NFTs and intellectual property

How do you assess the value of an intangible, non-fungible asset?
Ned Sackman Banner 767x326

Ned Sackman

As coverage of NFTs has proliferated in the news cycle, some of you may be wondering how they interact with intellectual property law. The short answer is that an NFT buyer does not acquire the IP rights associated with the item underlying the NFT, but most NFT marketplaces include terms of service that grant NFT buyers a non-exclusive and non-transferrable license to use, copy and display the creative work associated with the NFT for personal use.

NFT stands for non-fungible token, and it refers to a public digital record that is maintained on a blockchain. A blockchain is a system for recording digital transactions that is maintained across multiple computers.  Blockchain is a form of secure public record that has been most frequently used to track cryptocurrency transactions, but it has increasingly been used to track NFTs as well.

Unlike a cryptocurrency like bitcoin, which can be exchanged for any other bitcoin, NFTs are non-fungible because they are unique and cannot be exchanged for other NFTs.

When someone “mints” an NFT, they write a smart contract code that becomes part of the blockchain they are using.  The smart contract code defines the properties of the NFT, and either contains a link to the underlying work within its terms or information about where the work is stored “off chain.”  This process allows NFT purchasers to obtain a digital receipt establishing their ownership of certain rights associated with a piece of property.

Although NFTs can be minted for tangible assets, such as a book, they are most frequently used with intangible assets, such as a tweet or a piece of digital art. The value of the NFT in the context of intangible property is that it acts like a digital souvenir, allowing the owner to claim bragging rights over ownership of the “original” item it is associated with, such as the first Tweet , which sold for $2.9M.

Although NFTs are often discussed as proof of ownership, in order to acquire rights that will hold up against others the buyer must confirm that the seller is who they say they are and has the rights they say they have.  The advantage of NFTs over other forms of proof is that once an NFT is purchased from a verified seller, it is easy to track the chain of ownership.

The emergence of NFTs is particularly interesting when it comes to intellectual property law because IP law often protects intangible assets, such as an invention (patent law), a song (copyright law), or a logo (trademark law).

NFTs are primarily sold on various online marketplaces like SuperRare, which sells digital art, or NBA Top Shots, which sells NBA highlight videos.   The terms of service of those marketplaces define the IP rights that come with an NFT purchase.  The most common form of license is a non-exclusive, non-transferrable license to display the item underlying the NFT for personal use.  In other words, you can display a copy of the meme you purchased in the same way you might show off an autographed football, but you cannot charge another person a license fee to view or display the meme.

The IP rights will remain with the creator of that IP in the same way that if you purchase a painting – you obtain only the painting, and not the right to sell reproductions of that painting.  That right stays with the painter.

Dapper Labs, which operates the NBA Top Shots marketplace, has proposed a form license called the NFT License 2.0.  Under that license, purchasers receive a non-exclusive, non-transferrable license to display the item underlying the NFT for personal use as well as the right to profit off the work underlying the NFT for up to $100,000 annually. It remains to be seen whether others will adopt this license, but for now purchasers of an NFT of a clip of a LeBron James dunk from NBA Top Shots may be able to profit off subsequent licensing of the video.

Like any emerging market, some odd things are happening with valuation, including a piece of digital art by the artist known as Beeple that sold for $69 million.  The value that buyers perceive in an NFT is the ability to own something rare.  It is immaterial that all of us can go on Twitter and view the first tweet.  The value is in “owning” the original Tweet and being able to prove it.

Attorney Ned Sackman, a shareholder at Bernstein Shur, works out of the firm’s Manchester office and specializes in dealer-side automotive and intellectual property matters.

Categories: Law, Legal Advice, Technology