NFTs and Intellectual Property Rights: An Overview of the Legal Framework

NFTs and IP Rights

NFTs and Intellectual Property Rights: An Overview of the Legal Framework

Intellectual property law is a rapidly expanding area of law; it is also a growing challenge for businesses today. As companies come up with new products and services every day, they are also constantly trying to protect their proprietary intellectual property.

Non-fungible tokens, or NFTs,  are a growing concern for companies today. Not only do they pose a threat to the existing supply chain and production processes; they also create challenges for businesses in managing the intellectual property and the related risks. This blog will provide an overview of the legal framework governing NFTs and intellectual property rights, including the primary legal principles, their scope, and their implications for businesses.

Introduction

NFTs are computerised tokens that can be used to store data and perform transactions. They can be issued and traded by any organisation and are considered as assets in the same way as stocks, bonds, and other financial instruments.

Digital ledgers and smart contracts have made the creation of NFTs much easier. These are digital records that are created and managed by smart contracts. They are similar to accounting ledgers and databases, but they are not susceptible to being altered, and are decentralised. This transparency ensures that all parties have access to the same source of information and can verify and audit transactions.

NFTs are also often referred to as digital assets, blockchain assets, or cryptocurrencies. Cryptocurrencies can be issued by government agencies or by private companies to serve as a medium of exchange.

Likewise, intellectual property rights are the rights granted to an author or inventor to control the commercial exploitation of the resulting product. These rights can take many forms, including the right to produce and distribute a product, the right to grant licenses to others to use the product, and the right to prevent others from using the product.

What are NFTs?

NFTs, or distributed ledger technology, is a type of software that creates a decentralised ledger system. The ledger records data and enables the exchange of assets via digital “tokens”, which are analogous to cash. These tokens could represent physical assets such as art, real estate, cars, or stocks, or they can represent the performance of a service.

The tokens are a representation of the underlying asset that is being exchanged. For example, a ticketing company can issue a digital token, which represents a ticket to a concert. The buyer can redeem the token for a ticket at the venue, while the seller receives payment in cryptocurrency.

Why should you consider NFTs?

NFTs are useful for several reasons. One reason is that they allow artists to monetise their creations without relying on third parties. Also, NFTs allow artists to capture some of the future value through royalties. That arguably will have a positive effect in motivating them to keep producing and improving their reputation, which in turn will directly benefit any pre-existing buyer of their art.

Another reason is that they provide a more secure and seamless way to manage intellectual property than traditional IP laws. For example, when you buy an NFT of an artist’s work you are ensured that this is digital, and conclusive, proof of authenticity; also, you can know how many authentic copies, if any, are out there and, thus, fakes will not crop up left and right. Effectively, the NFT is equivalent to that traditional artist’s signature at the bottom of their physical painting, but, unlike that signature, the token cannot be fraudulently replicated.

What are Intellectual Property Rights?

Intellectual Property Rights (IPR) are the rights granted to an author or inventor to control the commercial exploitation of the resulting product. These rights can take many forms, including the right to produce and distribute a product, the right to grant licenses to others to use the product, and the right to prevent others from using the product.

Intellectual property rights can be protected in many ways, such as by filing a patent, filing or registering a trademark, or using contractual agreements. In many countries, like the United States, these rights are protected by law.

IP law has developed to provide protection for innovators, so that they can profit from their ideas without fear of competition. While patents are typically associated with products, trademarks are more associated with services.

How to Acquire and Protect Intellectual Property Rights?

The acquisition of intellectual property rights is a critical stage in the lifecycle of a new product or service. This encompasses ideas and inventions as well as trademarks and copyrights.

There are various legal strategies to protect an idea or invention before it enters the market. These strategies can include filing for patents for the product or service, applying for trademarks or copyrights, or licensing the product or service to third parties.

Trademarks are the most effective and long-lasting form of intellectual property protection. They are words or symbols that identify the source of a product or service and set it apart from competitors’ offerings.

A good trademark name should be descriptive, but not confusingly so. The trademark should also be considered distinctive. A mark that might be confused with a descriptive term or one that has already been used as a trademark is less effective in establishing distinctiveness.

What are the main elements of a licensing agreement?

A licensing agreement must identify the works being licensed. It must specify which assets the licensee will receive in return for paying the licensing fee. Finally, it must define the scope of the license. 

Scope means that the licensing agreement specifies exactly what the licensee can do with the assets. For example, if the licensing agreement says that the licensee can only use the assets as decorations for weddings, then the licensee cannot resell them. If the licensing agreement says that the licensee is free to deal with the assets, then the licensee can resell them.

Assets means the specific pieces of content that are covered by the licensing agreement. For example, if a licensing agreement covers three different songs, then the assets would be the individual tracks.

Licensing fees means the amount that the licensor charges the licensee for using the assets. Licensing fees might be based on the number of assets transferred, the duration of the license, or other factors.

Why should you consider a Non-Fungible Tokens Licensing Agreement?

There are many reasons to consider a non-fungible token licensing agreement. Here are some examples:

  1. Intellectual Property Protection – When you protect your ownership interest in digital assets, you want to make sure that those assets aren’t lost. Unfortunately, once you sell or give away your asset, you lose control over its future. That makes it easy for someone else to copy and steal your work. With an NFT license agreement, you have the right to protect your IP rights. You get to set the rules about when and where your intellectual property may be sold.
  2. Digital Assets – One of the biggest advantages of owning NFTs is that you no longer need to worry about copyright infringement issues. Once you register your NFT, you can easily transfer and manage the associated digital assets via smart contracts and your copyright is easily provable 
  3. Access Control – With an NFT, you can control access to your assets. This could help you prevent unauthorised users from copying them. You can also restrict who has access to which assets.
  4. User Experience – An NFT license lets you customise the user experience around your assets. For example, you can let people use your assets as they see fit; or, you can limit access to your assets so that only authorised users can view them.
  5. Security – In addition to protecting your assets, an NFT license helps ensure that your assets remain secure. By restricting access to your assets, you reduce the likelihood that others can copy them.

In NFT license agreements, there are two main types of licenses:

The first type of license allows the owner of the token to sell it on any exchange at their discretion. The owner of the token is also allowed to use the token for whatever purpose he/she wants. For example, if I own a car, I am free to sell it on any online auction site.

The second type of license is called “Asset Transfer Restriction”. With this type of license, the owner of the token cannot transfer it to anyone else unless the new buyer agrees to certain terms and conditions. These restrictions include things like how long the asset can be used by the new buyer, whether the asset can be resold, etc.

Licensing Agreement in NFTs – Initial Sales and Secondary Sales

An NFT is considered as a unique item and is not a tradable commodity. It is meant to be owned rather than traded. Because of this uniqueness, secondary sales of NFTs are restricted.

Initial sales: If an NFT is initially offered through ICO, then the creator of the token will have full rights to sell the tokens in the initial offering. However, the creator will not be able to sell the same NFT again. A creator of an NFT would need to go through another round of fundraising after selling the tokens.

Secondary sales: After the initial sale of NFTs, the creators of these NFTs can offer the same NFTs to other investors. But, the sale of these NFTs should be done through private transactions. Only the seller can decide what price to charge for the NFT.

UK and the Regulatory regime for NFTs

In the UK the Treasury and FCA have stated that, for now, NFTs will remain out of scope of financial regulation. The main basis for that assessment is the non-fungible aspect of NFTs, ie they seem to operate as a unique or collector’s item rather than a financial product that is indistinguishable from another similar product. However, the UK regulators have clearly indicated that they are aware of the development of new trends in the NFT market and how these new NFTs may blur the boundary of non-fungible and fungible product. The government stated that it will closely monitor market developments and take further legislative action if required.

Conclusion

Non fungible tokens have many potential uses. However, the landscape is still uncertain and having a good legal agreement in place is necessary for success. Whether you are an artist, agent, marketplace, influencer, a legal contract that ensures your rights are to be respected will save you from wasting your time and energy into something that may not prove as lucrative as you originally thought.

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