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WHAT ARE NFTS AND THE IPR SIDE OF IT?

INTRODUCTION

Non Fungible tokens (NFTs) are the talk of the town, and for quite a while now. In the recent past, we heard about many artworks being sold in millions as NFT, be it Beeple’s digital artwork or a tweet by Jack Dorsey (co-founder of Twitter). The NFTs have risen to fame among the millennials during the previous year. The concept is still new to many people as the NFTs sudden climb to the charts has left a large chunk of commoners in a state of awe. NFTs have revolutionised the concept of ownership of artwork, by providing a new platform for such transactions. Not only for the general public but the lawmakers as well, NFTs have come as a pandora’s box. NFTs being a new platform for ownership of artwork, there are many challenges for the lawmakers with regards to the Intellectual Property (IP) rights, copyrights, trademarks, etc. To bring some clarity to the relation between IP rights and NFTs, it would be pertinent to first understand what are NFTs, how they work, how are they different from cryptocurrency, what are the rights of the owner of an NFT, and under which laws are these covered.

What are NFTs: opening the pandora’s box

Non Fungible Token is a unique digital identifier that cannot be copied, substituted, or subdivided, that is recorded in a blockchain, and that is used to certify authenticity and ownership (as of a specific digital asset and specific rights relating to it). According to this definition, NFTs are like a token that is sold digitally and cannot be further reproduced and can be authenticated. NFTs can be said to be digital collectables or assets representing artwork, real-life objects, music, etc. NFTs can be used to digitise real-world tangible assets and then sell them digitally. The NFTs don’t restrict the supply of any digital artwork, i.e., the digital artwork can still be shared throughout the internet. NFTs rather just identify the owner of the item through its unique identification system. Essentially, NFTs are cryptographic tokens having unique identification, so that they cannot be replicated. This unique identification allows to trace and authenticate the owner of artworks, and real-life objects easily. Not only does the owner of an NFT keep the original piece of art but NFTs also prove to be a stamp of authority with regards to their own as well. It contains built-in authentication, which serves as proof of ownership. Each NFT is unique. Each has a unique identifier that makes it inconceivable for NFTs to be traded for or equivalent to each other (hence, non-fungible).

How does NFT Work

The makers of NFTs sign up to an NFT commercial centre where they compose a code that then, at that point, turns out to be essential for the blockchain that they are utilising for the exchange. This code gives fundamental data and the properties of the NFT like its area, outside the blockchain. Along these lines, any individual who buys an NFT is provided with a computerised declaration through which they can prove their ownership for that work. By and large, NFTs are bought through a course of an internet auction, similar to the manner in which auctions are conducted at Christie’s, Sotheby’s, or other sale houses. While the bidding system can marginally vary in view of the platform utilised for transactions, normally there is a floor price set by the creator, and offers are opened for a particular time period. All exchanges connected with the NFT are recorded on a blockchain. Mode of payment can vary, like for certain platforms permit only ETH (Ether-cryptocurrency of Ethereum blockchain). The Beeple sell-off at Christie’s, for example, was off-chain for bidders as they were permitted to offer in both actual cash and ETH to improve its outreach. This was done despite the craftsmanship being stamped on the Ethereum Blockchain.

NFT and its relation to Intellectual Property Rights

Intellectual property rights are the rights that are given to a person/organisation over the creation of their minds, such as inventions, literary and artistic works, designs, symbols, names and images used in commerce. Intellectual Property rights grant the owner exclusive rights to use, replicate, or sell their work. Ownership of NFT does not come with copyrights over that article. As per sec.14 of the Copyright Act, 1957, a copyright owner has several exclusive rights over the artistic work, which includes the right to reproduce, make replicas of the original artwork. NFTs are just a mere showcase of owning something over the internet, as the copyright over that article still remains with its creator. Unless explicitly specified in the sale agreement, the copyright is not transferred with the NFT. However if at all the NFT owner wants the IP rights over the artwork, it can be done through licensing. The copyright owner can sue if any of his/her rights are infringed on the artwork. The infringement usually happens when someone without any prior consent from the owner of the copyright, does something which falls under the purview of the exclusive right of the owner. The principles of Infringement are extensively under section 51 of the Copyrights Act, 1950. In case of any infringement, the copyright owner does have civil and criminal remedies available stated under sections 55 and 63 of the Copyrights Act, respectively. Other than the IP rights over the artwork, the NFT owner does not get possession of original artwork, he/she is rather provided with the authenticated copy of the artwork. Ownership of NFT generally implies that an authenticated copy of the original artwork is being sold to the owner. The main purpose of NFT is to manifest the authenticity of the artwork and its owner, over the internet.

NFTs and Patents

A patent is an exclusive right that is granted over a product or a process, which is in a broad sense something new or a solution to an issue at hand. In India, patents and the activities related to them are governed by the (Indian) Patents Act, 1970. NFT involves the usage of technology that is unique in its own way. Blockchain platform owners can patent their technology if it is novel and fits the criteria for licensing as prescribed in the Patents Act, 1970. A patent will give the patent owner exclusive right to decide on who uses the technology, which in turn may make the NFTs more valuable, and more sought after. Recently Nike got the patent for “[a] system and method for providing cryptographically secured digital assets”, which identifies a system for minting, exchanging, and intermingling cryptographic digital assets in the form of digital shoes, which can each be linked to a real-world physical shoe.

Conclusion: The way forward

In the modern internet-driven world, and concepts like metaverse growing vehemently, NFTs are gaining traction very rapidly. Currently, there is no mechanism in India that governs NFT transactions. The sale and purchase of NFTs are taking place with minimal checks as till now there is no specific law regulating these transactions. Regulations are a must to keep a check on fraud that may happen during the course of a transaction, as the NFTs are not governed by any central body making the chances of fraud highly probable. From the IP rights point of view, there is no well-defined law that deals with NFTs. As a buyer, there is always dubiousness with regards to the authenticity of an NFT, as there is no mechanism to check the authenticity of the seller. It is pretty normal to observe manifestations of this issue, for example, when somebody tokenizes an artwork that isn’t theirs and sells it while disguising themselves as the first owner. The copyright act does provide for remedies to the owner of the copyright, but there is no remedy provided to the person with whom this fraud is conducted. This highlights the fact that a well-defined law is the need of the hour in order to regulate these transactions and keep a check on them. NFT is a growing sector just like cryptocurrency and the metaverse, and it opens up a lot of opportunities for the Millenials to sell artwork or invest in it as well. However, in order to maintain the smooth functioning of NFTs, the Government does need to come up with a well-structured mechanism so that no one is deprived of his/her rights and can explore this emerging new sector.

Author(s) Name: Satvik Tewari (ILS Law College, Pune)