Intangible assets in the metamorphosing fintech landscape: NFTs and IP
Introduction
“We're still in the first minutes of the first day of the Internet revolution”, a decade old quote by the e-commerce tycoon Scott Cook holds incontrovertible relevance today. In the early 1960’s, when the invention of the internet was solely limited for military purposes, none would have imagined the boundless possibilities this pioneering has to offer. In less than 70 years, the internet has revolutionized mankind. A contemporary example of the same is creation of digital assets. The internet has transmuted value creation and transaction to a single click. An inestimable addition to this space is non-fungible tokens (NFTs).
An NFT, in its simplest form “is a one-of-a-kind digital token that is permanently linked to a piece and is encrypted with the artist's signature. It validates the piece's ownership and authenticity”. This form of digital currency can be used to represent real-world artifacts including but not limited to art and music. NFTs are part of the Ethereum blockchain, with ether being the native cryptocurrency. Apart from the uniqueness of ownership provided by this form of digital currency, NFTs facilitate the creation of efficient marketplaces by streamlining processes, eliminating intermediaries, enhancing supply chains and bolstering financial security.
The popularity of NFTs can be affirmed by the amount of value they garner in today’s business spaces. In March of 2021, when Iranian-born crypto entrepreneur Sina Estavi purchased the NFT for Jack Dorsey’s first tweet for $2.9 million[1], it created an uproar in the fintech landscape. Even in India, NFTs have become the most sought-after form of virtual paraphernalia. In June 2021, WazirX, India’s largest cryptocurrency exchange, launched an NFT marketplace predominantly for Indian artists. This platform has been extensively used by Indian artists to launch their digital collectibles. Some of the prominent collections include poem readings and a Big B Cryptopunk by Amitabh Bachchan. The entire collection sold for under $1 million. The acceptance of NFTs by Indians is evidenced by the fact that the largest global NFT sale to date, the $69 million Beeple sale, was incidentally also purchased by a buyer of Indian origin, Vignesh Sundaresan, also known as MetaKovan.
However, the augmenting popularity of NFTs is combined with the complex legal challenges involved in their implementation. Apart from the Finlegal issues, the multiple use cases offered by NFTs also command detailed IP compliances.
NFTs and IP
Section 14 of the Indian Copyright Act, 1957[2] confers on an owner the exclusive right “to reproduce the work in any material form including the storing of it in any medium by electronic means”. NFT, in its simplest form can be categorized as a mode of electronic storage and thus, deserves protection under this Section of the Copyright Act. However, similar to tangible assets, buying an NFT does not in itself imply that the buyer has IP ownership of the art therein. The digital work within the NFT was not created at the request of any person, and therefore, the artist is the first owner of the rights. However, the scope and extent of any transfer of rights is determined by the terms set by the seller or artist of the NFT. These terms must be agreed by the parties in writing and thus, “smart contracts” have witnessed a huge spurge in the recent past. The most important aspect of enforcement of copyright in an NFT is to recognize the distinction between owning an NFT versus owning rights to the creative work associated with the NFT. This is similar to a transaction in the real-world marketplaces, wherein by default, an artist retains copyright ownership over a painting even if ownership of the tangible painting itself is conveyed to the buyer.
Similarly, most NFT sales merely convey a license to use the digital copy of the creative work and the author or copyright holder retains their copyright. The creators can protect their intellectual property rights and economic rights by coding the NFT license agreements into their smart contracts that automatically execute the terms of the license in all the subsequent resale of the NFTs.
Despite explicit laws governing copyright protection of NFTs, growing reports of copyright theft involving NFTs have raised serious concerns across stakeholders. Many artists around the world are reporting thefts of their works on NFT sites without their knowledge or permission. At the centre of many reports of theft is an automated NFT tweet-minting bot with the name @tokenizedtweets. The bot creates NFTs of tweets without alerting the owner of the tweet. A Twitter user simply has to mention the bot below a tweet, for that tweet to be made into an NFT.
The question of seller genuineness becomes especially significant in the virtual marketplaces due to the extent of anonymity this space has to offer. Pirates and counterfeits have also infiltrated the NFT space and often masquerade themselves as the original owner of the artwork. In such cases, the copyright owner has civil or criminal remedies available under Section 55 or Section 63 of the copyright laws, respectively.
Apart from copyright, NFTs offer several applications in the patent regime as well. Patent ownership may be transferred via NFTs, and blockchain technology may be used to keep track of patent owners. The tokens can also include self-executing contracts to facilitate the transfer of legal rights to patents when the tokens are transferred.
A collaboration between IBM and IPwe has pushed for the use of NFTs to protect patent ownership. The firms have teamed together to create the infrastructure for a marketplace to acquire and sell patents using NFTs. This marketplace can be used for both transfer as well as transaction of patents.
Conclusion
While NFTs have gained significant popularity across the globe, including in India, the absence of mandated rules in India surrounding the sale and purchase of NFTs has created immense legal ambiguity. The position of cryptocurrency in India has attracted immense conjecture. The Reserve Bank of India (RBI) attempted to ban the use of virtual or cryptocurrencies in 2018. The Internet and Mobile Association of India, other organizations, and a few enterprises that manage online crypto-assets exchange platforms, filed appeals in response to the said order. The three-judge bench of the Supreme Court, while rejecting the RBI mandate, held that the RBI could not place limitations on cryptocurrency trading because there was no legislation prohibiting the purchase or sale of these currencies. The court found that such restrictions would infringe on persons’ fundamental right to engage in any lawfully permitted trade. In order for NFTs to reach their maximum potential and serve as the “currency of the future”, governments must play a proactive role in defining their position in the economic landscape of the nation.
For any queries, please feel free to write to Ms. Ankit Sabharwal at ankita@iprattorneys.com.
