NFT Buyers Beware: IP Rights

There are several Intellectual Property (IP) traps ready to snare unsuspecting NFT buyers.

Below we set out some of the more common IP legal issues of which buyers of NFTs ought to be aware.

1. NFTs

An NFT is a record, like a certificate/receipt, that is stored on an unchangeable digital ledger called the blockchain. When you buy an NFT, you acquire a unique class of crypto asset; it is a set of digital code that represents uniqueness and singularity (this is the “non-fungible” element). An NFT is therefore different to a ‘crypto currency’, which is “fungible” i.e. replaceable and mutually interchangeable.

Whilst it is an asset itself, it also represents or points to another digital or physical asset, commonly a digital or physical work: a meme, a sports clip, or a digital artwork, for example.

A common misconception is that when you buy an NFT, you automatically acquire its connected asset: the original physical artwork and/or its copyright.

In fact, when you buy an NFT, you enter into a contract with the seller, and the terms of that contract determine what rights you acquire: the NFT; the NFT and a digital representation of the work in question; or the NFT and the actual connected work, including its copyright.

2. Smart Contracts

A buyer’s contract with the seller of an NFT is a ‘smart contract’ which can ‘self-execute’ which means upon a certain even happening in the future, it performs an action: like paying out a percentage of future sale proceeds back to the NFT’s original creator each time the NFT is sold.

However, as “smart” as the contract may be, it’s still a contract: a set of terms providing for rights and obligations on the buyer’s part. It’s therefore important a buyer takes steps to understand the terms of the contract into which they are entering.

Many NFTs rely on ‘standard-form’ smart contracts, which can lack certainty and clarity in their terms; the risk is that an uncertain contract is unenforceable and therefore, worthless.

It is therefore recommended that legal counsel specialising in IP and NFTs is retained to advise as to the relevant smart contract.

3. IP Rights

The next issue to be aware of, for a buyer of an NFT, are the IP rights attached to the NFT.

When we talk about IP rights and NFTs, we are typically talking about copyright. Copyright is the right to copy a work, the right to commercially exploit a work (commonly and artistic work) and to stop others from doing the same without permission.

When you buy an NFT representing a digital artwork (which is very common), you may assume you are also buying the right to exploit the artwork: to copy, display and commercialise it. However, unless this is expressly provided for in the NFT’s smart contract (i.e. it contains a written assignment of copyright, signed by the current copyright owner) you may at best be acquiring a licence to use the work, and at worst, no rights at all. For example, an artist can sell an artwork e.g., a digital file containing the artwork, but retain the valuable copyright in the artwork.

The following are some of the important considerations to have at the purchasing stage of an NFT:

• If the subject of the NFT is an artwork, investigate whether the copyright owner of the artwork created the NFT, and if not, whether the creator obtained permission to use copyright protected work in the NFT’s creation.
• It is important to take steps (as far as is possible) to assure oneself of the provenance and authenticity of work connected to an NFT.
• Also, if the NFT purports to convey rights in the work the subject of the NFT, whether those rights properly attach to the NFT: are they provided for and set out in the coding of the smart contract.
• Further, if the NFT smart contract provides sufficiently in its terms to convey the rights it claims: an assignment of copyright, or a licence for use, for example, whether those rights were in the gift of the creator/seller.

It may also be that an NFT purports to sell or convey IP rights to which the seller has no right to sell. A recent example of this is a claim made in respect of an NFT featuring, and purporting to assign rights in, the artist Jean-Michel Basquiat’s 1986 mixed media work on paper, ‘Free Comb with Pagoda’. The NFT was created without the permission of the copyright owner (the late artist’s estate) and was removed from its hosting forum. See the article here

There are multiple cases of NFTs being created using work that infringes copyright or trade mark rights. The risk to a buyer, is that you end up owning a worthless NFT, and you could become a party to infringement proceedings.

It is impossible to eliminate risk when buying an NFT, however by taking steps to assure oneself of the provenance and authenticity of a work connected to an NFT can help to reduce the risk of buying an infringing work.

Conclusion

NFTs are still relatively new as a concept and asset. All too often it is unclear as to the rights accompanying an NFT (if any!) and what rights may have been infringed in their creation.

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