Non-fungible tokens are all the rage, and they are a talking point in areas such as the art world. But what about the intellectual property protections for NFTs? How robust are they, how do they work, and what needs to be done to prevent problems? This brief article considers the picture.
At the moment, non-fungible tokens or NFTs appear to be a limitless conversation piece. Unlike cryptocurrencies such as bitcoin, which are identical units that can be exchanged and are therefore fungible, NFTs are not interchangeable. Each NFT is a unique token on a blockchain which stores information about provenance that can be traced back to the original issuer; therefore, it provides collectors with the opportunity of building a digital collection. For this reason, NFTs are popular in applications which require unique digital items, including crypto art, digital collectibles and online gaming, where some guarantee of authenticity and ownership history add value.
To write about the field and its relevance to wealth management is Matthew Erskine, managing partner, Erskine & Erskine in the US. (See here for a previous example of his writing.) This firm focuses on areas such as estate planning. The views are his own and the usual editorial disclaimers apply, but we are grateful for this contribution to debate. Email email@example.com
There is a great deal of ambiguity concerning the rights you receive and the rights you give away when you buy or sell a non-fungible token (NFT). As it stands now, the NFT has no mechanism to automatically define the rights kept by the creator, owned by the seller or acquired by the buyer. An NFT is a code that 1) records the chain of ownership of the NFT and 2) identifies the location of a securely stored digital asset. Not even the Smart Contract associated with the NFT, which allows blockchain to execute automatic actions when certain events happen to the NFT, will automatically preserve or define intellectual property rights. Not only are creators' rights at risk – so are the rights of third parties to the digital images tied to the NFT, especially when those images affect the third parties' branding rights. Finally, there is no universal enforcement mechanism – all you can do is request that the NFT be taken down by the platform it is being sold on, such as OpenSea.
Providing clarity on rights to NFTs and digital assets is important to creators and collectors individually, but they are much more important to businesses and retailers to defend their hard-won branding and image in the retail marketplace, both virtual and physical. The display and transfer of images, logos, jingles and other intellectual property is now protected by trademarks, copyrights design patents and rights of publicity. These clarify who owns what and when; how those rights are registered so everyone knows who has rights and who does not – are clear in the way in which the rights are licensed and transferred – and how you can enforce your rights. These protections do not automatically extend to NFTs and digital assets. In order to do so, you need to redraft the registration of those protections to include those digital assets; and, you need to create smart contracts that provide a license, requiring a digital signature that allows access to information to both the licensor and licensee.
Once the intellectual property rights of digital assets are well
defined, the advantages for businesses are immense. Inventories
of tokenized products can be managed quickly and efficiently, and
the encrypted blockchain is protection against fraud and
knock-offs. As it exists now, there is greater transparency
on such things as the repair history of a used car than there are
for the property rights of NFTs.
To make this work to its fullest potential for both creators of digital assets and businesses who use digital assets to enhance their brand, two things are needed: first, there has to be a uniform and universally acknowledged set of terms for what a license of intellectual property associated with a digital asset means, the scope of intellectual property rights and to whom these rights are transferred to or retained. The second is a quick way of identifying that the intellectual property rights of an NFT are protected along the lines of those universally acknowledged [in a] license.
At this point, it is good to remember that, though we are light years away from what our ancestors were dealing with more than a hundred years ago, there are lessons that are worthwhile learning from the past. Specifically, the origin of the term, “All Rights Reserved.” That phrase, now outdated and unnecessary to protect intellectual rights, was a product of the Buenos Aires Convention of 1910. At that time it was created to protect intellectual property as world trade became more global. It was agreed that any person who indicated that they reserve their rights to intellectual property, gained protection in any signatory country. From this came the term, “All Rights Reserved.” It was nearly fifty years later that “All Rights Reserved” was officially adopted. Indeed, the term still has some moral, if not legal, weight when used on a creative work.
It is time for platforms and marketplaces such as Etherium and OpenSea to agree on what the basic protections will be; and, what code is needed in the smart contract that, when used, activates those rights for the owner, to protect their rights, the buyer’s rights and the rights of third parties. It will go a long way in removing some of the ambiguities and misunderstandings of what NFTs do, and do not do, relative to intellectual property rights.