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Intellectual property issues of non-fungible tokens

2021-07-29

Introduction

On 11 March 2021, Everydays: the First 5000 Days, a non-fungible token (“NFT”) made with a combination of 5000 digital images created by a digital artist known as Beeple was sold for US$69.3 million in an auction house. As with everything related to blockchain technology and cryptocurrency, NFTs have gained huge popularity in recent years, especially among art collectors, graphic artists and musicians. In this article, we will explore possible intellectual property rights issues in NFTs, focusing on the difference between the ownership of NFTs and the copyright ownership of the in the underlying asset in which copyright subsists.

Intellectual property issues of non-fungible tokens


What are NFTs?

NFTs are digital assets that can be traded on blockchain. While cryptocurrencies are minted to be fungible, like fiat currencies, each NFT is minted with a distinct, unique identifier. Therefore, while two pieces of digital art in the form of NFT may look the same, they are distinguishable by their identifier which is non-fungible.

Some benefits of NFTs include providing ease in the verification process on authenticity and trading. As ownership of an NFT is passed on, each record is documented on the ledger which cannot be altered. Therefore, there is transparency as to the whole history of ownership of an NFT and subsequent buyers can easily verify whether an NFT is authentic or not. Unlike previously where replica copies of digital arts are identical, now an owner of an NFT is able to point to a specific copy of the digital art that he owns since each and every NFT is distinct and unique. Moreover, NFTs can be stored in digital wallets and traded through online auction sites or sites which facilitate the exchange of digital assets. As the use of NFTs becomes more accessible and popular among art enthusiasts, digital arts rise in value. The use of NFTs exclusivity on digital arts which in turn may secure growth in resale value over time.


Does buying an NFT equates to acquiring copyright of the underlying digital art?

The simple answer is no. Generally, a creator of an art piece retains copyright to the art piece he or she creates even when the art piece is sold. When a person purchases a painting in a gallery, he or she is only acquiring the right to ownership of that piece of painting but not the copyright to that art piece. Similarly, when a person buys an NFT, he or she is only acquiring the right to ownership of that piece of digital art but not the copyright to that art. Most artists expressly retained the copyright to the artwork and most digital art trading platforms expressly stated that the copyright remains with the creator of the art piece.

Interested buyers of NFTs should seek legal advice as to what kind of rights are transferred with the NFTs (whether through a sale and purchase agreement or a licence for use of the NFT). If the creator of a digital art retains the copyright, investors looking to buy NFTs as an investment vehicle may need to beware that similar NFTs may be minted by the creator in the future, taking away the exclusivity in ownership of that art piece and potentially decreasing the resale value of the NFT.


Is there an obligation to get a permission to create or distribute the NFTs?

In general, the creator of an NFT using someone else’s work should ensure they have permission from the copyright owner. When a person who is not the author or copyright owner in the underlying asset in which copyright subsists, mints an NFT and misrepresents that they are the author or copyright owner of the work can amount to copyright infringement. Similarly, when an NFT is made without authorization of the copyright owner, the resale of such an NFT could constitute copyright infringement, as analogous to reselling a counterfeit good. Therefore, generally speaking, the creation of the NFTs should acquire prior consent of the copyright owner, and such consent for patent(s) contained or applied therein may also need to be acquired.

As such, it would be wise for the creators to seek legal advice before using a brand name, logo, technology, famous character, picture, video, music, artworks or any other intellectual property of a third party in their NFTs, while the sellers should also do the same before selling NFTs to ensure authorization from the author, copyright owner or inventor has been properly obtained.


Conclusion

While the world figures out how to make widespread use of NFTs, how copyright law will apply to NFTs in different scenarios is yet to be clarified. No matter you are the author or copyright owner of an underlying asset that is to be used in NFTs, a creator of NFTs, or a distributor of NFTs, early legal advice will be quite useful to make sure the concerned copyright is properly protected and licensed, and the risk of facing an infringement lawsuit is well managed.


For enquiries, please feel free to contact us at:

E: ip@onc.hk                                              T: (852) 2810 1212

W: www.onc.hk                                          F: (852) 2804 6311

19th Floor, Three Exchange Square, 8 Connaught Place, Central, Hong Kong

Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.
Published by ONC Lawyers© 2021


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Partner

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