Non-fungible tokens – a new way to hold IP?

Non-fungible tokens (NFTs) have been making headlines recently for being sold at auction for enormous sums of money.  Business school drop-out turned American DJ, 3LAU, apparently sold his NFT collection just over a month ago for $11.6 million USD ($15 million AUD).^[1]  Grimes, otherwise known as Claire Boucher, a prominent musician and partner to Tesla CEO, Elon Musk, sold multiple digital artworks amounting to a total of $6 million USD ($7.79 million AUD).^[2]

So what are NFTs and how can they help you protect your intellectual property (IP)?

How an NFT works

Non-fungible simply means unique or distinguishable from similar goods or assets within a market of trade.  This ‘non-fungibility’ is what distinguished NFTs from other tokens, like Bitcoin for example, which are tradeable currency indistinguishable from other Bitcoins.  NFT’s are integrated as part of a blockchain, generally, the Ethereum blockchain.^[3]

The token element of an NFT represents the method by which ownership can be confirmed.  Ownership over cryptocurrencies and similar ‘digital properties’ is represented by tokens, which are like digital certificates establishing ownership.  Artists may designate or allocate a particular and distinguishable NFT over any digital artwork, including renderings, videos, paintings, albums or even electronic tickets to see their performances.

How do NFTs benefit rights holders

If you are the owner of digital IP, NFTs provide a meaningful way to either maintain ownership in that IP or transfer it to a prospective purchaser.  NFT’s are maintained on a blockchain which can be understood as a type of ledger which establishes the terms of sale of an NFT.  That is, the transfer of NFTs between contracting parties is facilitated, or underwritten, by blockchain technology.  As an NFT owner, proprietary rights in the artwork to which an NFT is allocated are protected by the security of blockchain technology.

Whilst, and this point is not decided in Australian law, NFTs may provide legal rights, they does not prevent others from using the IP.  Of course, neither does a trademark or patent, but NFTs are not some revolutionary creations addressing this issue.  In much the same way that Van Gogh’s Starry Night can be reprinted and owned by any individual, so too can works protected by NFTs.  In fact, you can view IP protected by NFTs here and here.

Legal issues that can arise with NFTs

As NFTs are relatively new, the legal requirements and implications have not yet fully presented themselves.  This makes the possible legal issues of NFTs quite broad and indefinable at this stage.  However, there are some things worth considering.  Most notably, what the purchaser is receiving in exchange for their money may not be accurate.  For example consider the sale of a animate GIF that the purchaser offers a very large monetary sum for at auction because they believe, possibly supported by actual or implied representations of such on behalf of the seller, that they are obtaining the one true original copy when they are in fact not.

Another concern is data security.  An NFT on a blockchain has a publicly verifiable chain of ownership meaning that, post-purchase, the purchaser has unrestricted access to the seller’s digital wallet address allowing them to see all transactions contained within.

Takeaways

NFTs have been making a name for themselves in the media of late as the new way to own IP.  As they are non-fungible, they do not equate to something of distinct monetary value, like exchanging currency would.  Ownership does not prevent others from accessing and using the IP.  Owning an NFT is like owning an original artwork.  The full legal framework and implications are still to be defined, however, accuracy of NFT description at sale and data security post-purchase can raise some concerning legal issues for both NFT sellers and purchasers.

Further information about non-fungible tokens

If you need advice on the purchase or sale of IP or the transfer of IP rights, contact us for a confidential and obligation-free discussion:

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

[1] Forbes (2021). Largest NFT Sale Ever Came From A Business School Dropout Turned Star DJ.  Available at: https://www.forbes.com/sites/abrambrown/2021/03/03/3lau-nft-nonfungible-tokens-justin-blau/?sh=75635f84643b.

[2] BBC (2021). NFT blockchain drives surge in digital art auctions.  Available at: https://www.bbc.com/news/technology-56252738.

[3] Ethereum is a popular cryptocurrency with its own blockchain.

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