NFTs: A brief overview of the technology from an intellectual property rights perspective

By 01.06.2023 June 2nd, 2023 NEWS

The non-fungible tokens or “NFTs” is a topic we hear more and more nowadays and given the fact that this technological innovation has the ability to produce revenue for both creators and purchasers, the issue pertaining to the intellectual property rights of this new technology is of much interest.

Selling copyright works in a digital space and using the same to form a digital currency creates certain dilemmas and once technology is going to evolve, so will the copyright law as we know it.

Understanding the concept of “blockchain” in relation to NFTs

“Blockchain” technology was first introduced in 2009, alongside the cryptocurrency Bitcoin, and it can be defined as a database technology that works by distributing identical copies of a database across an entire network, which makes it very difficult to hack the system.

However, since 2009, the blockchain didn’t just stick to cryptocurrency, it has developed massively, gaining new purposes. Nowadays, blockchain is used for banking, smart contracts, and supply chain monitoring and will start being used even for voting. 

Blockchain works exactly like the name suggests, like a chain, by duplicating and distributing transactions across the entire network of computer systems on the blockchain. Each block in the chain contains several transactions, and every time a new transaction occurs on the blockchain, a record of that transaction is added to every participant’s ledger.

Based on blockchain, this new technology of NFTs is starting to be part of a lot of markets, and for sure, there are still many more to come.

NFTs are digital assets that can be traded on the blockchain, so it’s the technology that allows them to exist. The difference between NFTs and cryptocurrencies is that cryptos are issued to be fungible, while each NFT is made with a distinct, unique identifier. Therefore, even though the creator can have two pieces of digital art in the form of NFT that look the same, their identifier is different and, therefore, non-fungible.

Smart contracts and NFTs

After creating an NFT, storage and exchange of the digital assets turn into the execution of smart contracts. Smart contracts are simply programs stored on a blockchain that run when predetermined conditions are met. Basically, it is possible to code any type of agreement into a smart contract. A smart contract is an agreement written in code between different parties that is stored on a blockchain and cannot be changed.

As ownership of an NFT is passed on, each record is documented on the ledger, which cannot be altered. The good part of using smart contracts is that you can access the whole history of ownership of an NFT and, since each NFT is unique, it takes away the risk of replicating digital arts.

One of the advantages of using Smart Contracts is the possibility of verifying the authenticity of the work. Compared to traditional paintings, where authenticating art involves experts reviewing the source and confirming authenticity through ownership history, Smart Contracts use technology to fight counterfeiting. It is well known that, regarding traditional art, there were numerous forged or otherwise misrepresented works of art offered for sale with fake or questionable provenance at online auctions, at fixed-price art websites, and at brick-and-mortar establishments. Many renowned artists, such as Leonardo da Vinci, Vincent Van Gogh, and Jackson Pollock, have had new paintings attributed to them through forensic analysis. For example, a painting, La Bella Principessa, previously thought to be the work of a 19th-century German artist, is now attributed to Leonardo da Vinci through physical evidence.

Smart contracts can authenticate the token and its ownership because when you buy an NFT, a unique token is issued, which has the information and the details of the smart contract. The information on the blockchain is public and includes the record of purchase and proof of ownership, and the transfer is only authorized on the blockchain if the personal key of the owner is used.

Of course, it remains difficult to ascertain who the copyright holder is. That is because there are situations when the owner of the artwork is not the same as the NFT creator, and the latter is “minting” the NFT without authorization, in order to put it into commercialization.

Copyrights and NFTs

The connection between intellectual property and NFTs starts with the fact that any kind of creation can be transformed into this digital token. NFTs can be anything from a painting, a picture, music, poetry, GIFs or even a trademark.

Given the fact that some creations have been sold for thousands, even millions of dollars, such as Beeple’s artwork, Everydays: The First 5000 Days, which has been sold for $69 million, there’s no wonder that people all around the globe are starting to either create or purchase NFTs. From a legal point of view, there are still a lot of mis-clarities. 

A misbelief many have is that purchasing an NFT means having ownership of the underlying art that is associated with the NFT, when it’s still the original creator that has the copyrights of the work, retaining the exclusive right to copy, distribute, modify, publicly perform, and publicly display the art (unless specifically granted to someone else). In fact, the purchaser only has a right over the token and the right to use the copyrighted art associated with the NFT for personal use

In terms of copyright, the author is generally the first copyright owner, and even after the sale of the work is completed, the copyright ownership is still retained by the artist. The same thing applies to the NFT owner, who does not have a right to print or make copies of the work without the copyright owner’s permission. 

Regarding the resale right, the creators can establish from the very begging to receive a percentage of the successive sales of this work and given the existence of smart contracts, this procedure will be a transparent one. The taxable person for this duty will be the seller, applied to the resale of original works of art and to copies considered to be original works of art. Nonetheless, granting authors the right to obtain financial compensation for each resale of their work of art in digital format considered unique, associated with an NFT that identifies it as a unique, indestructible, verifiable digital good, is a great thing.

Considering the copyright reproduction and adaptation, there were already a few conflicts. Hermès had sued NFT creator Mason Rothschild for selling unauthorized Birkin Bag NFTs. On 7 February 2023, the jury ruled that the NFTs of ‘MetaBirkins’ violated Hermès’ trademark rights and awarded Hermès $133,000 in damages for trademark infringement, dilution and a violation called “cybersquatting”, which involves registering or using a brand’s trademark in bad faith. This case was the first major example of  a brand taking legal action over the use of its trademarks in the metaverse, and it was followed by others. Other famous cases would be the conflict surrounding ownership over a series of unauthorized NFT photos of Olive Garden restaurants and Quentin Tarantino’s NFTs from Pulp Fiction. Regarding the latter, the conflict started from an announcement made by Quentin Tarantino at the NFT.NYC conference in November 2021, that he wants to auction some footage of his original Pulp Fiction screenplay, which contained “secrets” about the film and his process as a creator, as NFTs (non-fungible tokens). Miramax has claimed that the company, not Tarantino, owns the rights to the film and the screenplay, and as a result, has filed a lawsuit for breach-of-contract and copyright infringement. On 8 September 2022, the parties agreed to a settlement.

In terms of licensing, given the fact that NFTs work with smart contracts, any terms can be agreed. The licensing and monetization of NFTs have a great due to the fact that the future of NFTs will be in highly personalized, tokenized digital objects used as part of video games or online virtual worlds, often dubbed the metaverse.

One problem that NFTs might have is, as was presented in Tarantino’s case, the potential copyright infringement. Due to the fact that so many creations can become NFTs, it is very difficult to confirm that the content used to create the token actually belongs to the owner, which will generate an abundance of conflicts with creators that were unaware that their work was being “minted” as NFTs without their permission. In case of a negotiation, the case can be solved by the removal of the token from the auction platform. But some of these conflicts are going to be litigated, and it will be up to the internal laws and judges to decide if someone is actually infringing the holder’s copyrights.

Until the legal provisions are sufficiently up-to-date to deal with NFT, the situation can be solved by applying the general principles of Intellectual Property. 

In 1996, the Berne Convention for the Protection of Literary and Artistic Works was supplemented by the WIPO Copyright Treaty, which deals with the protection of works and the rights of their authors in the digital environment. The first paragraph of The Agreed Statements of the treaty shows that: “The reproduction right, as set out in Article 9 of the Berne Convention, and the exceptions permitted thereunder, fully apply in the digital environment, in particular to the use of works in digital form. It is understood that the storage of a protected work in digital form in an electronic medium constitutes a reproduction within the meaning of Article 9 of the Berne Convention”. Therefore, if you “mint” an NFT which contains an artistic work, the prior approval from the copyright holder is mandatory, as “minting” can be considered an act of reproduction.

That said, at least for the time being, from a legal point of view, holders of intellectual property rights should at least benefit from a restitutio in integrum in case of infringement of their rights.

However, the question that remains is how to actually prevent an infringement of an IP right from taking place, given the fact that anyone can “mint” a digital file as an NFT, whether or not they have rights to it in the first place, and the process is anonymous by default

The fact that the “minting” of an NFT is an infringement of IP rights is also confirmed by a new Study developed in October 2022 by the European Parliament called “Intellectual Property Rights and Distributed Ledger Technology with a focus on art NFTs and tokenized art”. 

The study said that, as a general rule, the creation of an NFT requires the consent of the author because it represents a reproduction in the sense of Article 2 of Directive 2001/29/EC of the European Parliament and of the Council of 22 May 2001 on the harmonization of certain aspects of copyright and related rights in the information society.

Also, offering an NFT on an NFT marketplace with the intention of a subsequent sale of the token is relevant from a copyright perspective, provided that the work linked to the NFT meets the requirements of an “original work”. The process would, if not licensed by the author, infringe the author’s right of reproduction according to Article 2 of the above-mentioned Directive.

Regarding the rights granted to an NFT acquirer,  the study recognizes the application of general principles of copyright protection above-mentioned. Thus, the purchaser of an NFT acquires only the right of ownership of the NFT in the sense of keeping it, possessing it, as well as the right to sell it, in the absence of an agreement or terms agreed by the author. In order to have an effective right of use over the work included in the NFT, it is necessary to have this agreement which can be part of the smart contract of the NFT or can be contained in the general terms of use of the sales marketplace, if the author using such marketplace validly agreed to such terms.

In conclusion, the NFT situation is still in an ongoing debate, with legal cases still waiting to be solved, which will be of great help in drawing guidelines for future disputes. We can see how, in addition to the general rules and principles of intellectual property, various updated regulations are emerging, providing, step by step, a direction for the legal assessment of the NFTs situation.

We will end with a quick look at registering NFTs as trademarks and see the European Intellectual Property Office’s (“EUIPO”) position on NFTs. On June 6, 2022, The Office announced that the term “downloadable digital files authenticated by non-fungible tokens” will be incorporated in Class 9 in the 2023 Edition of Nice Classification. They also said that NFTs are treated as unique digital certificates registered in a blockchain, which authenticate digital items but are distinct from those digital items. For the Office, the term “non-fungible tokens” on its own is not acceptable. The type of digital item authenticated by the NFT must be specified. For example, “virtual goods, namely, virtual clothing”, would be accepted.

(Article by Ana Maria Achim and Gabriela Umbrarescu)