NFTs and the IP Conundrum

The era of digital expansion has seen non-fungible token (NFT) transactions growing from USD62.8 million in 2019 to a whopping USD250.8 million in 2020. But this growth has also promoted unsettled legal issues regarding ownership and IP, writes Patrick Tan

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lockchains are immutable, decentralised digital ledgers of transactions of the sort that underpin well-known cryptocurrencies like Bitcoin and Ether. The cryptocurrency and blockchain are characterised by an open-source ethos and culture of experimental development that have led to the speed and progress of advancement that are emblematic of the space.

The same ideology has also made possible rampant abuse and misuse, and forced lawmakers and regulators to pay closer attention to the nascent sector. In this regard, NFTs have opened up a Pandora’s box with respect to the enforcement of IP rights, where the value ascribed to an NFT as a whole is greater than the sum of its parts. It would be fair to say that, for a vast majority of NFTs, the digital asset that underlies the NFT is often of dubious value – a simple inspection of CryptoPunk #7610, which was purchased by payment services giant Visa for an estimated USD250,000 worth of Ether, provides one such example.

What are NFTs?

The idea of creating NFTs on the blockchain is not new. Soon after Bitcoin was created, the idea of so-called “coloured coins”, or specially marked Bitcoin, was floated with the idea that these coins could be tied to property ownership or manage real world assets. While Bitcoin’s coloured coins never really took off, Ethereum’s NFTs did. Because NFTs are units of data stored on the blockchain that can be sold and traded, smart contracts on Ethereum made it possible for self-executing sale-and-purchase agreements that were tied to NFTs.

A purchaser would simply transfer cryptocurrency into a smart contract to purchase an NFT, and the smart contract would automatically update the blockchain that the NFT would now be tied to a different digital wallet address. Beyond smart contracts, NFTs could be associated with digital and physical assets, including such licences to use the asset for a specified purpose.

NFTs residing on the blockchain also provide a natural provenance, with a string of records of cryptographic hash, a set of characters identifying datasets and previous records, creating an unbroken chain of identifiable data blocks. (Hash functions are mathematical functions that transform a set of data into a bit string of fixed size). With the unique identity and ownership of an NFT verifiable via the blockchain ledger, NFTs have become a way for artists and content creators to monetise digital art, photos, videos, audio and other digital files by selling NFTs, which are analogous to certificates of authenticity.

Although NFTs are typically associated with a licence to use the underlying digital asset, it generally does not confer the copyright in that production to the buyer. Some agreements only grant the NFT buyer a licence for personal, non-commercial use of the underlying digital asset, while other licences also allow commercial use.

Because the bulk of legal issues with respect to NFTs are likely to revolve around IP, it is helpful to analyse NFTs in the context of copyright law, which will turn on the related issues of subsistence and infringement.

This analysis poses three questions in sequence: First, whether copyright subsists in a work, in this case, the NFT; second, whether the copyright has prima facie been infringed; and third, whether any defences apply.