Not a day goes by without a new story about non-fungible tokens (“NFTs”). For example, a reworked Andy Warhol computer image from the 1980s sold for $ 870,000 at a Christie’s auction. The famous YouTube video “Charlie Bit My Finger”, which holds a record of more than 885 million views, sold for $ 760,999. Jack Dorsey, the co-founder and CEO of Twitter, recently sold his first tweet – the first on Twitter – for $ 2.5 million in a charity auction.[1] Christie’s auction house announced that artist Beeple sold a work of art for more than $ 69 million, the third highest price for a living artist. But the work entitled “Everyday Life: The First 5000 Days” is not a physical work of art. It’s all digital.[2]
All of these transactions involved the use of NFTs. This thriving technology could transform the way we own everything from works of art and concert tickets to our homes. Forbes Magazine reports that an estimated 85,787 NFTs were bought and sold per day for a total of $ 5.8 million in May.[3] NFTs could also affect intellectual property ownership, both its value and its monetization.
To understand the impact of NFTs on IP, we first need to understand what an NFT is and how it works. With this basic understanding, we can then see how NFTs will shape the monetization of intellectual property.
What are NFTs?
Investopedia defines NFTs as cryptographic assets on blockchain with unique identification codes and metadata that differentiate them from one another.[4] What does that really mean? Let’s analyze the definition to better understand it. A “fungible” good can be exchanged for a similar good. Money, for example, is the best example of a fungible good. When I ask someone if they have “two 10s for 20s”, the 20 bill is easily converted into the two 10 bills and the value of the transaction does not change; it’s still worth $ 20. In contrast, a “non-fungible” good is not exchangeable. A Mickey Mantle Rookie Card cannot be exchanged for a Roberto Clemente Rookie Card. Baseball cards are not fungible as each card has unique properties that add or decrease in value (Mantle’s Rookie card sold for $ 5.2 million at auction, while Clemente’s card sold for $ 478,000).[5],[6] Each card represents a different baseball player, which makes the card unique. Another common example is a car. For example, if someone borrows my car, it is not acceptable for the borrower to return another car.
How about a token? In plain language, a token represents a feeling or an event.[7] A token establishes or convinces through evidence that a certain fact exists. A driver’s license is a sign (or proof) that a person has met all of the necessary requirements to drive in a particular state. In the blockchain world, a token represents any asset. Tokens can act as a store of value for conducting internal and external transactions and provide a different type of monetary system, including digital assets. A token also indicates the rightful owner of a unique asset.
With this understanding, we can form a clear definition of a non-fungible token: NFTs represent unique, non-transferable digital assets in a blockchain, in which each NFT has only one owner and each NFT has a certain value.
Like all things on the blockchain, NFTs are subject to standards. NFTs are covered by two standards: ERC-721 defines the minimal interface – owner details, security and metadata – required for the exchange and distribution of the tokens. This standard is limited to the use of NFTs, so that, for example, a new smart contract is required for each token. The ERC-1155 standard allows someone to combine fungible and non-fungible elements into a single smart contract, reducing overhead costs and simplifying the transaction.
The best known example of NFTs are cryptokitties.[8] Cryptokitties were introduced in November 2017 and are digital representations of cats with unique identifications on Ethereum’s blockchain. Each kitten is unique and has a price. They reproduce among themselves and produce new offspring that have different characteristics and ratings compared to their parents.
NFTs and Intellectual Property
Given a simplified definition and some background information on NFTs, how would NFTs affect the valuation and monetization of intellectual property? Simply put, NFTs can simplify transactions with the added benefit of security.
In the case of patents, a patent holder can choose to convert their granted patent into an NFT. This can make it easier for investors and innovators to sell, trade, and commercialize patents. For this purpose, IPwe and IBM announced an agreement back in April to present patents as NFTs.[9] The recordings of the NFTs are stored on the IPwe platform, which is hosted in the IBM Cloud and operated by the IBM Blockchain.[10] Smart contracts[11] can be used to facilitate the transaction and can be incorporated into the token using standardized terms associated with each patent. The owner of the patent sets the terms of the contract, including what is public and what is not. For example, Jack Fonss and his consulting firm True Return Systems LLC are auctioning US patent No. 10,025,797 on the NFT marketplace OpenSea. The tender for the patent, believed to be the first to be auctioned off as a non-fungible token, started at around $ 7.5 million.[12] A self-executing contract is built into the NFT, which represents the Fonss patent, simplifying the cost and number of documents required for the transaction. As mentioned earlier, since ownership of an NFT is known (an owner), it is easier to determine who to turn to if, for example, there is interest in a licensing agreement or a direct purchase of the patent property.
There are some caveats with implementing NFTs for patents. Ownership of an NFT does not automatically transfer ownership of patent assets. Purchasing the NFT means that you are the owner of the NFT on the blockchain. A proper written agreement is required to complete the transfer of title and rights relating to the patent and its proper assignment to the U.S. Patent and Trademark Office.
Similar questions arise for buyers of NFTs when dealing with trademarks and copyrights. The biggest problem, as seen above, is that the owner of the NFT has no rights to the intellectual property unless it is included in the smart contract. The bottom line is that a buyer can purchase an NFT that has a trademark attached to it or an NFT that is a work of art, but the buyer does not acquire the right to use the trademark, for example, unless such an acquisition is made is a condition for the sale of the NFT.
For brand owners, how to deal with the ability to use their brand name in an NFT can be an important consideration. Unless the work is specifically licensed for use in NFTs, it may be useful to include a clause in the license agreement that prevents the licensee from creating NFTs based on the licensed work. If a trademark owner grants it, what are the potential benefits and pitfalls of such a grant? It can be beneficial to structure a license agreement in a smart contract.
Brand owners should consider using NFTs for brand authentication and marketing of goods and services.[13] LVMH (the owners of Louis Vuitton, Tiffany, and Dom Perignon) are reportedly using the AURA blockchain to enable consumers to use NFTs to track the authenticity of their branded luxury goods.[14]
For copyright holders, the work’s creator probably still owns the copyright to the work contained in the NFT itself. The purchaser of the NFT generally does NOT acquire ownership of the artwork embedded in the NFT, nor the right to reproduce or convert that artwork. As part of the creation of an NFT, the author can create further conditions, which can include the granting of a license or ownership of the platform for the use of copyright. For example, just as a musician needs permission to sample or remix someone else’s music and sell it as his own, the creator of an NFT needs permission from the copyright owner of the work that he is embedding and offering in an NFT. Sale. Violation of these exclusive rights can constitute copyright infringement.
Takeaways to NFTs?
Non-fungible tokens offer IP owners new ways to monetize their portfolios. Intellectual property owners should learn about the benefits and pitfalls of using this new technology to add value to their portfolio. Therefore, the advice of an IP advisor on these matters is essential to reduce the risk of potential problems.
[1] https://www.cnbc.com/2021/03/22/jack-dorsey-sells-his-first-tweet-ever-as-an-nft-for-over-2point9-million.html#:~:text = The% 20tweet% 2C% 20what% 20 says% 2C% 20% E2% 80% 9C, sells% 2C% 20only% 20like% 20physical% 20Assets.
[2] https://onlineonly.christies.com/s/beeple-first-5000-days/beeple-b-1981-1/112924
[3] https://www.forbes.com/sites/whittiertrust/2021/04/06/the-one-strategy-high-net-worth-individuals-depend-on-to-grow-wealth/?sh=2d517a7443bd
[4] https://www.investopedia.com/non-fungible-tokens-nft-5115211
[5] https://www.beckett.com/news/1955-topps-roberto-clemente-rookie-card-tops-475000/#:~:text=1955%20Topps%20Roberto%20Clemente%20Rookie%20Card%20Sells%20for% 20% 24478% 2C000
[6] https://www.beckett.com/news/1952-topps-mickey-mantle-sells-for-5-2-million-highest-ever-for-a-baseball-card/
[7] https://www.merriam-webster.com/dictionary/token
[8] https://www.cryptokitties.co/
[9] https://newsroom.ibm.com/2021-04-20-IPwe-and-IBM-Seek-to-Transform-Corporate-Patents-With-Next-Generation-NFTs-Using-IBM-Blockchain
[10] I would.
[11] A smart contract is a self-executing contract in which the terms of the agreement between the buyer and seller are written directly into lines of code. The code and the agreements it contains exist over a distributed, decentralized blockchain network. (From Investopedia – https://www.investopedia.com/terms/s/smart-contracts.asp)
[12] https://news.bloomberglaw.com/ip-law/the-trendy-hot-nft-market-has-a-new-entrant-patents
[13] https://www.glossy.co/fashion/beyond-the-hype-nfts-stand-to-benefit-fashion-brands-in-the-future/
[14] https://www.lvmh.com/news-documents/news/lvmh-partners-with-other-major-luxury-companies-on-aura-the-first-global-luxury-blockchain/
