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What you must know about NFTs and INTELLTUAL PROPERTY (IP)?

Non-fungible tokens (NFTs) are blockchain-based units of value or “tokens,” each connected to an underlying asset with a unique ID number. The Etherium blockchain is the most typical place to store an NFT. However, other blockchains are utilized as well. NFTs are made up of “smart contracts” written in software code. In the smart contract, the NFT is linked to the underlying digital or physical asset and the laws and rights that apply to the NFT itself.

Many NFTs have used other people’s intellectual property (IP) without their consent. There have been instances when NFTs have contained third-party intellectual property (IP) in their content. In other circumstances, the material has been provided solely by third-party intellectual property (IP). IP owners, whose material is being exploited in NFTs without their permission, are taking notice and increasing their attempts to protect their intellectual property.

For Instances, DC Comics, a well-known IP owner, has issued a harsh warning to DC’s creative teams and freelancers after one artist gained $1.85 million by selling NFTs, including characters he used to create for DC (e.g. Wonder Woman and others).

What is Non- Fungible Token (NFTs)?

“Non-fungible” refers to a token’s inability to be substituted with another of the same kind. Unlike the fungible nature of crypto-currency or government-issued fiat money, where each currency unit is equivalent in value and interchangeable with any other currency unit, this is not the case with government-issued cash.

An NFT may be explained using the example of a one-of-a-kind print of a piece of art. The artist would sign physical prints and have a print number attached to them in the real world (for example, one of five). The artist’s signature and the print number must be included on the piece to authenticate the artwork.

However, in the domain of NFTs, an NFT is:

  • A Signature in digital form and the print number connected with the underlying asset is represented by this digital signature.
  • The digital work, or the underlying asset
  • Having a copy of the underlying asset encoded in the NFT (which isn’t very frequent).
  • The NFT contains a code that connects to or may be used to identify the digital copy of the artwork or the underlying asset (which is the more common). When this happens, it’s called “hashing” (to which we will return below).

NFTs and Intellectual Property:

A business’s exposure to NFTs may be both positive and negative. In the following sections, we’ll take a closer look at each of these:

  • The monetization of your intellectual property.
  • The possibility that the intellectual property rights of your company may be violated in some way.

You may want to know: NFTs and Copyright – How far they are protected?

Let’s discuss this in detail:

Monetization of Your Intellectual Property

Selling an NFT to a third party is the most apparent method to monetize it. An NFT’s purchase isn’t always as simple as a physical asset purchase for the buyer. The owner must provide proof of the NFT’s ownership to verify ownership of an NFT.

A non-fungible token (NFT) is simply information about an item that is stored on a blockchain. It implies that, although an asset is used to encode the NFT to create a unique representation of that asset, the NFT is not typically – unless the smart contract encoded in the NFT or any accompanying conditions of sale expressly states otherwise.

NFT example of JACK DORSEY Tweet

When Jack Dorsey auctioned off his tweet, he used the Valuables platform. Valuables describe the purchase of an NFT as acquiring “a signed certificate of the tweet”, and the rules of sale make it plain that such a transaction does not transfer the copyright in the tweet to the buyer.

Thus, even if the purchaser of Jack Dorsey’s tweet spent millions of dollars on the NFT, the purchaser would be unable to utilize the tweet itself (e.g., by printing it on a shirt) without authorization, since Twitter and Jack Dorsey retain ownership of the copyright.

Those purchasing an NFT should be cautious in determining what they are buying since ownership of an NFT does not immediately confer ownership rights on the underlying asset.

Transfer of Intellectual Property (IP) Rights 

Naturally, an NFT seller who owns intellectual property rights in the underlying item may transfer those rights to the buyer. However, this must be accomplished by the assignment of intellectual property in writing. It will not occur automatically upon sale of an NFT unless clear written conditions specify otherwise, either in the smart contract or elsewhere.

NFTs for sale

An NFT seller may sell both the NFT and the underlying asset simultaneously, albeit this is uncommon. The NFT may then be used to prove ownership digitally. It brings up two key points:

1) The underlying asset must be owned by you:

The NFT buyer should check the owner of the underlying asset. The underlying asset and any intellectual property rights that vest in it are usually not sold together with the NFT.

2) Actual possession of the NFT:

The purchaser of the NFT should also investigate who owns the underlying asset, especially if the underlying asset is a digital file, such as a digital work of art.

You should know: Take Down Notice for Online Copyright Infringement: Steps to Complete the Process

Licensing of the underlying asset’s Intellectual Property Rights

A more frequent option is for an NFT seller and IP rights owner to provide the purchaser of the NFT a license to utilize the intellectual property rights in the underlying asset for specific purposes.

This license should be included in the smart contract or a separate agreement between the NFT vendor and the buyer. The rights owner may select how open or limited the purchaser’s usage of the underlying item is. The owners of intellectual property (IP) issue licenses to their IP for a variety of purposes. Some license specified uses (for example, the right to utilize a specific distribution channel) while others license wide usage and retain certain rights. IP owners have traditionally not included NFTs in their licensing agreements. NFTs have not been considered by most IP owners as part of their IP protection plans, either.

The license for CrytoKitties, for example, allows the owner of the NFT to commercialize the “kitty” till the commercial usage does not generate more than US$100,000 per year in revenues. The NBA TopShots license, on the other hand, allows the owner of the “moments” to “use, copy, and display” such moments but not to “reproduce, distribute, or otherwise commercialize” them.

The purpose of this article is to provide a general overview of the subject. Regarding your situation, you can seek expert guidance. HHS lawyers and legal consultants specialize in dealing with cases relating to the infringement of Intellectual Property. You can contact us for further consultation.


M. Al Khatem

Trademark & Intellectual Property

M. Al Khatem is a senior Trademark and Intellectual Property (IP) expert in HHS Lawyers. He has handled some of the firm’s complex, high-profile cases – many involving the protection of trademark and IP rights.