City Student Ambassador, Maria Mudenda
You may be wondering what NFTs are. The world is becoming increasingly more digital and as a result so is the concept of tokenisation through the use and adoption of digital assets.
Non-Fungible Tokens, commonly known as NFTs, are being embraced for many reasons - one being the sense of democracy the decentralisation of the technology brings. However, NFTs are not without its cons as this technology challenges the Intellectual Property (IP) Laws.
NFT’s are unique assets that cannot be replaced with something else - essentially representing any form of digital file (art, music, video and real estate). NFTs have emerged and grown in popularity as a way for artists and creators to take ownership of their work and have control over their value.
Understanding what an NFT is?
NFTs are unique cryptographic assets using blockchain and thereby cannot be replicated due to their exclusive identification codes and metadata which are key distinguishers.[1] NFTs are made up of three elements namely metadata , smart contract (code) and a unique identifier. Their value is derived from being non-fungible.
Non-fungible refers to goods or assets that are not interchangeable for other items due to their unique properties, for example diamonds, land, baseball etc.[2] While, fungible items include cryptocurrencies and physical money.
Generally, NFTs and cryptocurrencies are built from a similar programme such as Bitcoin or Ethereum, however, it should be noted that NFTs are an evolution of cryptocurrencies and enable digital representations of physical assets.[3]
Earlier this year, the English High Court established an arguable case by recognising that NFTs may be treated as ‘legal property’ under English Law.[4] The facts of the case are as follows, the claimant alleged that digital artworks from the ‘Boss Beauties’ were stolen from an online wallet on the OpenSea NFT marketplace. Through carrying out investigations, it became evident that the NFTs were transferred to two other accounts opened by OpenSea. The main issue was that the first defendant could not be identified so the claimant was unable to seek its recovery.
The Claimant, therefore, brought an application seeking an injunction to freeze the transfer of that NFT and an Order requiring OpenSea to disclose details of the individual holding the NFT to allow the Claimant to pursue its recovery. In order to succeed, the Claimant needed to show that the NFT was capable of being property and therefore attracted ownership rights.
The Court held that the NFT was held by the First Defendant on Constructive Trust for the Claimant. In reaching that decision, the Court determined that the NFT was considered as property in English law as without such recognition a claim of Constructive Trust would fail. Thus, awarding some legal protection to NFT owners.[5]
NFTs and Smart Contracts
Though an asset is used to encode the NFT to make a unique representation of that asset, the NFT is not usually (unless there are terms to the contrary in the smart contract encoded in the NFT or in any associated terms of sale ) the actual asset itself. The NTFs proof function and power of proof of ownership are limited to the asset placed in it.
Smart contracts determine the terms under which the NFT is sold. This includes any obligations or rights that accompany it and therefore sets out which IP rights if any may be sold, retained, or licensed. Nevertheless, many smart contracts do not provide sufficient clarity on creator protection resulting in rights being carelessly disposed or waived. If an NFT has been created for a work that is off-chain i.e. work that is not on a blockchain by someone who is not actually a right holder, the transfer of the NFT will not mean the transfer of the relevant intellectual property, nor will it gain copyrights. In this context, the NFT will only be the assurance of the uniqueness of the smart contract that it contains. Thus, it is important for NTF buyers to carefully examine a smart contract to determine which rights the transfer of an NFT covers as not every NFT represents the whole work itself.
What is Intellectual Property Law?
Intellectual property law protects and governs the use of the creations and products of human intellect preventing unauthorised use from others, enabling recognition, financial benefit and or awarding (limited) monopoly to the owners of the protected property. Intellectual protection can be given in the form of copyright, trademarks, patents, and design rights.[6]
NFT ownership and Intellectual Property
Through the use of distributed ledger technology (DLT), NFTs’ uniqueness and ownership is verified. Ownership of NTFs like any other intangible assets can be transferred through the buying and selling of title. However, many issues arise over ownership rights in NFTs. Issues may also emanate over the purchasing of NFTs. While selling NTFs to 3rd parties allows for monetisation, purchasing NTFs is not often as straightforward as purchasing physical assets. The legal title of the NFT is considered separate from the beneficial title this means NFT buyers may only have a license to use, copy and or display the NFT without other intellectual property ownership benefits or protections. Essentially a buyer can prove that it owns an NFT but that does not mean they necessarily own anything more than that.
NFT creators cannot create or transfer ownership rights in an underlying asset that did not already exist. An example of this can be seen with digital artwork where anyone can ‘claim’ ownership of a piece of digital art provided that they turn it into an NFT by attaching a token regardless of them not being the original creator.[7] The ownership would have IP implications especially if it is done without the permission of the original creator.
Another issue associated with NFTs is that it may be difficult for those whose work has been used without their permission to gain sufficient recourse. NFTs are stored on blockchain which generally has an unchangeable digital ledger that tracks all transactions but does not legally require people to attach their identities to such transactions. Making it challenging to track who has actually infringed the IP rights of the original creator whose work has been turned into an NFT.
In the absence of express provisions governing ownership of IP rights or usage rights, under English law, a purchaser of an NFT would typically be limited to a right of personal use of the underlying copyright work, and the right to resell the associated NFT. There are, however, many examples of NFTs being sold on a variety of different terms and granting different rights to the underlying asset. Yet some terms are clearer than others.
NTFs and intellectual property (IP) infringement
The most common potential IP rights infringed in respect of NTFs include Copyright, Moral and Trademark rights. [8]
Copyright
There are two main types of infringement that may arise as a result of the unauthorised minting of an NFT relating to a digital asset:
Infringement of the reproduction right (i.e. the restriction against reproducing or copying copyright works).
Infringement of the communication right (i.e. the restriction against communicating copyright works to a new public not originally envisaged by the copyright owner).
It is important to note that the person who acquires copyright ownership of an NFT/ artwork will also be owner/ entitled to the associated moral rights. If any infringement occurs, owners have the right to take enforcement action to protect their rights.
Trade mark
Trade mark infringement may arise where an unauthorised party mints an NFT linked 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 trade marks.
Conclusion
Further development in Intellectual Property Law (specifically around copyright and patent law) is necessary to ensure adequate protection and safety regarding NFT and digital assets in this area. New laws can help prevent unlawful use of NFTs, unknown sales of creator’s creations and further prevent infringement thereby increasing creator protection.
[1] Rakesh Sharma, ‘Non-fungible tokens (NFT): What it means and how it works’ (Investopedia, 22 June 2022) <https://www.investopedia.com/non-fungible-tokens-nft-5115211> accessed 1st November 2022 . [2] Ethereum, ‘ Non-fungible tokens’ (Ethereum, April 2022)<https://ethereum.org/en/nft/ > accessed 1st November 2022. [3] Rakesh Sharma, ‘Non-fungible tokens (NFT): What it means and how it works’ (Investopedia, 22 June 2022) <https://www.investopedia.com/non-fungible-tokens-nft-5115211> accessed 1st November 2022 . [4] Osbourne v (1) Persons Unknown and (2) Ozone Networks Inc trading as Opensea [2022] EWHC 1021 (Comm) [5] Ibid [6] WIPO, ‘ What is Intellectual Property Law’ (World Intellectual Property Organization, 2022) <https://www.wipo.int/about-ip/en/ > accessed 2nd November 2022 [7] Rebecca Neumann, ‘NTFs and the law’ (RocketLawyer, 28th April 2022) <https://www.rocketlawyer.com/gb/en/blog/nfts-and-the-law/ > accessed 2nd November 2022. [8] Saunders Law, ‘NFT Disputes, Litigation and Copyright Issues’ (Saunders Law, 2022) <https://www.saunders.co.uk/services/media-law/nft-and-ip-disputes/> accessed 2nd November 2022.
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