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Ten things to know about NFTs

Hayleigh Bosher, Senior Lecturer in Intellectual Property Law at Brunel University introduces Non Fungible Tokens (NFTs) and tells us how they have been used in the music world, in this blog, originally published on TheIPKat.

1. NFTs enable the sale of new media

A Non-Fungible Token (NFT) is a blockchain-based token, or unit of value, with a unique ID that is linked to a specific asset. The non-fungible part means that it is something that has unique value based on the buyer’s sentiment and/or market dynamics. The owner of an NFT essentially has a link to a digital asset, owning a certificate of authenticity that is publicly verifiable on the blockchain.

In practice, what this means is that a whole new market has been opened-up as NFTs have provided a system that has enabled the sale of digital items by transforming them into collectables, such as a tweet.

This said, of course, NFTs are not the only way that digital assets can be marketed and sold. Digital assets can be protected by intellectual property and have always been capable of being licensed or assigned via a contract, or protected as a trade mark. For example, the owners of the famous ‘Grumpy Cat’ meme licensed the use of the name, image and likeness of the cat – and successfully enforced these rights. The ‘Disaster Girl’ meme was also minted as an NFT.

2. Not all NFTs are a success

There are headline examples of success, but equally there are also many failed examples of unsold NFTs. Despite the hype, it is a niche market, and purchasers are just as often speculative investors as they are fans or collectors. Successful NFTs that were lucrative for the seller include, for example, the band Kings of Leon who reportedly generated $2million from NFT sales of their album, which was minted alongside other benefits including artwork, a vinyl, and for six buyers, lifetime front-row seats to Kings of Leon headline gigs.

As stated, there are also many unsuccessful NFTs that never sold, including some of those mentioned above minted by Kings of Leon. When NFT platform Serenade partnered with the Brit Awards to create NFTs, Adele’s Artists of the Year Award sold out in 30 minutes, but many others, such as Olivia Rodrigo, Sam Fender, Dua Lipa and Becky Hill, are yet to sell out at all.

Despite the uncertainty around the long-term success of NFTs, we have certainly seen a ‘land grab’ from brands filing trade marks, including ITV (for Love Island), Heineken and even The Empire State Building.

NFTs can now count towards sales for the purposes of the Official Charts. Muse recently raced to the top of the charts with their album sales which included NFT purchases. However, be aware of misleading headlines - it is important to know that they sold 51,500 copies of their album, and only 1,000 of those were NFT sales. This means they would have still hit number one without the NFT sales, which amounted to 1.96% of sales.

3. NFTs are legal property

A recent case in the High Court recognised NFTs as property under the law of England and Wales. The case was brought by Lavinia Deborah Osbourne (founder of Women in Blockchain Talks) against Ozone Networks (trading as OpenSea) in January 2022, after two NFT artworks that she had purchased from the Boss Beauties collection were taken from her digital wallet without her consent. Osbourne sought a freezing injunction ‘restraining the dissipation of non-fungible assets alleged to have been stolen by persons unknown from a crypto asset account maintained by the claimant.’

In a landmark ruling, the High Court recognised NFTs as legal property. In granting the order, Judge Pelling QC stated:

‘There is clearly going to be an issue at some stage as to whether non-fungible tokens constitute property for the purposes of the law of England and Wales, but I am satisfied on the basis of the submissions made on behalf of the claimant that there is at least a realistically arguable case that such tokens are to be treated as property as a matter of English law.’

4. They are not intellectual property

An NFT does not give any intellectual property rights in the collectable to the purchaser; in the same way that a purchaser of a vinyl owns the tangible property, but does not have any rights to the song. Except, of course, that rights in physical goods such as vinyls can be exhausted (meaning that IP rights cannot be used to stop the further distribution or resale of the goods)

No such limitation applies to digital goods, because exhaustion does not prevent other IP rights, such as reproduction and communication to the public, from being enforced. In any event, the licence will determine the rights afforded to the purchaser, which usually confirm that no copyright ownership is passed, and that the purchaser is prevented from adapting, reproducing, or communicating the work to the public.

I am of the view that the copyright artist resale right should also apply to NFT digital art, meaning that when it is resold the original seller receives a percentage of the subsequent sale. The purpose of the resale right is to compensate the author for the loss of control over their work by granting them remuneration for each successive sale and therefore seems appropriate in these circumstances. Many platforms already incorporate this clause into their terms and conditions, but not all do.

5. They can infringe IP rights

It is possible, although not necessarily lawful, for anyone to create an NFT.

Whilst some platforms might take steps to verify that the person minting the NFT has the rights in the collectable, infringement disputes have already arisen. There have been disputes where the NFT creator has flagrantly minted others' copyright-protected works (such as HitPiece, which attempted to create NFT songs without permission from the rightholders). There have also been complaints where creators have tried to NFT their own creativity but by doing so have breached a contract. For example, production company Miramax is suing director Quentin Tarantino for breach of contract, unfair competition, copyright and trade mark infringement, after Tarantino announced an auction of seven 'never-before-seen' scenes of his handwritten Pulp Fiction script in the form of NFTs.

It is infringement to mint an NFT of a protected work without the permission of the rightsholder. This can apply even to the creator, where they have contracts and agreements in place that control the use of their own work. The defendants in these cases will be the sellers since the platforms are protected by a warranty in their terms and conditions.

6. Terms and Conditions apply

The terms and conditions of the NFT market platform are important and determine the ownership of rights in the NFT as well as who bears the risks (usually not the platform) and who receives what remuneration. The terms of ownership and remuneration vary between platforms.

One key thing to look out for (other than the warranties mentioned above) is ownership. Some platforms require the NFT seller to surrender an extremely broad scope of rights, which may impact on the exclusivity, and therefore the potential value, of the collectable.

7. There is a risk of not making a return

Recent data shows that sales and profits of NFTs are slowing

8. Be aware of false advertising and ASA standards

As a result of the reality of the risks and the generously optimistic advertising (hype) the Advertising Standards Agency (ASA) has launched a wide-ranging review of the issues surrounding NFT advertising, which they have stated will lead to action to address any potential problems that they identify.

Ex-Footballer Michael Owen deleted a tweet claiming that his NFTs will be ‘the first ever that can't lose their initial value’, after the ASA considered that the tweet was likely to mislead consumers.

9. NFTs can be stolen

NFTs can be stolen - they are only as secure as the digital wallet they are stored in – as was the fate of actor Seth Green's Bored Ape NFT. Even though blockchain is a public ledger it is not always possible to identify the perpetrator, such as in the Lavinia Deborah Osbourne v Ozone Networks case mentioned above. This, alongside jurisdiction issues, creates challenges for enforcement.

10. They carry a heavy environmental impact

Lastly - although slightly off topic for IP, but still relevant when thinking about buying, selling or advising on the topic - it is important to be aware that NFTs carry a heavy carbon footprint, because they depend on blockchain and energy-intensive computer functions. However, some platforms are moving towards solutions and claim to be more environmentally friendly.

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