Introduction
Ownership considerations
Copyright and other IP issues
Tips for dealing with NFTs
Comment


Introduction

Non-fungible tokens (NFTs) are digital tokens that can be used to represent ownership of assets on a blockchain. They are "non-fungible" in that they are not interchangeable for other items because of their unique properties (similar to a vehicle identification number on a car). Their ownership is managed through unique metadata.

NFTs are created through four steps:

  • an asset is chosen – these are usually digital (eg, GIFs, collectibles, music or videos) but they can be non-digital (eg, legal documents, event tickets or luxury goods);
  • a platform is chosen – these vary with respect to cost, processes and terms;
  • a smart contract is chosen – this is an executable piece of code that governs the particular token. The chosen platform will usually have a set template; and
  • the NFT is minted – that is, the code is executed and the smart contract enters the blockchain.

One important aspect is that digital art is often combined into the NFT smart contract. Therefore, everyone can see it. This is not the case for physical goods – other users would see the terms of the contract or perhaps a picture of the good, but they would not have access to the physical good itself.

This article, part of a series on the metaverse and NFTs, outlines the ownership considerations that parties should be aware of before getting involved in NFTs.(1) It also sets out tips for buyers and minters of NFTs and outlines the risks to be aware of.

Ownership considerations

The question of who owns what with respect to an NFT is important and often misunderstood. What the buyer is really purchasing is a deed, or title, to the underlying asset. By default, the buyer does not obtain the copyright or any other IP rights.

The Christie's auction house, which has sold most high-value NFTs to date, states as follows in its conditions of sale:

[Y]ou do not have the right to distribute, or otherwise commercialize the digital asset, or to represent or imply any sort of sponsorship, endorsement, affiliation, or other relationship with the seller and/or the creator of the digital asset without the prior authorization of the seller or the party(ies) that hold such rights.

When a buyer purchases an NFT, the rights they receive are not too dissimilar to the rights they would receive if they bought a physical thing. A buyer of an artist's painting, for example, has the right to:

  • use it for their own enjoyment;
  • display it;
  • sell it on; or
  • destroy it.

They cannot make prints of the painting or derivative works, and they cannot represent sponsorship or affiliation. The rights a buyer gets when purchasing an NFT are similar to the default rights they would get if they were to purchase a physical good. The exception is that while a physical good can be destroyed, it can be hard to destroy an NFT – so-called "burning rights" must be specified in the contract.

Where other rights exist, if they do exist at all, they will be specified in ancillary contracts – that is, the terms and conditions of the marketplace, such as the Christie's auction house conditions of sale. If buyers want rights such as copyright or the right to affiliate themselves with the seller, they must make sure those rights are clearly specified in the contract.

In some respects, once a digital work becomes an NFT, there is a lack of control over its distribution, because the work is published and anyone can access it. The whole world can see it, but only one person owns it. This is why some people claim than an NFT of a digital work is merely a glorified bragging right – there is no real discernible difference between what the owner can do with it and what a mere viewer can do with it, other than that the owner gets the positive feeling of owning art. However, importantly, the owner can resell it down the line, which is particularly important if the NFT's value increases.

Copyright and other IP issues

Can copyright be acquired?
In some jurisdictions, a party cannot acquire a copyright unless there is a written assignment. When purchasing an NFT, one of the contracts (ie, the smart contract or an ancillary contract) would need to provide for such an assignment in order for the buyer to acquire the copyright.

The Christie's auction house conditions set out above state that purchasing the lot does not provide the buyer with copyright or other IP rights in the underlying digital asset. On the other hand, Bored Ape Yacht Club, which is a popular NFT community, publicly states on its website that by buying an NFT, the purchaser does get an exclusive right to the copyright. The buyer may commercialise it, make derivative works or use it as a trademark, among other things. When buying an NFT, it is important to understand the situation with respect to whether the copyright is included.

Can NFTs be used as trademarks?
Even if the seller states that the buyer can use the digital asset in question as a trademark, this does not mean that it is fit for use. The seller does not know what the buyer intends to use it for or in which country such use is planned. The buyer of the NFT would still need to carry out a clearance search to establish whether any other existing trademarks could present an obstacle to legal use.

Who can mint an NFT?
Minting an NFT requires copyright. When an NFT is minted, at least for a digital work, the underlying digital work is put into the blockchain. It is accessible to the public, so it has been distributed, published or made available. These are rights that belong to the copyright owner alone – not the owner of a print. Distributing a work through the blockchain without owning the copyright would constitute copyright infringement in most instances.

Unfortunately, a substantial number of NFTs and digital works are being minted by parties without the appropriate permissions. These kinds of rogue minted NFT works are likely to cause problems for anyone who wishes to buy them, because there are no rights that underlie them. An individual making an NFT should make sure they have the permission of the copyright owner if they want to follow best practices, and a buyer of an NFT should make sure that this copyright was in place at the time of minting.

Tips for dealing with NFTs

Purchasing NFTs
Buyers of NFTs must:

  • conduct due diligence on marketplace and smart contract terms and conditions to see what they are getting – for example, whether:
    • they have rights to destroy the NFT;
    • they have rights to sell it on;
    • royalties must be paid; or
    • there are limitations on use; and
  • ensure that the specific rights that they are interested in are contained in the contract.

Minting NFTs
Minters of NFTs must:

  • ensure that they have the permission of the copyright owner for the digital work; and
  • determine what to include in the smart contract – for example, conditions relating to
    • scarcity (ie, whether the same NFT can be created again, which may dilute the rights of the purchaser);
    • royalties; and
    • transferability.

Comment

NFTs present a lot of interesting opportunities from a copyright, trademark and commercialisation perspective and in how they enable brands to engage with their customers. However, parties interested in NFTs should be aware of the following risks:

  • NFTs are digital tokens that are controlled by passwords and recovery phrase. If the password is lost, the owner of the NFT loses control – it can never be transferred again.
  • NFTs may lose value through re-minting of the same work, which is where the underlying work is made into a new NFT, thus diluting the scarcity.
  • Digital tokens can be stolen through cybercrime.
  • A purchaser could buy an NFT from a person who did not own the copyright in the first place, and the NFT could be devalued or ordered destroyed/transferred.

Parties should also consider other legal issues, such as whether NFTs can be used as trademarks, as well as tax and insurance implications.

For further information on this topic please contact Daniel Anthony at Smart & Biggar by telephone (+1 613 232 2486) or email ([email protected]). The Smart & Biggar website can be accessed at www.smartbiggar.ca.

Endnotes

(1) This article was prepared by ILO based on the webinar "Brands in the Metaverse and NFTs: Protecting Trademarks & Copyrights Online, in Digital Media, and Beyond" hosted by Smart & Biggar, and is shared with permission by Mark Biernacki and Daniel Anthony. For the first article in the series, see "In brief: protecting brands in the metaverse". The webinar is part of a series on practical tips and strategies for global brand protection in Canada. For the complete list of webinars, see "Canadian Trademarks: Protection Strategies for Global Brands".