MyFondia VirtualLawyer
April 19, 2021

What are NFTs and What Do You Need to Know About Them?

Non-fungible tokens (NFTs) have grabbed media attention lately. The headlines boast of people making millions of dollars by selling their digital art or other content, even Tweets, using NFTs. But what exactly are they, what use do they have, and does this new phenomenon have implications on the ownership of IP rights?

One of a Kind

NFTs use blockchain technology and they work in a similar way to cryptocurrency. One important difference, however, is that NFTs are not

interchangeable. A single Bitcoin, for example, is interchangeable with another Bitcoin, as they both have the same value. There is no need to specify which Bitcoin you actually have. NFTs, on the other hand, have all been assigned specific IDs that renders each of them unique – no other token can replicate the assigned ID, which makes for a fool-proof way to verify authenticity. By using blockchain technology, managing and verifying the ownership and transfer of NFTs is extremely reliable. Every record of who owns what at any given time is stored on a shared ledger (the blockchain).

Beeple's

Beeple’s ”The First 5000 Days” sold for roughly $69 million. Image by Beeple/Christie’s

These features can make NFTs especially useful for artists, musicians and others who want to create and sell limited edition digital content.

NFTs are Created Using Smart Contracts

NFTs are created, or “minted” as they say, when an underlying smart contract code is written. These smart contracts can be used to add additional functions to the NFT. An NFT could, for example, be used to allocate a certain percent on any resale back to the original owner. This way the original creator of the content receives a portion of each sale instead of being left out should the content become more valuable in the future. With smart contracts, NFTs are not only limited to the sale of art as they have also been used to sell lifelong front row seats to concerts.

NFTs and IP Rights

Creating an NFT does not automatically mean ownership of any intellectual property rights (IP rights) related to the digital content itself. You can think of the NFT as a bill of sale on a painting - even when the physical painting changes hands and ownership, the copyrights related to the painting do not transfer automatically with it. The painting’s new owner cannot for example make a profit by selling copies of the painting or otherwise use it commercially. The same applies here.

With the purchase of an NFT comes only the ownership of said unique token of ownership, nothing more – unless agreed otherwise.

It is, of course, always possible to agree on the licensing of IP rights related to the digital content. Some NFT marketplaces already offer an easily modifiable NFT license templates for this very purpose. These licenses distinguish the actual NFT token from the digital content, such as artwork. The license can be used to grant the owner of the NFT a commercial license to make merchandise that displays the art associated with the NFT and to even specify a revenue limit tied to sales of those products.

NFTs Cannot Be Used to Verify the Ownership of IP Rights

NFTs’ reputation as a fool-proof way to demonstrate ownership has created confusion regarding the ownership of the underlying IP rights, which has led to some people taking advantage of this by selling counterfeit copies of digital content.

Blockchains can be used to pinpoint the owner of the NFT at any given time as well as reliably document all transfers of the token. The copyright, other IP rights and possible licensing agreements made in connection with acquiring the NFT, however, are not immediately accessible by others. That is why the owner of an NFT cannot be used to verify the ownership of the underlying IP rights. Usually, it is left up to the buyer to ensure that the NFT in question is attached to the original work and not a copy. Some NFT marketplaces have begun combatting this issue by requiring verification of the physical person selling the digital asset. Some, on the other hand, leave all responsibility to the buyer.

When jumping in on the NFT business you should always ensure you are clear on what you are actually buying or selling; the token itself or any of the underlying IP rights.