The Complex Intricacies of NFTs in relation to Intellectual Property Rights

It’s the year 2021, you wake up one morning. As usual, you check the morning news, catch up on social media, and decide to see what’s trending on Twitter. In the financial section, you read the news headlines and tweets about how there is, once again, another new cryptocurrency in the blockchain (database), and users debating about whether this new cryptocurrency will rise in value to the likes of Bitcoin and Ethereum (Top cryptocurrencies) alike. Throughout the days to follow, many artists and celebrities, out of nowhere, change their profile pictures to images of what seemed like cartoonish grotesque-looking apes. Then “#NFTS” is trending, and soon after you are done glossing through and over it, you find out that some of them are worth hundreds of thousands of dollars, and some are over the one million dollar mark. You begin asking questions about its authenticity, legality, and what makes an image that can be easily screenshotted, duplicated, and shared worth so much amount of money.

NFT (Non-Fungible tokens) basics

What exactly is an NFT? First, let’s understand what fungible and non-fungible goods are. Fungible goods are items that are interchangeable because they are identical to each other for practical purposes. Commodities, common shares, options, and currency bills, oil are examples of fungible goods. The opposite is non-fungible goods, they are unique and distinguishable items and assets. Land, artwork, real estate, custom-made gold, silver, diamond ornaments, and painting are examples of this.

Tokens are digital assets defined by a project or smart contract and built on a specific blockchain. Tokens can be utility tokens or security tokens. Utility tokens are also called consumer or incentive tokens, and they are programmable digital units of values that are recorded onto a digital ledger inside the blockchain; they can represent commodities, coins, shares, and more.

NFT (non-fungible tokens) can be used to digitally represent any item, including online-only assets like digital artwork as well as real-world assets like real estate that can be represented in digital form, also referred to as Metaverse.

The metaverse is a kind of virtual world. With this technology, people can enter the digital world through virtual identity. In-game things like avatars, digital and non-digital collectables, domain domains, and event tickets are all examples of assets that NFTs can represent. Even a photo or a video taken by an ordinary person can be turned into an NFT. Most of which are purchased with ETH (Ethereum). The first-ever NFTs were characters called Cryptopunks and were released in 2017. But they didn’t gain worldwide traction until the beginning of the year 2021. And soon, many works have been turned into NFTs, memes, music albums, and other digital arts are some of them. The most common type of NFT is a metadata file, which contains the encoded information along with the digital version of the art. The first basic part of an NFT is a number called the tokenID, which is generated when the token is created; the second is the contract address, which is a blockchain address that can be seen using a blockchain scanner anywhere around the globe. The token’s combination of parts makes it one-of-a-kind; just one token with that combination of tokenID and contract address exists in the world. The NFT is made up of only these two numbers at its foundation. A contract may be included with an NFT giving its rights to the purchaser. One is the creator’s wallet address, which is used to link the NFT to its inventor. The majority of NFTs additionally provide a link to the original material.   

Facts of NFT

Globalization was adopted by the entirety of the world; whenever there is a market for anything, in this instance, the digital market, intellectual property rights are sure to follow.

1. Intellectual Property Rights: Intellectual property refers to mental creations such as literary and creative works, as well as designs, symbols, and even names. Intellectual property rights, or IP rights, are legal frameworks that can control and safeguard the products of mental effort. Intellectual property is based on exclusive rights and monopolies. The only right to manufacture, use, present, or sell such work belongs to the patent owner. It is illegal for anyone to use a brand name that is confusingly similar to one that already exists, thanks to trademarks. Along with the expansion of innovation, such protection is an important agenda item for any conscientious businessperson.
2. NFT Ownership and Copyright: When an NFT is purchased, the ownership of that particular copy of the NFT is purchased, and as proof, the purchaser receives a cryptographically signed receipt. He has no proprietary rights over every copy of work purchased and only has ownership of the purchased work. The original copyright is with the creator who minted the NFT. Under Section 14 of the Indian Copyright Act of 1957, the copyright owner has a number of rights, including the ability to make reproductions and alterations. When a consumer purchases an NFT that corresponds to creative work, they receive a copy of the underlying work (in some digital format, such as .jpeg, .pdf, or .mp4) as well as the NFT itself, i.e. tokens. Sections 55 and 63 of the copyright laws provide civil and criminal remedies to copyright owners, respectively. The principles of copyright infringement established in Section 51 of the Copyright Act will be applied to determine whether an infringement has occurred and if it falls under Section 52 of the Copyright Act.
3. Trademark and NFT: Trademark infringement occurs when an unauthorized or rival party attempts to mint, sell or resell that NFT using the asset owner’s registered trademarks without the asset owner’s consent. For example, as the owners of major fashion brands such as Tiffany, Louis Vuitton, Bulgari, Cartier, Hublot, and Hennessy (luxury brands) use the AURA blockchain to allow customers to track the authenticity of their branded NFTs, the question of whether the company owns NFTs rather than trademarks or the assets being sold emerges. This conundrum can be greatly alleviated if industry participants broaden their trademark registrations to include NFTs in their trademark strategies and classifications. They might also choose to associate their brand with particular designs or trade outfits.
4. Patents to mint NFTs: Patents allow an NFT blockchain owner to license the technology they utilize for their NFT, allowing users to acquire legitimate brand collectables. For example, Nike has a patent for creating “cryptographic digital assets for footwear,” which allows customers to ensure the authenticity of their purchase while also keeping a digital collectable version of their sneaker in their wallet (Cryptokicks). This gives Nike the leverage to lease out its patents through contracts with designers and collaborators.
5. IT Act 2000: The obligation will fall on the NFT markets and platforms, according to Section 79 of the Information Technology Act of 2000 and the Intermediaries Guidelines/Rules. These laws place a duty on intermediary platforms to undertake due diligence and act immediately if they learn that their platform is being used to assist illicit activity. If they fail to do so, they become liable for the act as a facilitator.

Takeaway

Even if the original creator of the NFT doesn’t copyright their original designs, the value of the original will be significantly higher than that of the knockoffs or fakes as the original minted art can be tracked, analysed, and verified on the internet. The sales history, it’s ranking among the collection, and much more can be found too. But it never hurts to have the NFTs legally backed by IP Rights in case of infringement/s and litigation/s

Conclusion: The future of NFTs is unclear, especially in India. The Reserve Bank of India (RBI) attempted to ban the use of virtual or cryptocurrencies in 2018. However, it was shot down by the Apex Court in regards to there being no laws in the country to prohibit cryptocurrencies from existing. This could be a new era for NFTs to boom in India, and therefore, the minters ought to seek their IP Rights to prevent themselves from getting copied and knocked off.

References: 

1. Andrew Guadamuz, Senior Lecturer, University of Sussex, World Economic Forum
2. Fungibles Goods and Non-fungible Definition –Investopedia
3. https://www.larvalabs.com/cryptopunks
4. https://www.goodreturns.in/partner-content/india-s-nft-problem-explained-1235694.html  
5. NFTs in India: The saga continues, Urfee Roomi, Rishikaa – Bar and Bench
6. NFT and copyright – iPleaders

Disclaimer: The present article intends to provide general guidance on the subject, and you can also consult us in your specific case.