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Demystifying NFTs: technology, market and intellectual property

Published in: Intellectual Property
by Arlo Canella
Home > Demystifying NFTs: technology, market and intellectual property

As NFTs have now become mainstream, they are no longer a novelty in the world of intellectual property. Artists and creators are dabbling in the creation of NFTs and their commercialization, exploiting the potential of this new channel for commercial monetization. However, some clarity on this trend is still needed, as it requires expertise across multiple disciplines.

What is an NFT: definition and commercial applications

The trend of NFTs applied to art initially burst out with the case of Beeple, the digital artist who sold an NFT work titled “Everydays: The First 5000 Days” for $69 million through Christie’s auction house on March 11, 2021.

Now, a Non-Fungible Token (NFT) is a technological tool that can be used to prove the uniqueness and exclusive ownership of a digital asset. It differs from cryptocurrencies such as, for instance, Bitcoin or Ethereum, as these are fungible, i.e., exchangeable.

Conversely, the term “non-fungible” implies that each token is unique, not replicable or exchangeable for another NFT. Hence, while cryptocurrencies can be traded with each other because they are identical in value – e.g., one Bitcoin is always equivalent to another Bitcoin – each NFT is unique just as a work of art is unique.

Such uniqueness is provided by blockchain, a technology that is part of the distributed ledger system and thatdocuments asset ownership and source in a transparent and safe manner.

To this extent, as noted just above with the Beeple case, NFTs have revolutionized the art market by allowing artists to sell “unique” or “limited edition” digital works, mirroring what happens in reality with traditional art pieces.

NFTs have also become prominent in the world of music, sports and entertainment. As a matter of fact, NFTs allow entertainment personalities to monetize their notoriety and thus their image in an innovative way, for instance, by selling exclusive gadgets, music tracks or special collections directly to fans, bypassing the traditional approach of the industry to which they belong.

In the gaming industry too, NFTs allow players to own unique accessories or even land in virtual worlds, which can also be marketed independently of the games themselves, offering new forms of investment.

Although the NFT trend has lost some of its initial momentum since the peak of interest corresponding to the rebranding of Facebook to Meta announced by Zuckerberg on October 28, 2021 (inspired precisely by the Metaverse concept), the NFT phenomenon remains one of the most interesting and discussed of the contemporary era, especially in association with the concept of intellectual property.

What relationship between NFT and intellectual property?

NFTs have led to much confusion among those who do not deal professionally with intellectual property. As NFTs are often associated with digital representations of works of art, merchandise, branded products, and even snapshots of memorable sports moments, they have raised a great deal of debate about the rights associated with owning NFTs and transferring them through online trading.

When you buy an NFT, as we have seen, you buy proof of ownership of the token on a blockchain, but this does not automatically imply ownership of the intellectual property rights to the digital work associated with it. Those rights, unless proven otherwise, remain with the author of the work or the owner of the trademark, copyright or image rights, unless they are explicitly transferred through a contract associated with the transfer of the token.

As an example, an artist can sell an NFT of a digital work while keeping the copyright for himself, allowing the buyer to own a unique piece or a limited edition provided with a kind of “digital certificate” regarding the authenticity of the work, but not the right to reproduce or distribute it.

The situation can be said to be totally legally identical to what happens with the purchase of a tangible work of art: by buying the original, or a limited edition, one does not buy the right to… make a collection of t-shirts and market them!

All in all, the purchase of an NFT gives the owner several specific rights, outlined in the smart contract associated with the token. These may include the right to resell the NFT, to display it in digital environments (such as virtual galleries or games), or to use it as an avatar in digital platforms. However, unless otherwise specified, the purchase does not include rights to modify, copy, or commercially exploit the original work associated with the NFT.

The distinction between owning an NFT and owning intellectual property rights in the related IP asset is crucial: owning an NFT means holding a token that proves ownership of a digital link to the work, but not necessarily the rights to use, create derivative works of, or distribute the intangible asset (Read more: NFTs, trademarks, and football clubs: the first Italian ordinance on the subject). These IP rights typically remain with the author or rights holder, unless an explicit agreement (which should be part of the NFT assignment agreement) provides otherwise.

The business of NFTs: from creation to trading

The rise of the phenomenon has led to the development of several online platforms that ease their creation and sale of NFTs. Tools such as OpenSea, Rarible, and Mintable allow artists and creators to digitize their artworks and turn them into Non-Fungible Tokens.

These services offer an intuitive user interface that allows an artwork to be associated with an NFT on blockchain, thus ensuring authenticity and traceability. However, in addition to the technological component, it is important to take care of the legal and contractual aspects related to the creation and transactions involving NFTs.

A proper contract is important to clearly establish the rights of the creator and purchaser of the NFT, preventing disputes and ensuring that all parties are aware of their rights and obligations. A well-structured contract eliminates ambiguities and protects both the creator and subsequent owners of the work.

The contract accompanying an NFT should include at least:

  • A clear specification of who the creator is, what rights are associated with possession of the NFT (e.g., of display and/or possible commercial exploitation);
  • The conditions under which the NFT can be sold, traded, or transferred, specifying the rights that are actually assignable to subsequent owners and those that are not;
  • The guarantees by the creator and/or seller as to the legitimacy of the NFT and the lack of third-party claims that might affect the original work.

In view of the value that these collectibles sometimes manage to achieve, the transfer or purchase of them must be handled carefully, especially in terms of preliminary verifications and, then, in contractual terms. It is usual to have pieces of art of great value appraised, prior to purchase, so there is no reason to adopt similar shrewdness by moving in the so-called metaverse.

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Publication date: 27 April 2024
Avv. Arlo Cannela

Avvocato Arlo Canella

Managing Partner of Canella Camaiora Law Firm, member of the Milan Bar Association, passionate about Branding, Communication and Design.
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