The IP in NFTs – What is being purchased?

As we reported in our first blog post in this series, non-fungible tokens (NFTs) are a new asset class that is being adopted eagerly across all sectors, raising some interesting challenges from an IP perspective.

While NFTs have demonstrated themselves to be a powerful tool in the new digital era, they remain poorly understood, in particular in relation to the rights that are (or are not) transferred on purchase of an NFT.

Releasing (known as "minting") and purchasing NFTs can give rise to a number of IP-related issues, such as:

• Who has the right to create and release NFTs?
• Does the NFT infringe third party rights?
• What rights are transferred with the NFT (and on resale)?
• How this rights transfer is achieved?

In our series of blog posts on NFTs, we explore intellectual property considerations, misconceptions and issues that we have seen arise in the NFT space over the last year, including in this blog post those around rights transfer or use following purchase.

Misconceptions around the transfer of rights

One common IP misconception, relevant to NFTs, is well illustrated by the case of Spice DAO, the Decentralised Autonomous Organisation (DAO) which was set up to fund the purchase of a book: director Alejandro Jodorowsky's adaptation of Frank Herbert's science fiction story 'Dune', that was being sold at auction.  The DAO ended up winning the auction, paying €2.7 million, almost 100 times more than it was estimated that the book would sell for.  After the purchase, Spice DAO said that its mission was to "Produce an original animated limited series inspired by the book and sell it to a streaming service".  However, as was subsequently pointed out to the DAO, purchasing the physical book does not necessarily include an assignment of the copyright underlying the book.  As such, Spice DAO had no rights to create derivative works simply because they owned the book.

The same is true of NFTs: the NFT is just a 'certificate of authenticity' for the digital asset, it does not intrinsically transfer any IP rights to the digital asset itself to the purchaser of the NFT.  This has parallels to fine art, where the acquisition of a painting does not give the purchaser any right to the underlying copyright in the painting itself (unless there is an agreement with the copyright holder that specifies otherwise, or in some cases where the painting is a commission).

Accordingly, as the default case, the purchase of an NFT does not assign (transfer) copyright or other IP rights to the purchaser.  This default position can be amended by contract in a number of ways:

• For example, the terms and conditions of the online marketplace where the NFT is sold (such as OpenSea, Nifty Gateway and Rarible) may specify that the NFT sale is accompanied by an assignment or licence of IP rights in the digital asset associated with the NFT. However, in practice, these marketplaces do not contain IP-related terms and conditions – although this could change in the future, and it is advisable to check this before the sale/purchase of an NFT on a marketplace.
• Alternatively, the 'smart contract' by which the NFT is minted may contain provisions related to IP rights. A 'smart contract' is a computer program that is stored on the blockchain, which facilitates the creation and transfer of NFTs.  Different smart contracts can exist on the same blockchain, and NFTs can be created using these different contracts.
• The smart contract that is currently most commonly used for NFTs on the Etherium blockchain is known as the ERC-721 standard, which does not contain any special rules in relation to IP.
• Conversely, a different smart contract, known as EIP-721, specifies that "Copyright and related rights waived via CC0", with the reference to CC0 meaning that 'creative commons' is intended to apply to the NFT and the underlying digital asset, and that IP rights are waived on minting.
• Finally, the creators of the NFT may attempt to define the IP rights in relation to the NFT, before or after the sale of the NFT. Yuga Labs LLC, the creators of the Bored Ape Yacht Club NFT collection, have stated on their website that holders of its NFTs have "a worldwide, royalty-free license to use, copy, and display the purchased Art … for your own personal, non-commercial use" and "an unlimited, worldwide license to use, copy, and display the purchased Art for the purpose of creating derivative works based upon the Art (“Commercial Use”).”  However, there are various issues if an NFT purchaser seeks to rely on such a statement.  For example, depending on the jurisdiction and the rights being assigned and/or licensed, a statement on a website may be insufficient to meet the formality requirements for an IP assignment and/or licence, rendering the transfer incomplete.  Furthermore, because of the imprecise and often incomplete nature of such statements, the rights being transferred are often unclear and capable of misunderstanding.  In the Yuga Labs LLC case, the statement draws a distinction between 'personal, non-commercial use', which is 'royalty-free', and 'commercial use', which is not expressed to be royalty free, but it does not then explain if there is intended to be a royalty (and what this may be).  A holder of a Bored Ape Yacht Club NFT may think that they are free to use the NFT for commercial purposes, whereas, in reality, Yuga Labs LLC may subsequently seek royalties from the holder.

See the first post in our series which looked at what NFTs are and how they can create effective control over digital assets and the use of NFTs for provenance and anti-counterfeiting. Other posts in the series look at IP issues associated with the minting of NFTs, and at branding issues for NFTs and the metaverse.

Follow our NFT series by subscribing to our blog IPNotes.

A briefing containing the first four blog posts in our IP and NFTs series is now available to download in PDF format. 

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