NFTs and the IP conundrum

The era of digital abundance 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 created unsettled legal issues regarding ownership and IP, writes Patrick Tan

Blockchains 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.

Do NFTs confer copyright?

Because it isn’t immediately apparent that ownership of an NFT grants copyright to whatever digital asset the token represents, the creator may sell an NFT representing their work, and isn’t precluded from creating more NFTs of that same work. From that perspective, an NFT is merely a proof of ownership that is separate from copyright, unless the copyright in the underlying work has been explicitly transferred. In that case, any licensing of the copyright in the underlying digital asset would need to be orchestrated separately.

There is an established precedent that finds copyright doesn’t protect facts, data or ideas. Still, an argument could be made that where a digital asset’s creation process is intertwined with an NFT, the NFT itself forms an integral part of the expression, and therefore embodies the copyright.

For instance, where a digital artwork had no prior existence up to the point that it was minted as an NFT, an argument could be made that the artist intended the NFT to embody the copyright in that creation, and the sale and transfer of that NFT would constitute a transfer of ownership in the copyright.

Even if the minting of the NFT was not inextricably linked to the creation of a digital asset, a case could still be made that a creator, by minting an NFT linked to the artwork, intended to confer the copyright in the digital asset onto the NFT.

Existing Singapore copyright law arguably provides for such a possible interpretation. In the Copyright Act, sections 4, 7A and 27 make it clear that copyright subsists in an original published work, which includes a compilation that, “by reason of the selection or arrangement of its contents, constitutes an intellectual creation”.

In Feist Publications v Rural Telephone Service Company (1991), the US Supreme Court noted that a compilation of facts, specifically a selection or arrangement of the facts, was original and could, as such, conceivably be eligible for copyright protection, although the justices in that case found that the copyright conferred in such a case would be “thin”.

It could reasonably be argued that a digital creation, encapsulated and tagged to an NFT, could be viewed as a compilation that is sufficiently novel as to confer copyright on the NFT itself.