April 5, 2022
Non-fungible tokens (NFTs) have become hot investments over the past year, and the number of new NFT projects and businesses emerging each month continues to skyrocket. Before January closes in 2022, NFT sales will surpass $200 million USD. Record-breaking sales prices paid on virtual auctions have motivated many traditional investors to begin investing and building business ideas around digital assets. These digital assets include digitized files of music, artwork, crypto art, videos, crypto game assets, tweets, and more.
Moreover, the sale and resale of NFTs have attracted the interest of people and entities who want to exploit the growing interest. Scammers, counterfeiters, and fraudsters make the NFT landscape risky and increase the likelihood of lost profits and value for NFT sellers and buyers.
What is an NFT?
An NFT is a digital asset containing metadata attributing ownership rights and certain other benefits to the holder. Powered by blockchain technology, the metadata attached to it authenticates the link and identifies it as an authorized link to a legitimate copy of a data file. The data encrypted in the blockchain details ownership, authenticity, legitimacy, and other important details about the NFT and the transaction granting ownership.
The question of whether NFTs are susceptible to fraud by copying is easily answered with the decentralized and transparent nature of blockchain technology. This is how buyers and sellers can distinguish between legitimate and fake NFTs.
Still, many questions remain with respect to how NFTs and blockchain technology work with existing intellectual property laws. This has created an increased focus on parts of IP framework that can be used to protect NFTs. The majority of the laws used to protect NFT holders are those that apply to the underlying data file that is linked to the blockchain. It is the link between this file and the metadata that the NFT holder purchases — nothing more.
So, for now, the key to protecting NFTs from exploitation, counterfeiting, and other nefarious illegal commercial acts is to protect them as ‘derivative’ works of the underlying data file which may or may not be connected to a real-world physical asset (e.g., painting, photograph).
How can NFTs be protected under current U.S. law?
The protection of NFTs and their value is the responsibility of the person/entity who owns the IP rights of the NFTs’ underlying creative works. In short, the authorized NFT creator and/or the creator of the artistic works must be vigilant and actively enforce their IP rights if they want to preserve them and their value. As for the NFT holders, their only legal recourse is to sue the NFT sellers for the loss of value of their NFTs due to dilution of their market or selling of unauthorized copies of legitimate NFTs.
5 Ways to Protect Your NFTs
With the rapidly growing NFT industry and innovations within it, NFT creators must protect the IP rights associated with the digitized data files underlying the NFTs. For the purposes of this article, let’s explore how to protect innovation around NFT projects. The following forms of IP protection can be used to protect NFT creators and the rights of the owners of the underlying creative works.
Copyright laws protect the rights of artists, authors, and other types of creators (e.g., choreographers) in their abstract creative works (e.g., books, music, song lyrics, dance movements, photographs, software). It gives them the exclusive right to control the reproduction and adaptation of their works for a pre-determined period of time (i.e., the creator’s life plus 50 years).
Trademarks are registered signs, symbols, and/or names that are associated with a manufacturer, merchant, or service provider and they are used to identify goods and/or services in commerce. Marks included under the category of trademarks are trade dress, brand names, service marks, certification marks, and collective marks. All the marks are used to prevent consumer confusion, loss of the creator’s goodwill, and dilution of the trademark owner’s brand by others.
Design patents can be obtained for artistic works that have unique ornamentation, are different from previous art, are not derived from prior art, and are visible when the product is used as intended by its creator. They include fonts, icons, software programs, screen layouts, and digitized media.
Right to Publicity
The right of publicity is the right to control the commercial use of a person’s name, image, anything associated with the person (e.g., person’s voice). Everyone has the right to prevent the unauthorized use of their name and image for the purposes of commercial exploitation.
Smart Contract Terms
One of the best ways to prevent the unauthorized public and commercial use of NFTs is to carefully draft smart contracts. Under such contracts, people who buy NFTs have limited use of them or only the usage granted to them by the licensing agreement that accompanies the sale of the NFTs and is automatically transferred when the NFTs are sold.
Using IP Strategies to Protect Newly Launched NFTs
When launching an NFT, do a thorough search of all products, goods, services, and media that may use the names you have considered/selected for your NFTs in the country where you plan to launch your NFTs. Provided that the names are not in use, file a trademark application in the country where you will launch the NFTs. Trademark is crucial for protecting your NFTs and being able to prevent infringement of your IP rights. In addition, trademark rights can be extended to cover other commercial uses of NFTs and their related goods and services. NFT owners are also advised to make sure they get trade dress protection for their NFTs.
Apply for a design patent when you file your trademark application. NFTs can be covered by design patents. Also, they are one of the best ways to defend your NFTs from infringement. In the case of infringement, NFT owners can sue the infringer, and, if successful, be granted all the profits that the infringer earned via commercial exploitation of the NFT owner’s property.
Copyright law covers NFTs, game accessories, and other NFT-related goods/services. It gives you the broadest coverage for your NFTs and any special features that are attributed to them. This protection can be used to stop counterfeiters from profiting from your creative works. If you are vigilant about protecting your copyright, then you may be able to earn handsome fees from licensing your NFTs and rights related to their usage to others.
Legal Issues to Consider
The IP laws governing NFTs and NFT-related accessories are far from settled. This will get even more complicated as metaverse games, virtual land, workspaces, and social spaces continue to develop. Currently, lawyers are looking into how to reconcile IP laws that apply to real-world tangible and intangible property to things that only exist in the metaverse. While that will be a challenge that the U.S. legal system must deal with in the near future, there are other issues that NFT issuers should keep an eye on now.
· NFTs as Derivative Works
NFTs ownership is currently limited to owning the link that connects the metadata to the blockchain. NFT creators can protect their investment and property using a variety of IP laws. However, if NFTs are classified as derivative works of the original creative work, then they themselves will have more protection. It is even possible that the protection granted to them will give NFT holders more power and legal tools to protect their investments and tokens.
· Fair Use Laws
NFT owners have limited defense against Fair Use laws. They are the loopholes that allow for the public use of legally protected intangible intellectual property. While educational use of NFTs is understandable, there are other cottage industries (e.g., podcasts, YouTube commentaries, gaming channels) that are developing alongside the NFT industry. So, NFT creators and owners should stay abreast of how the Fair Use laws apply to the NFTs and NFT-related items.
· NFTs Turned Securities
The U.S. Securities and Exchange Commission (SEC) has been actively reassessing NFTs and cryptocurrencies to decide if they fall within its domain as securities. If NFTs are defined as securities, then there will be more complications to protecting them. In addition, there are likely to be more instances of unauthorized commercial exploitation. This is a particularly sensitive point because the NFT landscape is fertile ground for fraud, scammers, Ponzi Schemes, and the like.
NFT projects and businesses should be sure to engage legal counsel to help protect their innovation and ideas. If you have any questions about the best way to protect your NFT project or business, please contact Jamilia Grier at ByteBao.
Learn more about issues at the intersection of data privacy, intellectual property and Web3.View all insights
ByteBao is a platform that connects Web3 businesses with lawyers that specialize in digital assets and digital commerce. We also provide legal consulting services and training for legal professionals seeking to scale their digital assets practice.
© 2022 ByteoBao. All right reserved.