Over the last several months, there have been dozens of news stories about cryptocurrencies, Blockchain, and the related technologies they have created. One item, in particular, has received an incredible amount of press—the NFT. Who has not heard of the $69 million price tag on Everydays – the First 5000 Days and other outlandish prices for digital art. This article will try to explain just what an NFT is and, because of their relationship to the creative arts, some of the intellectual property issues surrounding them.

It all starts with Blockchain

Blockchain is a technology that has emerged as an innovative, record-keeping technology that authenticates transactions. It is essentially a transaction ledger that is open and decentralized, so anyone, with proper access credentials, can view the ledger to the authenticity of whatever is being transferred and the chain of ownership. Blockchain is the technology behind cryptocurrencies like Bitcoin and Dogecoin and ensures that the cryptocurrencies being transferred in a transaction are authentic.

What is the difference between “fungible” and “non-fungible”?

Like a Bitcoin or Dogecoin, a Non-Fungible Token (NFT) is a digital asset that has been certified as authentic on a Blockchain ledger. “Fungible” means that value-wise, something is interchangeable and indistinguishable with something else. For instance, one $10 bill is indistinguishable and interchangeable with another $10 bill since both have the same value. Similarly, one Bitcoin is interchangeable with another. “Non-Fungible” means that something is unique or one of a kind and not interchangeable with something else.

Because NFTs are often digital artworks, it helps to think in terms of art. The Mona Lisa is non-fungible. It is not indistinguishable from or interchangeable with, say, American Gothic or a Warhol print. There is only one Mona Lisa and nothing can substitute. In the digital world, Blockchain comes into play by certifying the authenticity of a non-fungible digital asset issue by providing distinct and unique metadata that is secured on a Blockchain ledger.

NFT History and Trends

NFTs are not new. They have existed in the video gaming realm for several years. An early adaption of the NFT concept was the game CryptoKitties. The game allowed users to purchase, collect, breed and sell virtual cats. Each virtual cat, like each real cat, had different and unique “DNA” and was thus non-fungible. Blockchain technology uniquely identified each CryptoKitty and its owner.

Digital art is not new, either. Andy Warhol famously used computers to generate art in the 1980s. So, like a signature on a piece of canvas, the Blockchain can authenticate a digital work of art. However, NFTs are not limited to digital art. An NFT can represent anything in digital form, from visual artworks to music, multimedia, e-books and even digital trading cards.

Currently, there is a trend to “tokenize” things, that is, to issue Blockchain security tokens to authenticate. This is especially true in terms of digital art. Because the Blockchain tokens authenticate an NFT and ownership, it allows for monetization of those works by sale and auction. An entire industry is evolving that facilitates the sale of NFTs, with niche marketplaces serving specific categories of NFTs and even established auction houses like Sotheby’s offering NFTs at auction. Sales of NFTs rose close to 2,000% between January 1, 2021, and March 30. Much of this may be due to art always being an investment as well as the massive surge in interest in all things crypto, but the basic ideas, technology and concepts are here to stay.

IP and NFT

So where does intellectual property crop up in this? There are two distinct issues that must be considered. First is ownership of an NFT generally and second, is ownership of the underlying intellectual property rights in that NFT.

Intellectual property rights protect creative expression, including expression in digital form such as NFTs. Usually, the intellectual property rights in a piece of creative expression remain with the creator. Thus, while Blockchain can authenticate an NFT as original and identify the owner of that NFT, the creator of the NFT may retain intellectual property rights, including such things as the right to make and sell copies of the NFT.

While there may be specific owners of NBA TopShots, which are digital trading cards of NBA players containing video, the NBA or a television network may own the rights to the video. Therefore, nothing can prevent the owner of the video from producing more NFTs with the same video. This raises the question of what rights are acquired when purchasing an NFT? If exclusivity is important, the purchaser should look into obtaining an assignment of the creator’s rights in the NFT.

Creators of an NFT could potentially face liability for infringement if pre-existing material (such as images, film or music) is incorporated into an NFT without adequate authorization. Similarly, creators want to be aware of what rights they have in the NFT and what rights they want to reserve, including the right to license or make copies. This will become more important as NFT prevalence expands and NFTs end up being incorporated into other NFTs. Businesses should also be aware of their intellectual property rights in the NFT world, including how their trademarks or copyrights are being used by others and to control their digital brand.

Take-Away

NFTs are a new and exciting area in the crypto world. Like any new frontier, however, the legal landscape is not entirely clear. Undoubtedly, new rules and legal constructs, intellectual property and otherwise, will emerge that more specifically address this growing space. Because of the evolving nature of the technology and the law, it is important to make sure you have current advice to make the best decisions you can when it comes to buying, selling or creating NFTs.

If you need assistance in this regard, I may be reached at mark.nieds@henlaw.com or by phone at 239-344-1153.