Understanding intellectual property rights in non-fungible tokens (NFTs)

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NFTs are non-fungible tokens that have taken the world by storm and the dust does not seem like it will be settling any time soon. The former Twitter CEO, Jack Dorsey, sold his very first tweet for nearly $3 000 000 as an NFT in an auction. Snoop Dogg announced in a Clubhouse chat that he will be launching the first ever NFT music recording label as he revamps the iconic Death Row Records, that he recently acquired in February alongside the investment firm, Blackstone.

South Africans are also sturdily establishing a vibrant community of digital artists in the NFT space with an active community minting, selling and collecting NFTs through different blockchain agencies. True to authenticity and pioneering, the Major League DJz dropped the first ever Amapiano NFT project on 22/02/2022 at exactly 22:22 CAT. This is definitely a game changer for the South African music industry, as it is highly likely that more artists will follow in due course as the digital world expands. 

As the NFT community grows in Mzansi, different products and marketplaces are going to be developed, managed and regulated.

With all this going on, the intention of this article is to try to simplify your understanding of NFTs and how to familiarize yourself with legal basics before anything and everything else.

So What Exactly Is An NFT?

A non-fungible token is a digital asset that is bought and sold online. The digital content, which is basically the token, is linked, logged and authenticated onto a blockchain. The blockchain is a shared ledger which cannot be varied under any circumstances and plays a fundamental role in recording and tracing assets in a business marketplace or network.

The blockchain records every transfer, sale and any other related transaction involving the asset and allows for the tracking of the origin and price history in the ledger. This means that each NFT can be a representation of a real-life commodity such as music, an art piece or video and virtually anything you can ultimately digitize on-chain, including physical assets in certain instances.

What particularly makes NFTs unique is the fact that each one has its own digital signature which cannot be exchanged. Unlike fungible tokens or goods that can be used interchangeably for one or the other, this is not the case with NFTs.

Fiat currency is one instrument that illustrates how one unit of a good is substantially equivalent to another unit of the same good of the same quality at the same time. A practical example would be the fact that one R10 note is still equal in value and interchangeable to any other R10 note.

All this probably sounds too good to be true and this is particularly why NFTs have become the new gold rush movement as people are buying and trading digital art at ridiculous prices. The celebrity entrepreneur, Mark Cuban is reported to have an NFT portfolio with a collection worth over $500 000 000 according to City A. M.

Everyone wants a piece of the proverbial cake and some individuals have even gone so far as making such impressive earnings that they have quit their regular day jobs to solely dedicate their lives to creating digital art.

Protection Of Your Intellectual Property Rights

So turning away from the financial and towards the intellectual property side of NFTs, the question is; in the wild and decentralized digital land, how does on go about protecting their intellectual property rights with NFTs?

There are two components that need to be established and clarified in order to answer this simple yet somewhat complex question.

The ownership of the token itself.

Terms and conditions always apply in any exchange between a seller and purchaser through obligations that arise out of the agreement, transaction and actual property in question. Buyers of NFTs must tread with caution because contrary to buying fungible property, the owner of an NFT owns just the token and nothing more or less.

Each token is encoded with a unique ID on the blockchain and this creates what is known as a “smart contract” which stores all the information pertaining to the underlying asset created by the NFT. This means all and any transaction information related to the NFT is stored on the blockchain and ensures all data in respect thereof is immutable and accessible to any party interested therein.

The NFT is thus not the actual asset but rather an instrument used to attach authenticity to the underlying asset. This allows the owner to enjoy exclusivity in exercising proprietary rights over the NFT. What this consequently entails is that the seller does not transfer intellectual property rights to the purchaser but the certification that such a token is owned by the buyer.

To understand the concept of ownership in this regard let us explore a practical example by assuming an instance where one buys a song on an app such as Amazon Music as a content consumer. Buying the song does not by virtue of the purchase make you the owner of the song itself nor does it imply that you possess the right to commercialize the song or any part thereof – that right is retained by the artist or the music label involved. However, it does afford you the exclusivity of enjoying the song to your liking and preference once it is in your music library.

Now taking the above practical example and applying it to an NFT would mean that just because you have purchased your NFT (being the song), the underlying asset (the ownership of the actual song as an artist) does not automatically become yours through the sale made. Let’s take a closer look at the case of Jack Dorsey’s auctioned first-ever tweet as an NFT: “just setting up my twttr.”. The highest bidder did not necessarily buy the content of the tweet itself but the rights to the unique token of the tweet as it is on the blockchain. Therefore, the bidder can be understood to have simply bought Jack’s autographed first tweet in a digital format. Any other rights acquired beyond that scope must have been set out in a smart contract and did not automatically vest in the bidder by virtue of the sale.

The ownership of intellectual property rights in the underlying asset linked to the NFT.

Now that you know that owning a token does not mean you own any intellectual property rights to the underlying asset, can you acquire these rights? Fortunately, you can. This would have to be done in writing between you, as the purchaser and the seller, if such a seller is in fact the holder of intellectual property rights to the NFT.

The transfer of intellectual property must be explicitly expressed either by being encoded into the smart contract or in any other manner that prescribes the terms of the transfer in such a sale of the NFT. In the absence of such an agreement, whether tacitly or implied, there will be no automatic transfer of intellectual property to the NFT so make sure you understand this fact before any sale.

Always ensure that the seller entering into the agreement to sell both the NFT and underlying asset does in fact have the authority to sell the underlying asset and interests vested in the intellectual property.

A licensing agreement is the best way for sellers to manage their intellectual property interests with purchasers. They can determine conditions that allow them to administer their business interests through imposing certain limitations in how their work is commercialized. This can be done by embedding smart contracts to automatically claim royalties on a secondary sale made from the original work by the creator of the NFT. The added advantage here is that this all happens without the need for a third party as this action is executed through the smart contract, which is legally enforceable, once all pre-established conditions are met.

Considerations On Infringement: Red Flags To Look Out For in NFTs

If you have gotten this far on this piece then surely you now agree with me when I stated earlier that everything mentioned herein probably sounds too good to be true right? Of course! There has been an increasing amount of NFT theft because it is so easy to “steal” someone’s work by simply taking a screenshot, encoding metadata to the blockchain and selling off the work in a different marketplace as your own. The concept of globalization comes to life through the internet as the worldwide web itself has morphed into a marketplace of its own.

Take note of the following fundamental legal considerations to avoid finding yourself on the wrong side of the law online and offline:

Copyright

The unlawful reproduction and distribution of NFTs are important factors for consideration in protecting your intellectual property interests. This means that those who mint (create) and sell NFTs should ensure that they possess the rights, permission and authority to produce the NFT or alternatively, to reproduce the tokens in question.

The distribution of NFTs can give rise to copyright infringement where an individual enters a marketplace selling NFTs that are not their own without the necessary permission or distributes the said work in a manner that was not intended by the originator.

The Copyright Act No. 98 of 1978 (as amended) is a remedial tool in ascertaining the basic function and administration of NFTs but taking into consideration that rules of engagement with non-fungible tokens differ from one platform to another, it leaves a big room for developing legislative measures regulating decentralized spaces to balance the autonomy of creators with consumer protection.

Trademarks

A registered trademark allows a business to distinguish itself either in the service or product it provides to the public through its badge of origin. A trademark makes it possible for prospective and current clients to associate a business with a certain reputation and goodwill due to its affiliation with a particular trademark.

Any person minting or selling an NFT with an underlying asset that is associated with a certain business or organization without lawful authorization is committing trademark infringement. This will be the case in the instance where consumers are misled about the sponsorship for the creator of an NFT or ultimately the underlying asset involved therein in cases where it could be confusingly similar to another product or service in its presentation and interpretation.

It will be interesting to note how future case law findings and precedents will apply the Trade Marks Act 194 of 1993 in trademark law cases relating to NFTs as this is still another field where legal development is needed to cultivate a safe environment that once again balances the freedom of creativity with limitations that overlap between the digital and physical world as NFTs continue creating alternate universes.

Key takeaways for intellectual property protection in NFTs:

• Always ensure a seller or an originator (minter) of an NFT is authorized to create a token or has legitimate rights in the ownership of an underlying asset if you are intending to acquire intellectual property rights in the token.

• Marketplaces such as OpenSea have take-down policies in place for originators to report the direct or indirect infringement of use and expression to allow them to take steps against unlawful masqueraders. Certain terms and conditions apply in this instance so conduct your own research on the legitimacy of a marketplace before sharing your work.

• Buyers of NFTs must be aware that a sale merely implies ownership to the token and any other acquisition relating to the sale of the NFT must be expressly in writing and not automated by the virtue of the sale. Mutual understanding of smart contract terms can save you time and costs involved in avoidable litigation.

Last But Not Least

NFTs are revolutionizing asset management and investment for creatives worldwide. Artists are being afforded an opportunity to own their time, business development and income creation through the digital space.

Through blockchain technology, smart contracts are offering transparent, efficient and instantaneous transactions that allow for legal enforceability for all people globally. You can vilify or endorse NFTs but one thing you can never do is ignore their impact in disruptively transforming the landscape of trade, income and the concept of ownership as we know it.

This is a whole new ball game with a whole new set of rules and it is quite exciting to witness what our legislature and the courts will be doing in advocating and developing intellectual property law rights in NFTs for creatives, creators, investors and business men and women in South Africa.

– Fedile Chichi Phadi

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