The IP in NFTs - what you need to know

Non-fungible tokens (NFTs) are one of the hottest intellectual property (IP) topics currently. NFTs can be used simply for marketing purposes or as a new form of asset to attract investment or as part of the transfer of products and services into the metaverse.

This new asset class has exploded across all sectors and raises 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.

NFTs can refer to or contain valuable intellectual property rights, for example, digital artwork, branded goods, or logos.  Ensuring intellectual property rights are protected and respected should be a paramount consideration in NFT projects.

Releasing 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

Even if there is no intention to create and release NFTs, brands must be vigilant to protect their IP in the metaverse and new web3 economy.  Any strategy could include monitoring of key marketplaces and platforms, defensive registration of domain names (including the new Ethereum Name Service) and trade marks in new digital classes, and developing policies to employ if infringement is detected.

In our series of blog posts on NFTs, we explore intellectual property considerations, misconceptions and issues that we are seeing arising in the NFT space, including, in this blog post, clarifying what NFTs are and how they can create effective control over digital assets and the use of NFTs for provenance and anti-counterfeiting.

Other blog posts in our series look at the IP rights that are being purchased (or not) with an NFT, IP issues associated with the minting of NFTs, and what can be done to protect the rights of brand owners in relation to NFTs and the metaverse.

What are NFTs?

NFTs are uniquely identifiable tokens, "minted" (created) using blockchain technology.  When an NFT is created on the blockchain, the token is added as a 'block' of digital data to the chain.  Because these blocks are linked together, the data in each block is immutable (that is, it cannot be changed without affecting the whole chain).

The NFT itself is a collection of data that provides information about the token, such as its contract address, token ID and name, and the 'identity' of the original creator.  While NFTs are commonly associated with a digital asset, such as an image or movie, this asset does not form part of the NFT's metadata.  Instead, the NFT metadata will link to the location where the digital asset is stored (such as a website address).

In a parallel to the traditional fine art world, an NFT could be thought of as the certificate of authenticity for a print or painting.  In this sense, an NFT functions as a digital certificate of ownership over a digital asset, but it is not the digital asset itself.

One NFT collection illustrates the distinction between an NFT and the underlying digital asset.  In March 2021, an artist known as @neitherconfirm created an NFT series called 'atlas III' with each NFT in the series linking to a JPEG image file, showing an abstract portrait at the time of the sale of the NFT.  However, once the NFTs were purchased, the artist swapped the JPEGs to images of rugs.  This was possible because the NFTs linked to image files that were stored at a website address which the artist had access to.  There are solutions to prevent this from happening, such as minting the NFT using the InterPlanetary File System (IPFS), which effectively preserves the image file and prevents tampering, but this 'atlas III' auction shows how an NFT is not the same as the digital asset that it links to.

NFTs can create effective control over digital assets

The quintessential use case for NFTs, to date, has been the sale and trade of digital assets like art, design and digital fashion.  NFTs create scarcity for a digital asset that otherwise, because of their digital nature, would be capable of infinite dissemination.

NFTs, provenance and anti-counterfeiting

The ability of NFTs to provide provenance over digital assets has also transferred into the real-world, and it is now common to see NFTs that are associated with physical products.  For example, brands can now sell an NFT which is redeemable for a physical product (such as fine wine or sneakers), which creates a convenient market for the trade of those goods.  The NFT also functions as an anti-counterfeiting tool to disrupt unlawful activities and tackle infringing copying of goods.

Other posts in our IP in NFTs series look at the IP rights being purchased (or not) with an NFT, at IP issues associated with the minting of NFTs, and at branding issues for NFTs and the metaverse.

Follow our NFT blog series by subscribing to our blog IPNotes.

For comment on how NFTs are being regulated in the UK and EU, please see our HSF blog post here.

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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