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IP Intelligence

Examining the Legality of NFT Ownership Through an IP Lens

New technologies are occasionally so innovative that they enjoy their first months and years relatively unregulated. Even the internet, a decades-old technology, is imperfectly regulated by industry, state, and federal decrees. The World Wide Web and other life-changing inventions are simply so far outside the status quo that existing rules and regulations don’t apply perfectly. This is certainly true of non-fungible tokens (NFTs), smart contracts documented on the blockchain that assert ownership over a digital asset.

The US Government is aware of the dangers blockchain and digital assets present, including “data privacy and security; financial stability and systemic risk; crime; national security; the ability to exercise human rights; financial inclusion and equity; and energy demand and climate change.” A March 2022 Executive Order, which outlined these concerns, tasks relevant agencies with “ensuring [the] responsible development of digital assets.”

While we wait for regulations specific to this new technological frontier, what intellectual property concerns should NFT creators and owners be aware of?

What does ownership of an NFT actually mean?

It is a common misconception outside of fields familiar with IP protection that a patent keeps other entities from using a technology, when a patent actually grants a patent holder the right to litigate against the entities using the protected technology. NFT ownership is similarly nuanced. Purchasing an NFT generally gives you the right to personal use of the digital asset the NFT represents. It may help to think about the relationship between an NFT and the digital asset it represents like the relationship between your house and its deed, or a novel technology and the patent that protects it.

The NFT is not the asset itself, but rather a record of ownership, so you likely won’t have the ability to use the asset commercially or modify it in any way. It’s like buying a painting to hang in your home. You can’t replicate the painting or collect admission to see it because you don’t own the copyright. The initial smart contract between an NFT creator and buyer should cover these licensing-type questions. However, because the sale and purchase of NFTs is a fledgling industry, these details may not be included. Blockchain cannot be modified (one of its strengths) making these contracts impossible to update. In this case, a default agreement could be useful.

Do existing licencing agreements allow you to mint NFTs?

Companies have existing licensing agreements for the use of other entities’ trademarks, copyrights, and other IP. Just like the industry, state, and federal regulations that don’t quite apply to NFTs, these agreements don’t explicitly cover the minting of NFTs that include these trademarks or copyrights. Optimistic business leaders and risk-averse legal teams likely have different opinions on whether or not minting an NFT that includes a well-loved (and well-protected) character is fundamentally similar to printing it on a t-shirt.

What actions can owners take if their NFTs are stolen?

Just like there are companies comfortable with using others’ patents until they’re caught, there are plenty of people online who have no problem sharing (and selling) digital assets that other creators sold the usage rights to via an NFT. Both the copyright holder (generally the original creator) and the NFT owner have rights that are being infringed. Fortunately, these rights to the asset are permanently documented on the blockchain thanks to the smart contract created when the NFT was minted.

There aren’t any protections specific to NFTs yet, but creators can use watermarks to protect their work, as they may already do on more established online marketplaces like Shutterstock or Etsy. A Digital Millennium Copyright Act (DMCA) takedown request may also be appropriate. Buyers can also help protect IP and their own interests by manually verifying the digital assets they purchase via NFT.

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