The Rise (and Fall) of NFTs from an IP Perspective

While their advent was initially hailed as a revolution for the creative industries, non-fungible tokens (“NFTs”) appear to have lost significant steam over the past months with the Wall Street Journal reporting that NFT sales have dropped by 92% over September 2021 figures.[1]

But, what, exactly are NFTs? Are they eligible for protection under intellectual property laws? Or are they merely the foremost Veblen good of the crypto era?

NFT is an acronym for “non-fungible token” and within the realm of blockchain technology it refers to a unique digital identifier composed of a string of characters (“hash”) which is created (“minted”) for storage on a blockchain ledger.

Let’s begin with the basics. Fungibility is a characteristic of commodities whose individual units are interchangeable, replaceable, and exchangeable for equivalent units of the same value. The fungible asset par excellence is currency – in the sense that fifty €1 coins are equivalent to and may be exchange for five €10 notes or even a €50 note. On the other hand, a painting is non-fungible since it is unique and can only be exchanged for something completely different or, at most, similar.

On the blockchain, NFTs are differentiated from their fungible counterparts, cryptocurrencies. Unlike cryptocurrencies, NFTs may increase in value irrespective of fluctuations in the underlying currency used to purchase them; much in the same manner as collectibles.

It is highly debatable whether the NFTs themselves would be eligible for protection as works covered by copyright. While at face value they may appear to fall within the ambit of a “literary work” – insofar as an NFT’s hash is typically composed of letters and numerals – it is unlikely that they would be able to satisfy the originality threshold set out in Painer. [2]

Their rise to prominence has largely been tied with the underlying assets to which they relate – which have, by and large, been works of creative expression, typically protected by copyright.

One must be wary of the fact that an underlying digital asset tied to an NFT may not necessarily have been authorised by the respective right-holder(s), and may consequently infringe third party intellectual property rights.

Moreover, unless otherwise stipulated, an NFT purchaser does not acquire copyright over the underlying work, much in the same manner that a consumer who purchases a vinyl record does not acquire the right to broadcast the musical works stored thereon.

Essentially, NFTs act as a form of verification of authenticity (akin to a deed of ownership or certificate of provenance) for the underlying (digital or even physical) asset.

Blockchain technology has been widely praised for its security and immutability – owing to its decentralised nature and its use of cryptography. Accordingly, once they have been minted, NFTs are nearly impossible to replicate or appropriate clandestinely. It is no wonder, therefore, that they have been lauded for their potential to combat piracy and counterfeiting.

It is for precisely these reasons that various international brands have been well underway extending their trademark protection to cover NFTs. In fact, this phenomenon has been so pronounced that the European Union Intellectual Property Office (“EUIPO”) has even issued an official practice tip related to NFTs and virtual goods. [3]

The EUIPO has indicated that the terms “NFTs” and “virtual goods” lack sufficient clarity and precision[4] and further specification is required by trademark applicants seeking to extend protection to the aforesaid goods falling within class 9 of the Nice Classification.[5] As outlined by EUIPO, this issue may be surmounted by merely indicating the specific type of underlying asset to which the NFTs relate.

Despite the foregoing, one can envisage brand owners hitting a stumbling block when attempting to enforce their trademarks related to virtual goods in the digital realm, particularly in instances where these are replicated by persons who are acting for non-commercial purposes – insofar as the exclusive rights conferred on trademark proprietors are restricted to “use in the course of trade”.[6]

Copyright law may provide right-holders the solace they seek to restrict certain types of digital uses of their intellectual property assets, since the exclusive rights arising thereunder are not typically conditional on commercial implications. Rather, the mere acts of reproducing[7] or communicating a protected work to the public[8] are prohibited without the necessary authorisation of the right-holder(s). Here too, however, this is subject to the various exceptions or limitations to copyright arising under applicable law, assuming that the assets in question are eligible for copyright protection in the first place.

While it remains to be seen how game-changing NFTs will turn out to be in the long run, as with any emerging technology, they present both challenges and opportunities for intellectual property right-holders. However, at this juncture, they appear to be more useful as a tool for certifying the ownership or authenticity of assets rather than as an asset in their own right.