The entire art industry was astonished to hear that a Non-Fungible Token (NFT) tied to a collage of digital art by Mike Winkelmann, popularly known as Beeple, was sold in an auction conducted by Christie’s for $69.3million on 11th March 2021. Immediately after that, many NFTs tied to artworks have been sold online, raking in serious moolah. For instance, an NFT tied to a self-portrait by the Humanoid robot Sophia was sold for $688,888. An Indian artist from Bangalore Prasad Bhat, who created a GIF of Leonardo Di Caprio recently sold his NFT for $4,324.36. NFTs are affecting not only the field of art, they are also being used in a lot of other creative industries like gaming (Cryptokitties), newspaper column of Kevin Roose published in The New York Times (sold for $560,000), the first twitter message by Jack Dorsey (sold for $2.5 million), NBA Le Bron James slam dunk video (sold for $200K), and a whole lot of other industries like digital identities, licensing, certificates, etc. This article provides a quick overview of the NFTs and the intellectual property issues associated with its exchange.
NFTs are crypto-collectibles based on blockchain technology. They are a kind of cryptographic tokens on a blockchain representing a unique asset. These assets can either be completely digital assets or tokenized versions of real-world assets. Like crypto-currencies, the ownership information of the underlying asset and the NFT is stored on the blockchain, because of which, it would be nearly impossible to create counterfeits or to illicitly transfer NFTs outside of the approved exchanges.
Fungibility in economics refers to the ability of a good or a commodity to be interchanged with other individual goods or assets of the same type and for that reason, they are essentially indistinguishable from each other. An example for fungibility is currencies, where a Rs.100 note can be exchanged with another Rs.100 note, or 2 Rs.50 notes, or 5 Rs.20 notes, or 10 Rs.10 notes and so on. NFTs create a digital asset similar to crypto-currencies, but add a unique identifier to each unit making it unique and non-fungible. While fungibility is a desired feature for currencies, as it is required to facilitate free exchange, it is not a desired feature for collectible items. While crypto-currencies are all created equally and are fungible with each other, NFTs are unique by design making them scarce and unique and hence collectibles.
Let me elaborate on the concept of NFTs using the example of a real property. Assume that you own a house. The ownership of that house is recorded on the property deed and the government, through its sub-registrar’s office, keeps a record of the ownership of the property, which can be verified by anyone at anytime by paying a small fee. The same principle applies in the NFT realm as well. The property that you own, which could be a painting, a digital art, or a video of an exquisite moment, or any other piece of art, acts as the underlying for the NFT. The information relating to the creator, the asset, and the ownership records are stored on the blockchain and distributed ledgers, which can be verified at anytime by anyone. That information is tokenized and issued in the form of an NFT, which is like the property deed. The unique difference between the two is that while the property deed cannot be considered as the property per se, NFTs can be treated as a distinct property and can be traded on exchanges earmarked for that purpose. But with the information of the underlying asset stored on the blockchain, and because NFTs cannot be interchanged, they act as proof of authenticity and ownership within the digital realm.
NFTs provide a novel avenue for intellectual property owners to restrict uses of their IP rights in digital marketplace including the use of their IP asset and extending to various monetization avenues. This part elaborates on some of the key IP issues relating to NFTs.
As commonly known, licensing of IP rights can be done for specific uses like rights to a specific distribution channel or restrict specific rights or limited to specific territory. NFTs can facilitate the breakdown / classification of such specific rights and would help IP owners and artists to benefit from specific rights emerging from NFTs.
Creation of NFTs can also be a right the IP owners / creators / artists could exercise as part of their IP creation. In effect, NFTs have created a separate class of IP rights within each class of existing IP rights.
When an IP asset is used as the basis for creating an NFT, such NFTs can be traded separately from the original IP asset. When the NFT is bought separately from the underlying work, you would get the right to claim ownership of the NFT and to exclude others from claiming ownership rights of that NFT. But it would not have any rights on the underlying IP asset. However, if the underlying IP asset is also traded along with the NFT, the NFT serves as an authenticity tool for the underlying work and can help enhance its value. NFTs work as an incorporeal personal property and can be sold, gifted, bequeathed, mortgaged, and used as a collateral.
As a tool to prevent counterfeiting NFTs could be used to authenticate a piece of information / data, which can become very helpful in licensing of IP rights, specifically know-how and copyright related information. Many software startups have used NFTs to tie their software solution before selling it / distributing it in the market, which can then be verified using the NFT token. They have done this with two objectives in mind: one is to prevent counterfeiting their software and the second one, which flows from the first one, is that it helps them attract investors fund the operations of the startup.
NFTs can also eliminate a lot of middlemen related problems and benefit the artist in multiple ways. For instance, musical artists like Justin Blake, popularly known as 3LAU auctioned 33 NFTs which could be exchanged for special edition vinyl albums, unreleased music and other merchandise. This way, he was able to directly connect with their fans and consumers thereby enhancing their brand value. Also it helped them middlemen related problems like delayed royalty payments from streaming companies. It also helped them prevent counterfeiting of concert tickets as they were tied to the blockchain and helped them realize the best value for their concert tickets thereby eliminating profiteering by agents and other middlemen.
NFTs also help artist by realizing more and higher value from their artwork. It is generally known that artwork created by artists can be exchanged many times over, either through the secondary or the auction market. But artists generally benefit only on the first sale to the first buyer and is not a party / beneficiary to subsequent sale. Through NFTs and smart contracts, like the ERC-1190 standard framework, artists can structure the tokens in a way that benefits them in the form of a portion of the value in every subsequent sale being paid to the artist. This is generally dependent on the platform where the NFT is created.
The benefits of NFTs have not been limited to art and artistic works; it extends to patents and trademarks as well. For instance, Nike holds a patent for blockchain-based sneakers it calls ‘Cryptokicks’ (US 10,5050,726 B1 dated Dec. 10, 2019). The patent reads “When a consumer buys a genuine pair of shoes, a digital representation of a show may be generated, linked with the consumer, and assigned a cryptographic token, where the digital shoe and cryptographic token collectively represent a ‘CryptoKick’”. Nike shoes have a large secondary market, which has given rise to counterfeits. Through CryptoKicks, owners of the shoes can track not only the ownership of the shoes, but can also get it authenticated using the NFT. LVMH has used the Aura blockchain to create NFTs associated with their branded luxury goods, using which the consumers can trace the authenticity of their products.
NFTs, being digital assets can be sold in any country through blockchain lockers and wallets. Such international transfer of NFTs along with the underlying IP asset to countries having less respect for IP rights of its holders could lead to counterfeiting of such asset, which may percolate and / or dilute the value of the IP asset. Also, if these NFTs are sold to countries that prohibit crypto-currencies and / or NFTs, then their value could diminish and the benefits accruing to IP holders / original artists could be eroded.
IP right owners might also have difficulty in enforcing their IP rights against infringing uses of NFTs. For example, if a movie is distributed through an NFT and that movie has clips or trademarks or music that belongs to people who are not associated with the NFT, then they would have difficulty bringing in legal action against NFT holders / users. To avoid such problems, it would be better if the person/organization minting the NFT on such movie takeout licenses for all the IP content used in such movie.
In order to seek these benefits from NFTs, the registration of the IP right becomes a must. Such registration would help not only in effective enforcement of NFTs, but also help in initiating a lawsuit for damages and the difficulty in removing, recovering or modifying NFTs.
NFTs are largely unregulated. In India, crypto-currencies are banned and miners and traders would be penalized. However, the government is planning to introduce its own crypto-currency. It has already used blockchain technology in various e-governance initiatives and one day NFTs could become a reality in India. At such time, linking NFTs to IP assets could become a possibility and could benefit genuine artists, business organizations, startups, and patent-holders licensing royalty payments in linking their IP rights with blockchain making them NFTs. Also, such introduction could generally benefit the artist community, as they generally lack the secondary market opportunity for their artwork and NFTs could provide a good way of monetizing their work. It could also benefit the startup community, which is generally facing the lack of financial resources and most of them face the problem of closure due to their inability to prevent counterfeiting of their works. NFTs could provide a better way of securing their works and thereby help them raise finances for their operations. It is just a matter of time that NFTs would get integrated into the business and the artistic realm in India and the IP issues associated with it should be specifically kept in mind before taking the plunge into NFTs.
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