Not Your Father’s Acronym – the NFT (and IP)

Every day we are confronted with new acronyms, or more specifically internet abbreviations since many don’t exactly fall under the traditional definition of acronyms, like: LOL (Laughing Out Loud); OMW (On My Way); TIL (Today I Learned); IMO (In My Opinion). Bear with us as we dedicate a column to one such abbreviation and its connection to intellectual property (IP).

NFT (Non-Fungible Token)

What is a non-fungible token? “Non-fungible” means unique. A non-fungible token means there is no other digital token like it. Crypto currency tokens such as Bitcoin, Ripple (not to be confused with the cheap wine of the late ’60s) and Ethereum, on the other hand, are “fungible” tokens. For instance, one Bitcoin token is interchangeable with another Bitcoin token.

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Being unique, an NFT is like an oil painting. There is no other oil painting like it. Ownership of that oil painting by your client may come with intellectual property rights, such as copyright rights to control the making of prints or the painting’s public display. Ownership of an NFT is no different.

In the digital world how is the original NFT distinguished from a copy? One Bitcoin, after all, is the same as another. How is the uniqueness of an NFT verified? By blockchain technology – a verification method that is used to certify an NFT’s uniqueness. 

Blockchain technology is also used to record cryptocurrency transactions. Blockchain is a shared database in which data is immutably (cannot be changed) stored and can be viewed by anyone. The blocks as they are created are connected chronologically which makes it ideal to permanently record cryptocurrency transactions. In the case of an NFT, the token is created (minted) on a blockchain and code (called a smart contract) identifies the owner and then tracks subsequent owners of that NFT. Thus, each NFT is cryptographically verifiable, unique and easily transferable. 

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So What?

Why are NFTs important? According to nonfungible.com, the value of NFTs traded in 2021 was $17.7 billion (billion with a B) – a 21,359% rise over 2020’s $82.5 million (million with an M). However, the big picture is not as rosy since profits were hard to come by for resellers. From a value standpoint, the creation (and sale) of NFTs appears to be on a dramatic upward trend.

IP Implications

How are NFTs IP related? NFTs can be used to represent any asset, whether it is digital, physical or somewhere in between. Presently NFTs are most commonly used for event tickets, digital collectables, and to track fractional ownership or royalty entitlements for media or art. 

In the case of an event ticket, an NFT can be used to verify that the entrant to the event is the owner of the ticket. This verification also reduces the occurrence of fraudulent tickets. If the ticket then becomes a collectible due to the event’s acclaim, the NFT serves as a verification of the ticket’s authenticity.

Brands can issue to customers NFTs that represent exclusive collectables or products or rights to future products or services for which demand may exceed supply. These rights in turn may be sold, transferred or licensed with the NFT verifying the owner’s right to do so and the subsequent party’s indisputable interest in the right they have purchased, or will purchase.

NFTs can also be used to implement royalty payments each time the work protected by copyright is sold or licensed downstream. In this sense NFTs have created a new model for monetizing intellectual property. 

Clients and attorneys have to be aware of any underlying third-party rights in the asset for which an NFT is certifying ownership. This third-party right can serve as a barrier to a subsequent sale or licensing of that asset. 

The next few years will be interesting as to the development of the relationships between IP, NFTs and their underlying assets. But no worries – if its anything like software development, a clear path is not likely.

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