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Non-Fungible Tokens, also known as NFTs, digital tokens are representations of various tangible and intangible assets. Information about the tokens and their ownership are stored in blockchains—digital ledgers that track all of a digital asset's transactions. NFTs are held in digital wallets that connect to the blockchain, the technology underlying cryptocurrencies such as Bitcoin.

NFTs can be used to represent ownership over many kinds of assets, including pictures and images.

NFTs have grown increasingly popular in the past few years. In 2020, sales of non-fungible digital assets (NDFAs) were about $94 million; by 2021 they had skyrocketed to more than $25 billion globally. The most notable sale was that of a “First 5000 Days” piece—a digital collage by artist Mike Winkelmann that shows multiple images combined into one—the value of which was around $69 million.

The growing popularity of Non-Fungible Tokens (NFTs) and the emergence of a new form of ownership have triggered interest in the Intellectual Property industry about whether or not to regulate NFTs.

In their most recent statement about new forms of digital invention, the World Intellectual Property Organization (WIPO) posed a question: Should laws governing intellectual property rights be altered to accommodate these innovations? Or should such innovations themselves be changed so that they fall within the scope of existing law?

According to WIPO, civil laws are concerned with the ownership of tangible assets (e.g., houses, cars), while IP laws regulate and protect intangible assets—trademarks or patents for example—of creators and authors.

This difference between intangible and physical property is corpus mysticum (intangible assets that IP can protect) and corpus mechanicum (physical objects not eligible for intellectual protection).

For example, the WIPO states that if a copyrighted work is embedded in an NFT (for instance, an image used as part of blockchain-recorded art), then it’s valid to assume that there will be copyright protections covering what can be done with those records. Users would need permission from the copyright owner before they could use or reproduce such works. Hence, it is important that the NFT community adhere to current intellectual property laws.

The Berne Convention for the Protection of Literary and Artistic Work also applies to NFTs. Under this agreement, it is necessary to obtain permission from the copyright holder before reproducing a protected work in digital form.

NFTs are essentially digital creations, their status as copyrighted work is not altered by their non-physical nature.

The confusing question is whether the owner of a NFT legally owns the intellectual property that underlies it. The experts in this field say that unless an author transfers ownership to someone else (as happens, for example, when artists sell their work at auction), he or she still holds onto legal rights over his or her creation even though they've transferred physical possession of it to another person—the new owner.

Therefore, unless the author explicitly relinquishes intellectual property ownership of his creation in a contract or other document (which is quite rare), the rights to any underlying invention or original work will always belong to him. Despite these ownership rights being traded between parties through virtual exchange—that is, by buying and selling NFTs on a blockchain platform.

Even after a NFT sale is complete, the copyright for any content associated with that NFT does not belong to its owner until the creator of it signs over ownership.

Because NFTs can transfer ownership without linking them to a human identity, it’s possible for some owners to remain anonymous. However, experts say that many issues might arise if signed copyright ownership transferability were required: It would be impossible to transfer intellectual property rights - and the ensuing royalties - to an anonymous entity.

As a result of the growing popularity of the NFTs, IP experts predict that this will present a challenge for the WIPO—the organization responsible for managing and protecting intangibles like copyrights and trademarks, etc.

One solution to this copyright transferability issue may be for the NFT author to grant specific licenses of its copyrights.

Even then, a licensing system does not solve the problem of establishing IP rights for NFT owners whose wallets are anonymous.

Even if the license is granted to him, the NFT owner would not be able to prove his right under those licensing terms. As he wouldn’t be able to prove that he owns the wallet that has the NFT—which grants him those license rights —he wouldn't have any way of establishing ownership or granting himself permission within this particular transaction.

Within the emerging NFT trade markets, there are several obstacles to transferability of IP rights, since buying and selling non-fungible tokens does not mean acquiring or losing proprietary rights. Therefore, IP laws will need to evolve so that they can more effectively address the problems associated with transferring rights in NFTs.

References:

1.     https://www.mondaq.com/india/fin-tech/1132188/nft-and-its-relationship-with-ipr

2. https://www.khuranaandkhurana.com/2021/11/15/nft-and-its-relationship-with-ipr/?utm_source=Mondaq&utm_medium=syndication&utm_campaign=LinkedIn-integratio

3.     https://www.wipo.int/wipo_magazine/en/2022/02/article_0002.html

4.     https://www.finnegan.com/en/insights/articles/demystifying-nfts-and-intellectual-property-what-you-need-to-know.html