-Vasundhara Shankar* and Mudit Kaushik**
Introduction
NFTs or Non-fungible tokens are units of data stored in the form of a digital ledger, recorded on a blockchain that represents files like videos, audios, photos, or any other type of digital file. These tokens signify a person’s digital assets that are not interchangeable and hence unique. These collections are one of a kind, and their popularity has significantly risen. Many motion artists and graphic designers have been gaining popularity through these tokens since small but worthy artists who didn’t have a platform to financially value their art before, have the help of NFTs now. Recently, a digital artist “Beeple” sold an NFT artwork for more than USD 69 million at Christie’s Auction House. This is just one example from the pool of many news articles ranging from memes to sports cards to tweets. In fact, this popularity has drawn the attention of investors, who are readily available to back this form of technology, financially. Recently, a news article revealed that Dibbs, an app allowing users to trade interests in sports cards, raised USD 2.8 million through seed funding. The Indian blockchain ecosystem has also been evolving to accommodate this technology, with three new NFT marketplaces opening up in the country in less than two months.
Ownership and Uses of NFTs
Digital art, music, and images are all artistic works under the Copyright Act. NFTs are essentially signed receipts on a blockchain, acknowledging that the holder owns a unique version of the said work. This gives rise to the debate around NFTs and Copyright Act, asking the question as to who owns the copyright to a unique artistic work after the NFT is sold. However, since the technology is very new, the discussions on how NFTs would be linked to copyright are still at dawn. When a person purchases an NFT, he holds a right to claim exclusive and non-rivalrous ownership of that token. NFT is an intangible and incorporeal property with a unique signature. Therefore, the question is, when a unique asset is transferred with its ownership, would the owner of a token be entitled to the ownership of that digital asset, the underlying artwork, or any other object? The general assumption to this question is that ownership of an NFT does not, by default, grant the buyer any rights to the intellectual property of the underlying asset. The Copyright Act, 1957 states that for original artistic work, the person who created such work is the owner, unless he agrees explicitly to withhold his ownership via the exceptions provided in section 17 of the Act.
The copyright issues are not limited to ownership. The price for tokenization of collectibles, arts, music, and videos has created a global hysteria. As a result, the intellectual property owners are rethinking their licensing agreements and protection strategies. Creators of NFTs have included third-party IPs without permission. One well-known example of this is the DC Comics case, where an artist earned USD 1.85 million when he sold NFTs with unlicensed DC Comic character drawings. In clear words, DC stated that “the offering for sale of any digital images featuring DC’s intellectual property with or without NFTs, whether rendered for DC’s publications or rendered outside the scope of one’s contractual engagement with DC, is not permitted.” Until then, the IP owners did not consider using NFTs in their licensing deals. But after this frenzy trend, they are considering so, which opens a pool of new avenues.
Advantages and Disadvantages of using NFT in IP transactions
One of the essential benefits to IP owners is that after introducing NFTs, they can license their intellectual property to developers of these tokens and blockchain, as it is a lucrative and emerging market. Another benefit is that this licensing would help in creating new and unique revenue models. Many NFTs are structured such that the NFT “creator” gets paid on the initial sale and any resale via smart contracts. The payment through NFTs is coded into the smart contract, which gets executed automatically as soon as the sale is made. Licensors would have to ensure their share of NFT resale revenue with well-drafted license agreements. The IP protection strategies for numerous brands would be changed because brands may become more aggressive in creating their own tokenized assets. In doing so, some brand owners must also consider extending their trademark registrations that would cover their trademark uses and classifications to include tokens. It provides value to its creators. Each time a sale of the NFT occurs, some NFTs have a proper structure that automatically collects royalties. In simple words, when an artist is represented by an NFT, he may receive 10% royalty each time the NFT sells on the blockchain.
NFTs find huge application particularly in the domain of art and music. It can turn out to be a highly effective channel for collecting revenue for musicians and artists. Artists will have the option of directly selling their creations to customers and simultaneously enjoy payment from the sales. Under the current payment model for royalties, artists enter into contracts with publishing houses, which pay them royalties based on the split between them and the artist, as decided by the contract. These publishing houses, because of their clout, hold huge bargaining power over small artists. As for NFT based royalty payments, payments are made as soon as the sale is made—through the execution of the smart contracts. Hence, through an NFT based ecosystem, the artists would no longer need to wait for royalty reports for months and the contract-based split in the earnings. Artists can also make the option for customers to redeem their NFTs in exchange for concert or show tickets and could also deal directly with consumers for the selling of merchandise. Inflated rates of tickets for black marketing can be curbed and royalty from subsequent artistic creations can be extracted efficiently.
Subsequent Usage of Copyrighted Work
Despite any misperceptions that may exist about traditional law not mattering to decentralized blockchain technology, the truth of the matter is that outsider IP rights, including copyright, trademark, and design patent, can be stated, and are being affirmed against NFT creators who have not got a license or other legitimate rights to IP remembered for their NFTs. The complexity is particularly enhanced in cases of copyright claims. Copyright grants an individual a bundle of rights and most NFTs include pieces of work that are copyright protected, as any artistic creation is ipso facto protected by Copyright. For instance, the viral video of Nathan Apodaca on Tiktok that included a lip sync of the song ‘Dreams’ by Fleetwood Mac. The composers of the song did not let Nathan keep the song in the NFT.
This question of usage of already copyrighted work can, however, be answered through the concepts of fair dealing and transformative usage. The fair dealing doctrine would allow the creator of the NFT to use already copyrighted work to a limited extent, depending on certain factors like the nature of the work, its purpose, the amount of work used, and the effect of such use on the original content. As for the transformative usage doctrine, the NFT creator would be allowed, based on the current legal standard, to use copyrighted work, if the same is used for a completely different purpose and in a different manner than the original. If an artistic piece is created by an employee as part of his duties, the copyright would vest in the employer and not the creator, in the absence of a contractual agreement stating otherwise. Further, works entailing remixing of tracks or sound effects can be complicated to be granted as an NFT as the licensing would depend on how the sampling in question is treated.
Another major complication with using NFTs for IP transaction arises where the work is the product of a collaboration of two or more creators. This convolutes the existing NFT-copyright conundrum, as now, each collaborator has a vested copyright interest in the work, and NFT being a unique licensing mechanism leaves it impossible to grant due rights to each creator. For instance, the ‘Expanse’ book series authored by ‘James S.A. Corey’ is in reality authored by two authors who use this name as a pen name. It is also complicated to grant NFT licensing of a work that is an outcome of multiple acts of creativity – each undertaken by a different individual. Thus, each independent artistic contribution can be ‘tokenized’ and licensed to one individual, while the resultant complete work may be owned by a different individual altogether.
In essence, the current state of affairs of ‘securitization of digital assets’ is getting all the more complicated by the issues emerging from the convergence of NFT and IP rights.
NFTs - Transforming IP & Innovation
Even though the global community is concerned about the future of bitcoins, NFTs, cryptocurrencies, digital currencies, and emerging technologies, it would be wrong not to acknowledge that these technologies have transformed many sectors, including intellectual property, by creating new and innovative ways. The creators and owners make for their digital assets depend on the widely varying terms governing the NFT. For example, the NBA TopShop license “grants the owner of a moment, a non-exclusive license to use, copy, and display the moment solely for personal, non-commercial use, as part of a marketplace, or as part of a third-party website or application that permits the inclusion of the moment.” On the other hand, the CryptoKitties license “allows NFT owners to make commercial use of their kitties as long as the use does not result in earning more than $100,000 in gross revenue each year.” Determining the scope of rights that will accompany an NFT requires a lot of careful thought, incorporating an overall IP strategy.
The Indian government and RBI have always taken the stand that their guidelines are well-suited to include cryptocurrencies and digital currencies within its ambit. The best legal practitioners of the country argue that since no bills or legislation govern these technologies, they would be governed under the pre-existing principles of Contract Law and the Securities Contract Regulation Act. With this continuing boom, WazirX, India’s biggest cryptocurrency exchange, has recently launched the first marketplace for NFTs. This platform allows the exchange of intellectual properties and digital assets, like artistic works, videos, programmes, audio files, and other digital goods and services. With this technology, the company announced that Indian creators can now place their digital assets for auction and earn royalty even after that, over the blockchain-based NFT marketplace. The CEO of the company, in an interview, talked about how NFTs are a nascent market currently, but have huge potential. He also discussed how WazirX is dealing with the business, informing that the company has been in talks with certain artists, who will list their works after creating them and uploading them to a crypto wallet. Following this, the sum would get locked into a smart contract, and the NFT would be released only after payment is made in cryptocurrencies. As for the point of ownership of copyright, he said that the choice of whether they want to transfer the rights along with the NFT or not has been left with the artists themselves.
Reports suggest that the NFT market activity may have lulled slightly since the freneticism of late February, but also that it was still worth more than USD 33 million in the last week of March 2021. Since NFT marketplaces and many buyers and sellers are located outside India, Indian participants in the NFT ecosystem make cross-border transfers of NFTs. This would raise questions under FEMA, such as whether there is an export or import of an intangible asset. If so, the transaction must have a corresponding remittance of fiat currency done through authorized banking channels.
Now with NFTs operating on an irreversible, decentralized system, the enforcement of these smart contracts can sometimes lead to disputes. Furthermore, with blockchain being a worldwide ledger, it is difficult to locate an NFT. However, even if the location of the NFT is assumed to be the location of the owner (since it is an intangible asset), enforcement concerns arise as to the applicable law and jurisdiction that would deal with the issue once the contract is executed.
Conclusion
To a great extent, creating NFTs is irreversible, and therefore, its future implications are unclear. Any misstep in its creation may lead to unintended consequences that may or may not be correctable. It is easily possible that creators could harm their products in the process, without any knowledge of it. For that reason, it is essential to think through any possible consequences and associated downside risks that NFTs may cause. Additionally, there is a possibility that the current sky-high valuations and excitement around NFTs may go down a similar path to the dotcom and Initial Coin Offering bubbles, both of which presented genuine innovations, but also saw unfounded hype. Ultimately, in the long term, as the market matures, only real use-cases survive. It is seen that so far, the use of NFTs associated with copyright is mostly for artistic works. But it is not far off when it will be used for other copyright works like videos, audios, softwares, etc. The possibility is not zero.
NFTs present an exciting new opportunity to engage and find new fans in a new territory and perhaps make some money in the process. But it has its risks and downfalls. The traders must understand market conditions, the latest technology, and applicable copyright law while engaging with NFT transactions. The NFTs with low transaction fees have no authenticity or scarcity, and thus have low value, because anyone can create an NFT that purports to represent something meaningful. Those internet transactions which hide the identity of the seller make verifying the authenticity of that token difficult. Since tokenization is a digital ledger, the risk of authenticity is a big concern. Therefore, any NFT buyer must, to avoid risks, also do his due diligence before buying a high-priced token for an artistic work.
*Ms. Vasundhara Shankar: Managing partner, Verum Legal (www.verumlegal.com). Vasundhara is a startup lawyer with over 7 years of experience and focuses on Data privacy, IP, Tech laws, white-collar crime, dispute resolution & legal tech innovations.
**Mr. Mudit Kaushik: Mudit is an IP and Tech law lawyer having extensive experience in brand enforcement, data protection laws, cyber-crimes and domain name disputes.
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