Non-fungible tokens (NFTs), digital records linked to digital images, videos, audio files, or 3D models, have drawn wide attention recently. Last year, the New York State Bar Association launched a task force to examine digital assets. The United States Patent and Trademark Office and the U.S. Copyright Office just stopped receiving public comment for their ongoing joint study on NFTs and related intellectual property law issues on February 3, 2023.
NFTs are known for their sky-high prices. For example, “The Merge” was sold for $91 million and is said to be owned by 30,000 people collectively. The most expensive NFT owned by a person is named “The First 5000 Days,” which was sold for $69 million. Some NFTs have 10,000 different versions. Notable examples are CryptoPunk and Bored Ape. Each Punk or Ape may cost $80,000. But not all NFTs are expensive. Many NFT trading cards cost less than ten dollars. Unlike static trading cards, NFT trading cards present as video clips highlighting glorious moments of athletes or celebrities. Many NFTs below one dollar can also be found on the OpenSea website before adding the gas fee, a fee for processing NFT transactions.
The invention of the NFT intended to solve the authenticity and ownership concerns about transacting a piece of digital artwork over the internet. The first concern is that digital files can easily be reproduced and distributed over the internet. How can we tell which one is the original? Second, how do we prove the ownership of a piece of digital artwork? To address these concerns, the idea to combine NFTs with original digital artworks was born.
Once an artist creates a digital artwork and plans to sell it online, the artist can go to an NFT website like OpenSea to mint an NFT. The NFT contains the artwork’s basic information, such as the artwork’s name, external link, and description. An NFT performs as a certificate of title for a piece of digital artwork, which is stored on the blockchain, a system that stores data in the form of a series of blocks across a network of multiple computers. Each NFT has a unique combination of a token ID and a contact address. There are no two identical NFTs. After the NFT is transferred, the previous owner can no longer transfer the same NFT to a third person. In addition, NFTs benefit the artists. The smart contract, a small computer program, controls the transaction of NFTs and executes automatically when some conditions are satisfied. For example, the smart contract automatically shares a specific percentage of the resale price with the artists when a resale occurs.
NFT information is stored in a digital wallet, like a bank account holding the account holder’s bank balance. The buyer shares his digital wallet IP address with the seller so that the seller can transfer an NFT to the buyer’s digital wallet. Transferring an NFT from one digital wallet to another requires a private key, similar to a banking account’s PIN. Only the NFT owner holds the private key. If the private key is incorrect, the blockchain will refuse to record the transaction. Through this process, the buyer trusts the seller’s ownership. The transaction process is entirely anonymous, so the parties’ real identities are kept secret.
It is critical to note that an NFT is only a title certificate for the artwork, not the underlying artwork itself. The artwork is usually not stored on the blockchain but held elsewhere. If the website or file system storing the digital artwork is shut down or hacked, the artwork can go missing. Also, the NFT owner needs to remember his or her private key, otherwise he or she can no longer access his or her NFT. If his or her private key is stolen, his or her NFT may even be moved to another digital wallet.
Like IP concerns with physical artwork, there are IP concerns regarding the digital artwork connected to NFTs. First, an NFT may connect to a public-domain artwork no longer copyrighted. Such an NFT is worthless because everyone can use the underlying artwork. Moreover, some NFT makers use algorithms to generate the underlying artworks. Nonetheless, copyright law does not protect an AI-generated artwork if it lacks any human authorship. Such artwork also may not be eligible to be registered a trademark if it is a single work, not indicating a collection or series.
Second, the existence of an NFT doesn’t guarantee that the NFT maker has the right to make the NFT. There is no upfront mechanism to verify whether an NFT maker has the right to create an NFT for the underlying artwork. However, the copyright owners may notify the NFT platforms to take down the “copymints” afterward, according to the Digital Millennium Copyright Act (DMCA). Moreover, some NFT makers have been accused of trademark infringement. For example, the creators of the “MetaBirkins” and “Vault NFT” were charged with infringing Hermès’ and Nike’s trademarks, and a court has held the MetaBirkins NFT maker liable for trademark infringement.
Third, owning an NFT doesn’t necessarily mean owning the copyright of the digital artwork unless the copyright holder transfers the copyright expressly. If the author keeps the copyright, he or she can freely create as many NFTs as he or she wants. Though each NFT is not identical, multiple NFTs can refer to the same artwork. The NFT owner cannot reproduce or license others to use the artwork without the copyright owner’s consent.
In conclusion, many people consider NFTs valuable digital assets, and NFT applications are expanding. But not all are aware that an NFT and its associated artwork are separate and may be stored in different locations, much less know the distinction between NFT ownership and the artwork creator’s IP rights. Before executing an NFT transaction, the buyer must confirm the NFT maker’s right to mint the NFT and ascertain what IP rights will go with the transaction. Further, the NFT buyer also has the responsibility to keep his or her private key safe and check whether the digital artwork is stored securely after the transaction.
Author: Chieh-Li (Jerry) Pai
New York & Taiwan Attorney; S.J.D. Candidate at Indiana University Maurer School of Law