Protection of Nonfungible Tokens in Philippines

29th October, 2022 - 5:17 am Categories: Technology 0 Comments

Introduction

NFT or non-fungible token literally means “non-interchangeable token.” This is a type of data that uses the blockchain (mainly Ethereum), or an online network of computers that acts as a digital ledger of transactions

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When you buy an NFT, you are purchasing the rights to say that a specific digital item — such as an artwork, website, photo, or video — is non-interchangeable or one-of-a-kind, and every computer on the blockchain will validate that you are truly the sole owner of this unique digital kitty or this artwork of a bored ape. Think of NFTs as limited-edition baseball trading cards you brag about to your friends; in the same way, people participating in the sale of NFTs consider their purchases as investments.

The Philippine trademark system follows a first-to-file rule, i.e., the party who first filed the application for the registration of the mark enjoys priority over the subsequent applicants. Thus, to ensure protection, it would be prudent for a trademark owner to cause the registration of its trademark, including its digital assets. This allows brand owners to better control, monitor, and protect the use of their IP on the blockchain.

NFTs present risks and opportunities in the IP landscape, particularly since it is still in its infancy. There have been a lot of issues surrounding the rights of NFT creators vis-à-vis intellectual property rights holders. IP lawyers must thus be mindful of these potential issues to ensure that IP assets, in whichever form, are adequately protected and defensively positioned, e.g., trademark registrations that cover NFTs provide an IP owner with legal basis to sue infringers and therefore have better brand protection; licensing agreements must specifically define the respective rights of the parties to maximize the profile, goodwill and commercial value of the IP; and assignment agreements must specifically define the IP being assigned esp. if copyright issues are involved.

Non-fungible tokens or NFTs have been described to represent a class of virtual asset (VA) that differs from traditional cryptocurrencies in that an NFT establishes ownership of a unique asset (digital or physical). This characteristic of “uniqueness” captures the non-fungibility aspect of NFTs. Some of the most used NFTs involve digital arts, music, and in-game tokens. In contrast, cryptocurrencies such as bitcoin, function in an opposite manner, wherein one person’s bitcoin would be identical (in terms of price/value) to another person’s bitcoin, providing the interchangeability or fungibility aspect.

While NFTs may broadly fall within the definition of VAs, BSP Circular No. 1108 dated 26 Jan 2021 on Guidelines for Virtual Asset Service Providers, specifically excludes digital units of exchange used as in-game

tokens in such regulation. The BSP’s attention is positioned on the VASPs that provide consumers with the means to exchange fiat money to cryptocurrency in order to acquire NFTs, as well as the redemption back to fiat money. This is in line with the Financial Action Task Force (FATF) Guidance on a risk-based approach to VAs and Virtual Asset Service Providers. It is important to note, however, that the use of virtual asset as a form of payment for goods or services may fall within the activities of an Operator of Payment System (OPS), pursuant to BSP Circular No. 1049 dated 09 Sep 2019.

Because NFT technology is in its infancy, there are few laws or regulations dealing with them. Thus, there are significant risks involved, such as fraud, financial loss and other scams. There is also the accompanying challenge in enforcing legal recourse against companies registered and operating outside the Philippines.

It would be prudent for the parties to revisit the applicable terms and conditions of their existing agreements to ensure that the intention, rights, and obligations of the contracting parties are reflected in the agreement. This will help to avoid issues and uncertainties in the future that could lead to a costly litigation.

A potentially more active and concerned regulator would be the Philippine Securities and Exchange Commission (SEC), which has a mandate to ensure that securities offered, distributed, and sold to Filipinos and residents within the Philippines are duly registered (unless legally excluded from the registration requirement), and where the securities issuer maintains compliance with disclosure requirements. In the Philippines, traditional media outlets featured the profitability and exceptional gains made by locals who are early adopters and players of Axie Infinity, making it more enticing amid a protracted pandemic where job cuts, business closures and unemployment have run high.

Conclusion

The regulatory regime with respect to NFTs in the Philippines remains reliant on traditional financial, securities and taxation laws, which do not give regulators the necessary flexibility to fully govern the innovation and adoption of NFTs. Under the IP regime, ownership of an NFT generally does not carry with it the transfer of copyright ownership to the underlying asset (i.e. digital work). To a blockchain evangelist, involving a regulator (the Intellectual Property Office of the Philippines) may even be unnecessary given the nature of NFTs hosted on a decentralized digital ledger that ensures its uniqueness and non-fungibility being the source of its value-generating proposition, as opposed to registration with a government-held (centralized) ledger. Regulators have shifted to a more open, sandbox approach in the hopes of attracting competitive technologies and economic opportunities that come with these technologies. Ultimately, they are mindful of the need to balance adoption of these innovations with the need to protect the public.

Author: Mr. Tarun Khurana – Partner and Director at Khurana & Khurana, Advocates and IP Attorney, and Co-author- Tanya Saraswat, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney.