NFT and Its Relationship with IPR

15th November, 2021 - 4:34 am Categories: Intellectual Property 0 Comments

Introduction

The non-fungible tokens [hereinafter referred to as “NFTs” have been the talk of the town for a decade now. They can have multiple use cases, given the ability to foster innovation and produce revenue for both creators and purchasers. Nevertheless, as the creative work enters the NFT market, the deal comes with the issue pertaining to intellectual property rights.

This essay explores a two-fold analysis— one is to inquire about the world of NFTs and their uses, and the second is to understand its relationship with IP rights. The essay begins with a brief yet in-depth analysis of the blockchain technology that runs NFTs. It then turns to the definition of NFTs, their uses, working methodology, and the reason for their popularity. Eventually, issues pertaining to IP rights and their infringement come into the highlight, which the essay further explains based on types of IP rights. Lastly, through a critical analysis of the existing laws and lacunae, suggestions are presented which may help NFT enthusiasts to build more out of their labor and benefit the creative ecosystem without falling into legal loopholes.

It all starts with a Blockchain: Understanding the Basics

Over the last several years, anyone who has been satelliting their attention over investment, banking, or cryptocurrency, must have heard the term “blockchain.” Although sounding complex, a blockchain is simply a type of database or a collection of large amounts of information stored electronically in an organized structure, such as a chain of blocks. Each block contains pieces of data, such as random numbers or letters (hash), which are unique within the block and are connected like a chain. If data within one block is changed, its hash also changes. This brings a difference in the entire chain. Therefore, if a hacker tries to add a new block or change data within an existing block, one has to recalculate and align data in all the other blocks. This requires control over 50% of the database, which is evidently challenging; thus, creating a secure and verifiable database.

Additionally, blockchains also have the ability to be ‘decentralized,’ i.e., not controlled by a single person, and ‘transparent,’ i.e., allowing anyone to view the blocks or ledgers in the chain. Bitcoin, Litecoin, Ethereum, and Ripple are examples of blockchain networks that allow the transaction of digital assets.

A digital asset is anything that can be stored and transmitted electronically and has ownership and usage rights associated with it. Tokens are one such digital assets that are stored within a blockchain. However, it must be noted that tokens in themselves are not an asset. A token represents the blockchain location or unit of code that assigns a digital authenticity certificate to the asset within it, including anything from a ticket to an event to a download of a song. Based on the ability to be exchanged or substituted, tokens can be categorized as fungible and non-fungible.

Understanding Fungible and Non-Fungible

Fungible tokens can be understood as something that can be exchanged yet hold the same value. Such assets can further be tangible— such as the dollar, or gold— or intangible— such as a bitcoin. These are interchangeable with no difference in their total value; for a simple illustration: if a person gives a 20-dollar cash note to his friend and receives two cash notes of 10 dollars each, the person will accept them. Even though the cash notes are different, they hold the same total value.

Contrarily, non-fungible tokens or NFTs are assets that cannot be substituted. It has unique attributes that differentiate it from the other asset, although it seems similar. Such assets can also further be tangible— such as a painting or a movie ticket— or intangible— such as a virtual world of a game. For example, if a boy has a photograph of a movie actor, he merely owns the photograph. The original rights regarding copies of the photograph might be vested with the photographer of the actor.

The NFT technology and its Working

In terms of a digital blockchain, NFTs can be defined as unique and non-exchangeable tokens with an underlying asset. These are created by a process called “minting,” where the unique token is generated in accordance with the standard set on the blockchain used. Several publicly available programs such as MintBot and Enjin allow users to mint an NFT. Minting allows the digital asset to be uniquely identified and own a non-fungible authenticity certificate. Since the copy of an NFT will lack the same certificate, it will be recognized as counterfeit.

After creating an NFT, storage and exchange of the digital assets turn into the execution of ‘smart contracts.’ A smart contract can be understood as software codes linked with the NFT, containing details, rules, and rights of the underlying asset attached to the NFT, such as song royalty payments, a bond, an invoice, etcetera. The uniqueness thus allows the original creator of the token to reap monetary gains and payments from the NFT buyers in the future—  the process known as “Tokenization.”

Why are NFTs the Talk-of-the-Town?

NFTs have caught the eyes of the people as early as 2012; however, it took the world by storm in 2017, when Dapper Labs initiated the sale of NFTs linked with rare digital cat cartoons named Crypto Kitties, that allowed people to trade virtual kittens over the internet, making people turn head-over-heels. Twitter’s CEO, Jack Dorsey, sold an NFT of his first-ever tweet for the US $2.9 million. Beeple’s digital artwork sold for the US $69 million, while Christie’s Gucci Ghost ended up for $3600. Bollywood actors, such as Amitabh Bachchan, have planned to launch his NFT collection of movie posters signed by him and crypto punk-style digital artworks featuring him. Platforms such as ‘Cricket Crazy’ allow cricket fans to collect a memoir of iconic moments in the forms of NFTs. Between January 2021 to March 2021, the sales of NFTs rose close to 2000%. This significantly suggested that anything— such as music, drawings, gifs, games, or even a tweet — was worth becoming a money-earning NFT. Since these transactions are tracked on blockchain ledged, individuals can identify the creator’s originality or avoid fraudulent purchases. Common NFT marketplaces such as OpenSea, Rarible, NiftyGateway, etcetera., allow creators to collect a royalty on subsequent resales of the original work within an NFT.

Not just monetarily, but the blockchain-based NFT also promotes the creative ecosystem. Grammy Winner Imogen Heap once wrote, “Blockchain has the potential to provide a more quick and seamless experience for anyone involved with creating or interacting with music,” thereby embracing blockchain systems in the music industry. In the tokenization realm, Bitcoin Founder Satoshi Nakamoto appreciated the NFT system by stating that an “electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.” The company, Valuable, even quoted:

‘Owning any digital content can be a financial investment, hold sentimental value, and create a relationship between collector and creator. Like an autograph on a baseball card, the NFT itself is the creator’s autograph on the content, making it scarce, unique, and valuable.’

Nevertheless, as the popularity bubble of NFTs rises higher, the tokenization process comes up with several challenges to ownership and potential infringement issues intertwined with their asset. Therefore, it becomes essential for individual creators and companies to overview the tender dynamics of NFT protections in their intellectual property protection strategies.

The Invisible Strings Attached: NFTs and its Relationship with IP Rights

Intellectual property involves the creations of the mind, ranging from literary and artistic works to designs, symbols, and even names. These fruits of mental labor can be regulated and protected under legal frameworks, known as intellectual property rights or IP rights. Exclusive rights and monopolies are at the heart of intellectual property. The patent owner has the sole right to make, utilize, present or sell that work. Trademarks make it illegal for others to use a brand name that is confusingly similar to one that already exists. Such protection is an essential agenda for every diligent businessperson, alongside the growth of innovation.

NFT owners can include brands having logos and trademarks in the consumer market, book authors, movie actors, songwriters, game companies, or even physical art-producing artists. These owners are likely to share their assets with others, which others can mint as an NFT; thereby, bringing a realistic chance of infringing the owner’s rights. Nevertheless, NFTs do not automatically come with IP rights. Ownership of an NFT is simply a display on the shelf; there is a difference between having NFT ownership and the ownership of underlying IP or assets within the NFT.

Since NFTs are based on blockchains designed to be decentralized and independent of third-party controls, the assets can be duplicated, replicated, and forwarded to an infinite extent. For example, a screenshot of artwork can provide a copy of the digital asset to someone else. However, it is often a missed argument that the fundamental purpose of NFTs is to manifestly prove the originality and ownership— which does not depend on the copies someone owns. Paul Kell, a famous cryptocurrency investor, remarked this: “you can take a picture of a picture, but you do not have what’s under the picture.” Thus, it is understandable that a freely owned copy of an asset provides one with no benefits. Eventually, when the issue transposes to ownership benefits for purchasers of an NFT, the dilemma becomes different.

NFT Ownership and Copyright of the Underlying Asset

When someone purchases an NFT, the purchaser only gets the ownership of the particular copy of the NFT in the form of a cryptographically signed receipt. Here, two confusions must be clarified: first, the purchaser gets no proprietary right to every copy of the purchased work, and second, the purchaser gets only ownership of the purchased work and not its original copyright vested with the creator. For example, a person who paid thousands of dollars to purchase the NFT of an animated digital cartoon, Nyan Cat, owns the copy of that. The original copyright is still in the hands of Christopher Torres, who made the original doodle of Nyan Cat. This is because of the following basics: each NFT has a one-of-a-kind serial number or “fingerprint” (hash) that cannot be duplicated. Because a hash is a cryptographic key produced from a single digital file, it will only equal one copy of that material. It, however, suggests that ownership of NFT is not necessarily beneficial. Nevertheless, here is where licensing and smart contracts help.

Ownership of the underlying rights will only transfer in the case of copyright if the creator of the original work specifically agrees to transfer those rights to the NFT owner. If and when copyright is transferred through licensing, an NFT owner can be disallowed to reproduce, share copies, publicly perform, exhibit, or create derivatives of the original asset, depending on the circumstances of the transfer.

The copyright owner possesses numerous rights, inclusive of the right to create reproductions and modifications, under Section 14 of the Indian Copyright Act of 1957. The customer obtains a copy of the underlying work (in some digital format, e.g.,.jpeg,.pdf, or.mp4) as well as the NFT itself, i.e., tokens when they acquire an NFT that corresponds to creative work. Any unauthorized reproduction, distribution, or adaptation of an NFT may be considered copyright infringement because it entails copying the creative work and sending it to the customer. Due to NFT ownership’s decentralized nature and immutability of blockchain transactions, enforcing IP rights against a purchaser can be challenging once the NFT is sold. An NFT is usually linked to a digital wallet address (just like a bank account), but without sophisticated digital forensics, determining the wallet owner’s identity might be difficult. Therefore, using strong (but legal) takedown notices could prevent the NFT from being sold in the first place.

Trademarks and NFTs

When a business person tries minting an NFT for an underlying asset, his first and foremost strategy would be to be unique in the marketplace. However, when an unauthorized or competitor party tries minting, selling, or re-selling that NFT using the asset owner’s registered trademarks without the asset owner’s permission, the act results in trademark infringement. For example, as the owners of big fashion companies such as Tiffany, Louis Vuitton, and Dom Perigon are using the AURA blockchain for consumers to trace the authenticity of their branded NFTs, a key question arises that whether the business owns NFTs over trademarks or the assets being sold?

This dilemma can be significantly resolved if industry players expand their trademark registrations to incorporate NFTs in their trademark maneuver and classifications. They may also opt to link their brand with specific styles or trade dresses. Where relevant, design patents should also be considered since their revenue profit and sales are often significant.

Patents and NFTs

Patents allow an NFT blockchain owner to license the technology they use for their NFTand let the consumers possess genuine collectibles of the brand. For example, famous shoe brand Nike owns a patent to generate “cryptographic digital assets for footwear,” which allows the consumers to guarantee the originality of the purchased product while also having a digital collectible version of their shoe in their wallet (Cryptokicks). However, it is pertinent to note that the patented invention needs to be novel and eligible to own the patent protection.

The Laws and Lacunae on NFTs and IP

While NFT transactions can significantly alter the art market by making transactions more accessible and secure, there are still questions about the seller’s genuineness. It is common to witness manifestations of this problem, such as when someone tokenizes an artwork that does not belong to them and sells it while masquerading themselves as the original owner. In such cases, the copyright owner has civil or criminal remedies available under Section 55 or Section 63 of the copyright laws, respectively. To evaluate whether an infringement has occurred and whether it falls as per Section 52 of the Copyright Act, the principles of copyright infringement outlined in Section 51 of the Copyright Act will be applied.

According to Section 79 of the Information Technology Act of 2000 and the Intermediaries Guidelines/Rules, the obligation will also lie on the NFT marketplaces and platforms. These provisions jointly impose a duty on intermediary platforms to exercise due diligence and act quickly if they become aware that their platform is being used to support an illegal act. They become responsible as a facilitator of the act if they fail to do so.

Nevertheless, there stand more hurdles to the win. Even though NFTs have reaped enough popularity and usage across the globe, there are no rules in India that control the trade of NFTs. The legal ambiguity surrounding the legality of cryptocurrencies in India is perhaps the most significant impediment to NFT trading because NFTs are only sellable in cryptocurrencies. As a bill in 2019 called the Banning of Cryptocurrency and Regulation of Official Digital Currency Bill was introduced, advocacy for a complete ban on cryptocurrencies veiled, including the NFTs. According to the draft bill, any direct or indirect deals in digital money would be subject to criminal penalties, including up to ten years in prison.

Aside from the bill in question, the Reserve Bank of India (RBI) attempted to ban the use of virtual or cryptocurrencies in 2018. The Internet and Mobile Association of India, other organizations, and a few enterprises that manage online crypto-assets exchange platforms, filed appeals in response to the said order.

The Apex Court threw aside the notice on the grounds of proportionality after considering various considerations in India and worldwide. The three-judge bench stated that the RBI could not place limitations on cryptocurrency trading because there was no legislation prohibiting the purchase or sale of these currencies. The court found that such restrictions would infringe on persons’ fundamental right to engage in any lawfully permitted trade. Although IP rights can be claimed under the Indian Copyright Act, 1957, the regulatory issues pose an unclear risk to new NFT investors and purchasers.

Key Takeaways and Suggestions

In the social media world, NFTs are gaining traction. It is critical to think about more significant legal issues like copyright rights in a system where anyone can create and sell tokens of any asset. When producing an NFT, a minter must understand the underlying copyright. As a buyer, one should be aware of unauthorized NFTs and the consequences that come with them. Furthermore, knowing the terms of an NFT’s use is essential for avoiding unnecessary legal action. For an NFT with shielded IP rights, the following suggestions must be considered:

• For enterprises, NFTs bring several opportunities as well as possible threats. The conditions of sale of the NFT and the smart contract encoded in the NFT should clearly define what is permissible and what is not authorized concerning IP rights, allowing a firm to control and monetize its IP.
• Regularly ministering NFT marketplaces and taking legal advice when possible are other measures to be taken.
• There should also be proper oversight of third-party use of a business’s IP (whether buyers of an NFT or other parties), and appropriate steps are taken if necessary.
• While NFTs can verify the work and the chain of title, the problem remains that if the original ledger entry is fraudulent or contains errors, NFTs will merely affirm and perpetuate the fraud. Until safety inspections are fool-proof and customer comprehension improves, extreme caution is urged.
• Copyright violations could include minting non-original artwork or stealing art from someone else. If one wishes to mint a collaborative work, the permission of other creators must be sought expressly.
• Consumer knowledge, understanding, and trust may all benefit from a visual portrayal of NFTs.

Conclusion: The Future of NFTs

The mechanics of demand and supply drive the ownership of an NFT, much like any other asset in the real world. Because NFTs are one-of-a-kind, there is a sense that their rarity adds to their worth. An NFT can be a financial investment, a means of creating a link between a collector and an artist, or carrying sentimental worth in the art world, much like any tangible painting or sculpture. Nevertheless, it all comes with IP rights issues and ownership dilemmas. Therefore, when considering the intellectual property implications of NFTs, it is essential to distinguish between the ownership of the NFT and the intellectual property that underpins it. The rights granted by an NFT seller are decided by rights transferred through a license or assignment, which can vary from one NFT to the next. India should also learn from countries with a well-balanced legal and regulatory environments, such as Singapore, Canada, Japan, and Switzerland. The legalization of cryptocurrencies is required for the seamless trading of NFTs in India. As a result, what is required is a solid legislative stance on this issue and a clear statutory framework.

While NFTs have become more prevalent in recent months, their future remains questionable. Critics worry that the NFT market is a bubble ready to burst or become oversaturated with tens of thousands of digital assets. The folly of selling ownership in digital art for excessive rates has been widely discussed on social and news media, with many jokes suggesting owning digital art, is worthless. The more practical, real-world value of NFTs — as a means of authenticating physical items — is, interestingly, even less certain. Businesses are only now starting to invest in and utilize blockchain technology in general. However, given the technology’s potential and, admittedly, absurdity, it appears to be here to stay. Therefore, securing one’s IP rights is essential to prevent being knocked off in the market.

Author: Pravertna Sulakshya– a student of  Rajiv Gandhi National Law University (Punjab), in case of any queries please contact/write back to us at Khurana & Khurana, Advocates and IP Attorneys.