By: Andrew J. Costa, Associate
NFTs are appearing everywhere lately from Times Square, to Louis Vuitton, to Sotheby’s, where pieces of an NFT art collection can auction for $12-$18 million dollars apiece! (See Sotheby’s “101 Bored Ape Yacht Club”). Yet despite their growing presence in our world, NFTs remain an elusive, confusing, or even concerning technology for many, even prompting comparisons to Enron after the collapse of FTX, one of the world’s largest cryptocurrency exchanges, and the arrest of its founder Sam Bankman-Fried for criminal fraud this past week. Senators Thom Tillis (R-NC) and Patrick Leahy (D-VT) of the Senate Subcommittee on Intellectual Property are among those in Washington D.C. seeking to better understand NFTs, presumably with an interest in future regulation. The Senators wrote the USPTO and Copyright Office in June to commission a joint study of NFTs, and on November 23, 2022 these agencies announced the start of public comments on the matter, and a series of virtual roundtables to discuss the impact NFTs on patents, trademarks and copyrights. While the results of this study will not be available for some time, in this post we will provide a brief overview of NFTs, explaining what they are and how they work, discuss some of their business uses and intellectual property considerations, and present some of the research questions the USPTO and Copyright Office seek to answer over the coming months.
NFTs, Blockchain and Minting, an Overview
The acronym NFT stands for “non-fungible token”, an equally nebulous name. It is easier instead to think of an NFT first as a kind of digital file, like an image, song, or GIF, because that is the part of the NFT with which we generally interact. In reality however, an NFT has two parts: (1) the forward facing digital file or “token” (the image, song, or any other digital “thing”); and (2) a record, linked to the file by metadata, that is stored on a blockchain ledger, and contains information about who created the NFT, who linked it to the blockchain and who has owned it throughout its history. (This video from Verge is an extremely helpful primer if this sounds confusing already!) This connection between a file and the blockchain ledger record is what truly makes an NFT an NFT, and different from any ordinary digital file. Unlike cryptocurrencies like Bitcoin that also exist on the blockchain but are fungible (i.e. every “token” of Bitcoin is the same and has the same value as every other token), an NFT is unique because it associates its ledger record with a specific file, rather than an arbitrary “token”, giving it a unique digital signature that distinguishes it from any other NFT. In this way, NFT technology turns any digital file into a one of a kind collectors’ item, like an original painting, or a trading card, that can then be sold or traded.
Blockchain is the technology that enables NFTs to exist, and gives sellers and owners confidence that their NFT is “authentic” (i.e. originating from a specific source). Blockchain is a highly complex computer system, but in its most simple form, it is a method of storing information in a decentralized way. In a blockchain system, information is stored in “blocks” that build upon, and connect to, other blocks, in an irreversible, sequential “chain” of information that cannot be modified or deleted. Blocks link securely to each other in specific sequences, or chains, that prevent any one block from being tampered with, or added to, making the sequence and system highly secure. This makes blockchain a useful system for storing transactional information.
Though this sounds complex, NFTs are relatively easy to create (or “mint”). To do so, a creator must have four things: (1) a file they want to become an NFT, (2) an account with a blockchain provider, like Ethereum, (3) a digital wallet in which to store the NFT, like Metamask, and (4) an account with an NFT exchange platform or marketplace, like OpenSea, that enables a creator to list and sell the NFT. Once a creator has made and linked all these accounts, she need only upload her file to the exchange and select “create” to make the NFT. However, the NFT is not really “minted” until someone else buys it, and thus starts the record on the blockchain ledger. All transactions on the blockchain, including listing the NFT for sale, generally require a fee called “gas”, so while it is free begin to create an NFT, the transaction on the blockchain that truly creates an NFT will cost the creator money.
NFTs in Business
The most important aspect of an NFT is that it acts as a certificate of authenticity for the linked file or object because the blockchain upon which it is built records every transaction it undergoes from the moment it is created. This is why initially many NFT creators used the technology to sell digital art, or accompany the sale of a tangible product – the buyer could easily authenticate the art or product by viewing the record on the blockchain ledger, and knowing exactly who has owned it since its creation.
However businesses are also deploying NFTs in creative ways to better connect and provide services to their customers. For example, Nike’s “Cryptokicks” shoes use NFTs to link a physical pair of shoes with a virtual version, so that a purchaser can “wear” the shoes in both real life and as an avatar in digital spaces like video games or the Metaverse. A Nike customer can also trade and sell the NFT version of their shoes as a collectors’ item, or use the NFT as an investment if it gains value. Nike also offers Cryptokicks NFTs that exist virtually until the real shoes become available. The customer is then notified and can purchase them before anyone else. In this way, the NFT acts like a membership in an exclusive club, giving the holder priority access to new products before other consumers. Nike patented the “Cryptokicks” system for “providing cryptographically secured digital assets” in 2019.
Other tech companies, like Meta, see NFTs as a new way of connecting consumers with businesses and events in the Metaverse. For example, a consumer’s avatar in the Metaverse can wear an authentic luxury brand, or a Metaverse event organizer could offer a unique NFT collectible to attendees to signify that they actually attended the event. Consumers can then share these “authentic” collectibles through their digital wallets with their friends, providing a way for people to socially connect on the platform through a common experience.
Intellectual Property
When it comes to intellectual property concerns, copyright and trademark considerations are typically more important than patents because an NFT can easily incorporate protected material in its file or “token” part. This is not as concerning for artists who create NFTs from their original works because they likely own any underlying copyright; but for businesses with independent contractors, this can be especially concerning. A business’s preexisting contractual relationships with artists, designers, writers, or others may not have contemplated uses of their work in NFTs. Although contractor agreements may include an assignment provision granting them broad rights, depending upon the specific language, that assignment may be much more restrictive. Further, some recipients of a contractor’s work may merely have a license to use that work in specifically agreed to ways. Thus before creating an NFT, a business should consider any ownership, licensing and assignment concerns beforehand to avoid copyright-related problems.
Importantly in consideration of trademarks, a business’s existing marks may not protect a company’s new NFTs or packaged products if they have not added new classes of goods to their federal registration to cover those new goods or services. The USPTO has very specific classification requirements for blockchain and NFT-related goods and services, so companies should not assume that an existing trademark registration will protect a new NFT product or service. For example, Nike’s existing trademarks for shoes and apparel may not necessarily protect their NFT “Cryptokicks” products and services, even though their NFTs accompany physical products that are otherwise protectable under their registrations. Numerous classifications are available to protect crypto-related products, and businesses should consider whether new trademark registrations are appropriate investments for their brand and business strategy. Lastly, despite the extra security and authentication blockchain provides, bad actors can still create NFTs using federally protected trademarks and impersonate real businesses from the moment an NFT is created, so traditional concerns of infringement and counterfeiting are still present.
It is important to also note that patent considerations are still highly relevant regarding NFTs, as certain applications, like Nike’s “Cryptokicks” system, are patentable. Nike’s patent specifically discloses a method for automating the delivery of NFT’s to their clients. However, as fascinating as that patent is, at least for now, these scenarios are rare.
USPTO and Copyright Office Joint Study
With all this innovation in mind, the USPTO and Copyright Office’s joint study to better understand NFTs and their interactions with intellectual property is officially underway. During the initial comment period any member of the public may respond to any or all of their questions until February 3, 2023. Some questions are specific, asking about NFTs in a respondent’s particular field or industry, while others are more broad, such as asking what role NFTs may have in the future generally. Below are some questions we found particularly interesting:
- What kinds of challenges or opportunities do NFTs present to “IP rights holders” in obtaining, transferring, licensing, or exercising control over their rights (Question 6);
- Are current IP laws adequate to address the protection and enforcement of IP in the context of NFTs? (Question 8)
- Have you observed any instances of copyright, or other IP-related infringement due to NFTs (Questions 9 and 10); and
- Have you made any “adjustments” to your IP portfolio planning or management in light of NFTs (Question 11).
When the comment period ends, the USPTO and Copyright Office will host a series of three public roundtables throughout January 2023 addressing trademarks, copyrights and patents, with more information about the topics of these talks coming soon. The public is also welcome to attend these events remotely. The agencies plan to use the public’s feedback to help guide their future research and report, so we will be eagerly waiting to see what eventually comes, and looking further, to see if the Senate will use it in crafting new legislation or regulation of NFTs.
