WHAT IS NFTs?
NFTs have been making headlines lately and it stands for “non-fungible token”. NFTs are digital tokens issued on the blockchain that are used to guarantee ownership and authenticity of unique digital assets.
Fungibility refers to an asset’s ability to be exchanged for something else of equal value. Fungible assets such as currencies or shares are interchangeable for equal value. On the flip hand, non-fungible assets, such as painting, real estate, music, software and game collectible (a player’s card/ electronic game prop) are not interchangeable for something of equal value as each has unique and distinctive qualities.
An NFT has a base (usually Ethereum), a digital file, and smart contracts (computer codes that interact with the blockchain). When these three components are combined, the NFT is minted. Authors “minting” an artwork refers to the act of tokenizing the artwork (ie. Uploading it to a given marketplace platform) and issuing a token to guarantee its authenticity.
NFTs have created a new channel for monetization of creative Intellectual Property and brought a new source of income for authors and creative industry players. Hence, it is crucial for IP owners to rethink the IP protection strategies for their original creations and NFT creators should also be mindful of potential infringement issues when using third-party IP as part of the content.
CONSIDERATIONS FOR NFT CREATORS
1. Are NFTs protected by copyright?
No. Under Acts in most countries, creative work must be the original creation of an author and the work must be reduced to material form for it to be eligible for copyright protection. NFTs are likely not protected by copyright as it represents data on a blockchain, which would not constitute an original work of authorship. However, the artwork that the NFT creator mint may be protected by copyright. Hence, the basic rule is that the NFT creator can only mint artwork of which they own the copyright to avoid any infringement of copyright.
2. Are NFT creators allowed to mint a piece of art that they created for their past/ present employer?
No. If a piece of art was created in the course of the author’s employment or was commissioned through a written contract, the party that hired the author to create the work is the owner of that piece and the underlying copyright. This is an exception to the general rule where the author owns the copyright to each of its creation.
3. NFT Ownership and Copyright of the Underlying Asset
It is crucial to understand that buyer who acquires the NFT merely owns a particular digitally authenticated copy of the NFT. It does not provide rights over every copy of version of the asset or the underlying copyright ownership of the NFT. This is because each NFT has a one-of-a-kind serial number or “fingerprint” (hash) that cannot be duplicated. Because a hash is a cryptographic key produced from a single digital file, it will only equal one copy of that material. Copyright will remain with the creator of the work of art. However, this position can be varied by contract. The smart contract which governs an NFT/ a separate agreement could specify how proprietary rights, including copyright, are transferred upon sale of the NFT.
Considerations for IP Owners
1. Assignment considerations
NFT creators (who also own the IP rights in the underlying asset) can transfer or assign its copyright to the NFT buyer. The Copyright Law requires the transfer/ assignment of copyright to be in written form and to specify the contractual arrangement between the copyright owner and the assignee. The written agreement can be a contract for sale or deed of copyright assignment entered between the NFT creator and buyer which stipulates how copyright is dealt with in the transaction. Only upon such transfer/ assignment, the NFT buyer would be entitled to the rights related to such original work and accordingly, would be treated as the owner of the copyright to the extent of the rights assigned.
2. Licensing considerations
NFT creators (who also own IP rights in the underlying asset) can license their intellectual property rights in the underlying asset to the buyer of the NFT for certain purposes. Strategic licensing for this channel can increase the profile, goodwill, and revenue of the IP that are interested in taking this step. When issuing licensing rights related to NFTs, there are few considerations that licensors need to be taken into account. (1) the scope of that license- in order to protect some sense of value that may come from it being a limited edition; (2) how royalty payments will be administered upon the resale of the work and (3) the contours of a marketing campaign.
For instance, the license for CrytoKitties permits the owner of the NFT to commercialize the “kitty”, provided that such commercial use does not result in earnings of more than USD100,000 per year. In contrast, the license for NBA TopShots grants the owner of the “moments” license to “use, copy, and display” that moment but does not permit the owner to “reproduce, distribute or otherwise commercialize” the moment.
3. Trademark considerations
As brands become more aggressive in creating their own tokenized assets during this early stage of the NFT boom, brand owners should consider extending their trademark registrations to cover trademark uses and classifications that include NFTs. Doing so at an early stage may allow the brand owners to better control and monitor the uses of their IP on the blockchain. NFT owners who have completed the process of a trademark application are permitted to sue infringers and therefore have better brand protection.
Undoubtedly, NFT transactions can significantly alter the art market by making transactions more accessible and secure as well as engaging new audiences to grow brands on a global scale. However, the IP owner of the artwork should place more attention in restructuring on the Intellectual Property protection of their asset or enter into a written agreement with third parties (be that buyer of an NFT or third parties) before they “minting” artwork to a given marketplace platform. While Malaysian Courts had recognized Bitcoin as a security and commodity under Contracts Act 1950, there are no laws in Malaysia governing NFTs as of now. It is advisable for NFT creators and IP owners to consult reputable IP firms like Pintas to assist you in restructuring your IP protection and drafting of legal documents to better protect your Intellectual Property asset.