The blockchain implemented tokens that are non-fungible or NFTs may need legal opinion letters. With the explosive growth of blockchain technology, different types of tokens are getting introduced to the market regularly. One such token type is named NFT, or non-fungible tokens. In simple terms, these tokens cannot be replaced or exchanged, thereby making these tokens valuable for the token holders. Accordingly, similar to the pre-requisites for listing any token at a cryptocurrency exchange, an appropriate legal due diligence is required prior to the launch of NFTs. Therefore, writing such legal opinion letters for tokens becomes an important skill for the technology lawyers to acquire.
Cryptocurrency and Off-Chain Digital Ledger Technology
A non-fungible token (or NFT) is a digital unit of value stored on a public ledger, also known as a blockchain, which authenticates a particular digital asset to be unchangeable and therefore unchangeable. An NFT may be used to transfer ownership of a virtual asset between two parties, or it may be used to give ownership of one particular virtual asset to another.
A non-fungible token is subject to manipulation by a third party and if this third party is malicious, the transfer may be unsuccessful. A major advantage of a non-fungible token over a traditional financial instrument like a bond or stock is that the value of a non-fungible token is not fixed and its value is subject to the volatility in the market price of that token. The main advantage of an NFT compared with a bond or stock is that there is no redemption value, which means that a bond or stock cannot be taken back once ownership is transferred.
The use of a non-fungible token is quite common in the worlds of software engineering, crowdsourcing and the internet. The most common example of this is the creation of an “ethernet” – a platform which uses internet technology to connect networks, like the internet. The use of a NFT in the context of e-commerce is quite common as well: a company that is selling products on the internet will use a NFT to transfer ownership of its asset onto its secured computer network. The use of a NFT in this context is therefore very similar to that of a bank that may be transferring ownership of some asset onto a computer network that it owns. This kind of transfer is called digital ownership transfer. One of the major advantages of this kind of asset transfer is that it is cheap and easy to do.
Unlike with physical securities such as stocks and bonds, the transfer of digital ownership is done instantly without any need for a intermediary. This also makes it possible for the transfer to occur even between individuals who do not necessarily have close relationship with each other. This means that the use of NFTs can be very useful in applications where one party may not have direct access to the media assets being transferred.
Another advantage of the fungibility of an asset is that it can be protected from theft or fraud. As mentioned earlier, the term fungibility refers to the property of something being able to withstand any form of transformation, such as alteration to a valuable thing (commodity) or change in ownership (blockchain technology). It also includes the property of a thing remaining unchanged (an intangible asset). If an entity or piece of software is combined with another entity or piece of software and an owner of one of those entities disassociates himself from the other entity or software, then the combination results in a non-fungible asset.
Therefore, the combined entity or software will not be able to use its tangible assets against the disassociating party. Non fungible ownership and its attendant problems arise when creators of tokens choose not to assign ownership of tokens to their creators by way of proper agreements and contracts. For instance, when an artist creates a tattoo, he normally assigns all ownership of it to himself but a purchaser cannot claim ownership of the tattoo even if he paid for it. This is because the purchaser is only entitled to use the tattoo as he sees fit. The purchaser can modify it however by making a payment for the right to do so.
NFTs and Intellectual Property Rights
Attorneys practicing Intellectual Property Rights or IPR are evolving their practice rapidly with a view to address the concerns of their clients who are preparing for the launch of the NFTs. NFT are virtual tokens that are non fungible/ non interchangeable and exist on the Ethereum blockchain (others are TRON and NEO blockchain that supports NFTs) as ledgers with each having a unique identification number/code to record ownership and validate authenticity. These tokens are different from cryptocurrency as these cannot be replicated or exchanged. The intersection of NFT with Intellectual property has been an interesting concept as NFT could represent a song, a patent, a painting and other intellectual properties. Though the concept of NFT using blockchain technology is not a new or novel concept and has been used in online gaming for many years. One such example include ‘Cryptokitties’ wherein players bred collectable digital cats using NFTs.
NFT Patents
The advent of NFT patents are already on the horizon and are showing accelerating growth. The blockchain patents are already being granted every year. One such recent example of NFT patent is Nike’s ‘Cryptokicks’. The US patent office issued a patent for Nike’s blockchain compatible sneakers wherein if a buyer buys the shoe, a digital representation of the shoe will be generated which will be stored in ‘digital locker’, a cryptocurrency wallet type app and cryptographic tokens will be assigned to the buyer of the shoe.
NFT Copyright
Copyright decides the ownership of the original art to the artist and provides him with exclusive right to make copies, sell and use his creation. When the rights are assigned to a third party, the ownership of the original art is not transferred to the third party. The third party can further resell the physical copy to the other party but does not possess the right to make additional copies. Similarly in case wherein the one has to sell and create an NFT embodying the art, the buyer of the NFT would receive ownership of the NFT as recorded on the blockchain but not the ownership of the original art associated with NFT.
There are various examples wherein major brands have already started tokenization of IP rights, for instance, online platform Maecenas has tokenized Andy Warhol painting and sold it on the blockchain, another example is of Gramatik, an independent music producer who has tokenized his future intellectual property. NFTs provide additional benefits to the musicians by allowing them to provide early access to concert tickets to fans who buy their albums on the NFT blockchain network.
NFT Trademarks
The major brands have already started tokenizing their luxurious goods, branded under their own trademark. Examples include the famous brand owner Louis Vuitton, Tiffany and Dom Perignon, who uses the AURA blockchain to allow consumers to use NFTs to trace the history and authenticity of their luxury goods in partnership with Microsoft. The other example is artists like deadmau5 and Kings of Leon releasing NFT packages under their trademarked artist names.
NFT Privacy Issues
The California Consumer Privacy Act (CCPA) and the EU’s General Data Protection Regulation (GDPR), regulatory bodies protect consumer personal data by imposing restrictions on storing, processing and transferring of personal data. This has generated challenges for the enterprises engaged in Blockchain offerings. The issue associated with the non-fungible tokens that exist on the Blockchain is that the data provided by the data owner is stored as a permanent and immutable ledger and cannot be altered, and hence it restricts modification of data. This stands in conflict with laws where alteration/ deletion of data is required. To solve this, the less efficient erasure methods were used such as deletion of private keys, the encryption of data and the like, but these erasure solutions were no longer feasible.
Another issue associated with the NFT on the blockchain is compliance with the storage limitation principle. This principle was added by CPRA from GDPR to protect privacy rights, wherein the data cannot be retained for a longer period of time than is reasonably necessary to fulfil the desired purpose. Blockchain technology does not comply with this principle as it stores data permanently. To tackle the issue, and to keep in line with the privacy laws, the design of Blockchain should include ‘programmable privacy smart contracts’. Programmable privacy is writing and designing computer code in a way that automatically checks the privacy compliance of smart contracts in a decentralised way.
Conclusion
The advent of non-fungible token utilising blockchain technology is novel and still emerging. However, this technology provides new opportunities to artists, creators, innovators, brands, investors, musicians and consumers. There are various risks associated with NFTs and needs to be tackled, one major risk is that if a false entry of ownership is uploaded on the NFT, this might lead to fraud. The intersection of NFT with Intellectual property requires careful thought when incorporating an overall IP strategy.
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Advocate Rahul Dev is a Patent Attorney & International Business Lawyer practicing Technology, Intellectual Property & Corporate Laws. He is reachable at rd (at) patentbusinesslawyer (dot) com & @rdpatentlawyer on Twitter.
Quoted in and contributed to 50+ national & international publications (Bloomberg, FirstPost, SwissInfo, Outlook Money, Yahoo News, Times of India, Economic Times, Business Standard, Quartz, Global Legal Post, International Bar Association, LawAsia, BioSpectrum Asia, Digital News Asia, e27, Leaders Speak, Entrepreneur India, VCCircle, AutoTech).
Regularly invited to speak at international & national platforms (conferences, TV channels, seminars, corporate trainings, government workshops) on technology, patents, business strategy, legal developments, leadership & management.
Working closely with patent attorneys along with international law firms with significant experience with lawyers in Asia Pacific providing services to clients in US and Europe. Flagship services include international patent and trademark filings, patent services in India and global patent consulting services.
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