Non-fungible tokens (NFT)

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NFT

NFTs are digital tokens that are non-fungible and therefore unique. A cryptocurrency like Bitcoin is also a digital token; however, one Bitcoin is fully interchangeable with another. The interchangeability of a Bitcoin ensures that it does not matter which Bitcoin is owned. After all, the underlying value of one Bitcoin does not differ from that of another.
NFTs differ from other digital tokens in that interchangeability or substitutability is lacking. This makes NFTs unsuitable for containing cryptocurrency: after all, the core of a currency is the mutual interchangeability of coins. For this reason, NFTs are highly suitable for containing digital objects such as art or music. NFTs can also be used for digital value objects in, for example, games and virtual environments such as a metaverse. NFTs, like cryptocurrency, are connected to a blockchain and are therefore decentralized.

Blockchain

Blockchains have been around for a while now and are already part of many people's vocabulary. Nevertheless, here is a brief explanation of exactly what a blockchain is.

A blockchain is nothing more than an interactive, online, decentralized database. That might sound like a mouthful, but in essence, it is less complicated. A classic database stores information in the form of tables (think, for example, of how series of data can be entered into Excel). A blockchain stores information in a different way, namely in pieces or blocks. The moment a block is filled with information (for example, information about transactions), the block is permanently added to the chain. The difference in data storage is fundamental. In a normal database, one can change, delete, etc., individual data inputs. A blockchain is designed so that this is not possible. The moment a block of data is "attached to the chain," as it were, the data is immutable. Moreover, the blockchain creates a self-sufficient verification system for the data. A block must correspond to and match the entire timeline of the entire chain. As a result, 10 cannot suddenly become 100; in other words, data in the blockchain cannot be altered. Besides cryptocurrencies and NFTs, blockchain technology has many more applications. These applications are therefore becoming increasingly popular.

NFTs & Intellectual Property

NFTs are widely used for digital art today. The creator of online art holds copyright on the creation, just as with physical art. When a buyer purchases digital art in the form of an NFT, what exactly is being purchased?

That depends entirely on the underlying smart contract. An NFT can:

• contain ownership and exclusive right of access to the original artwork
• be only a certificate of ownership of the artwork
• only a unique token or link that represents the value of the underlying artwork

The purchase of an NFT does not entail the transfer of copyright.

In principle, it can be agreed during the purchase or sale of physical art that the copyright is transferred upon the sale. However, this must involve a direct purchase of art from the copyright holder (the creator), because the copyright holder is the only one who can make the transfer legally valid. The moment a copyright has been transferred by the original creator, that copyright, like the art itself, is naturally marketable.

Technically, therefore, it should be possible to transfer copyright in the case of NFTs to the buyer. The problem, however, is that the purchase of NFTs takes place via so-called smart contracts on the blockchain. For the transfer of copyright, the Dutch Copyright Act requires a deed (Article 2). There is uncertainty as to whether the Dutch legislature or courts classify a smart contract as a deed within the meaning of the Copyright Act.

A Non-Financial Transaction (NFT) can infringe copyright. As a copyright holder, it is necessary to seek expert advice regarding the risks and possibilities. We have the knowledge and expertise to assume various roles: from advisory services to dispute resolution. We have an experienced team of lawyers and legal experts in the field of NFTs and intellectual property. Contact us to discuss the possibilities.

Is an NFT itself an intellectual property right?

A common misconception is that an NFT is in itself an intellectual property right (IP right), comparable to copyright or trademark rights. This is not the case. An NFT is not an IP right, but a digital property certificate: a unique certificate of registration on the blockchain that refers to an underlying object. Anyone who buys an NFT acquires the economic entitlement to that token, but not automatically the underlying copyright, trademark right, or other IP right. Those rights remain with the creator or the rights holder, unless expressly agreed otherwise. This is because a valid transfer of an IP right always requires both a valid title and an act of delivery; mere possession of a token is insufficient for this. For the connection with other IP rights, we refer to our core expertise in Intellectual Property (IP Law).

NFTs and trademark law

In addition to copyright, trademark law is playing an increasingly important role in NFTs, virtual goods, and the metaverse. A trademark registered for physical products or services does not automatically protect the use of that trademark in the digital world. Therefore, trademark holders are increasingly registering their trademarks for virtual goods and services (in practice, often in Class 9 of the Nice classification for downloadable digital files and virtual goods). Anyone who uses an existing trademark in or associated with an NFT without permission risks trademark infringement: it is not permitted to use a sign that is identical to or resembles a registered trademark for similar goods or services. High-profile international proceedings concerning digital counterfeit products show that judges take trademark protection seriously in the virtual context as well. For entrepreneurs, this means two things: protect your own trademark in a timely manner for digital applications as well, and check before minting whether you are not using someone else's trademark.

Minting without permission: copyright infringement and liability

Creating (minting) an NFT based on someone else's work is simple, but legally risky. Anyone who mints an NFT of a protected work without the permission of the rights holder and trades it directly infringes copyright and is liable for it. The rights holder can then claim, among other things, an injunction, damages, and disgorgement of profits. Moreover, in proceedings concerning infringement of intellectual property rights, a broader award of legal costs applies pursuant to Section 1019h of the Dutch Code of Civil Procedure, meaning that the losing party, in principle, bears the full reasonable and proportionate legal costs of the opposing party. This makes it all the more important to thoroughly map out the chain of rights before minting or trading an NFT.

Licenses, royalties and resale

Since the purchase of an NFT does not, in principle, entail a transfer of copyright, it is important to carefully define the usage rights. The smart contract and its accompanying terms and conditions can specify exactly what the buyer is permitted to do: only personal use, or also commercial exploitation. Some projects opt for a broad license or even release via a Creative Commons license (including the CC0 model, in which the creator waives their rights). Additionally, many creators include a royalty arrangement in the smart contract so that they automatically receive a percentage upon every resale. Whether such a programmed royalty is legally enforceable, and how it relates to the statutory resale right of visual artists and the exhaustion of the distribution right after the first sale, is a matter that requires assessment on a case-by-case basis. A clear licensing and royalty structure prevents subsequent disputes between creator, platform, and buyer.

What MKB Juristen does for you regarding NFTs and IP law

NFTs, blockchain, and the metaverse touch upon virtually the entire field of intellectual property law: copyright, trademark law, and the surrounding contract law. Our mixed teams of lawyers and (in-house) legal counsel advise and litigate in this area, ranging from the international corporation launching a global NFT collection to the baker around the corner seeking digital protection for their brand or design. We draft smart contract terms and licenses, register and enforce trademarks for digital applications, take action against infringing mints and counterfeiting, and advise on the risks and opportunities of blockchain applications. Please feel free to contact us to discuss the possibilities for your specific situation without obligation.