NFTs AND INTELLECTUAL PROPERTY


What is NFT?

An NFT (non-fungible token) is a cryptographic tool using a suitable blockchain to create a unique, non-fungible digital asset. The term non-fungible means that it is one of a kind. These tokens are unique items and are not replaceable with another identical item. An NFT serves as a unique verification of ownership, that could be used to establish ownership of an item.


Can NFT be an IP Asset?

There is a big debate going on that whether this new technology is patentable or not. If we talk about existing categories of patentable inventions (patent-eligible subject matter, novel or new, useful, and non-obvious), NFT does not fall in any of the categories, therefore it can be said that the NFTs are not patentable. However, there is a way to get NFTs patented. In order to increase the likelihood of getting an NFT patent, it is preferred to tie NFT patent application to a physical invention. This may make it easier to secure patent as it turns NFT into a more tangible invention rather than an abstract concept.


The landmark case of getting an NFT patented was of Nike. Nike received approval for a “CryptoKicks” patent (“US10505726B1” – Titled: “System and method for providing cryptographically secured digital assets”) that diminishes the boundaries between the physical and virtual world. Nike’s combination of protections allows it to monetize both physically manufactured shoes and those developed in the digital world. In other words, a real-world shoe gets re-designed in the digital world, or a digital shoe gets manufactured in the real world. When a buyer purchases a physical pair of shoes, the buyer will also receive an NFT of their “CryptoKicks” linked to the physical pair of shoes. Nike and prospective buyers can then use the NFT to confirm authenticity of the physical shoes.


The biggest advantage of NFTs is that they cannot be duplicated and forged, companies can look at leveraging the NFTs for preventing counterfeiting products. It shall be good for brand owners to consider extending their trademarks and design patents to cover uses that include NFTs.


Further, for other IP assets like trademark, if the owner of the trademark wants to get protection in the online world, he or she should file (or re-file) trademark applications including goods and services associated with the metaverse, online world, digital art and NFT.


For copyright, the WIPO states that the NFT reproduction and trade should conform to the current IP laws and principles. If there’s a copyright that grants exclusive rights to an NFT owner and if someone else wants to use or reproduce any creation (image, sound etc.) in the NFT, the user will need to first request an authorization from the copyright holder. For example, if a digital creator wants to use the logo of a company in its digital artwork, he/she will first need to request permission from the owner of the logo to reproduce that image, regardless of whether the NFT is going to be digitally created by him/her. Similarly, when someone buys an NFT from its creator (author), it does not result in automatic transfer of ownership of the intellectual property (e.g., copyright) of the digital asset. As per the legal experts, the author remains the authorized owner of the intellectual property related to the NFT despite transfer of NFT to the buyer. The buyer only gets the ownership to NFT itself. Thus, the author remains the owner of the IP of the underlying invention or creation of the NFT if the IP ownership is not explicitly transferred to other people.


Furthermore, the WIPO also states that ​​the Berne Convention for the Protection of Literary and Artistic Work applies to NFTs. The agreement mentions that the reproduction of protected work in digital forms should be previously authorized by the copyright holder.


NFT Market

According to a report, the NFT market size is expected to grow by at least 33% year over year and is forecasted to reach approximately USD 80 Bn in net sales volume by 2025 and nearly USD 350 Bn by 2030. Further, recently, big players (worldwide) have also started investing in NFT domain. To name few:

  • In Dec 2021, Microsoft led USD 27 Mn funding round for Palm NFT Studio. Palm works with companies and brands to help them create NFT projects, using Ethereum on the backend.

  • In Oct 2021, Facebook (now known as meta platform) announced that the company’s metaverse will support non-fungible tokens (NFT).

If we see the patent filings trend, there has been an exponential rise in the number of patent filing from 2017 till 2021. Below is the chart showing number of patents filed from 2017 till 2022:


* The data for 2022 is incomplete due to time gap between patent filing and publication


Patenting of NFTs in various jurisdictions

As NFTs are gaining popularity, a number of players are trying to obtain patent protection in this technology in an effort to take first mover advantage. Below is the jurisdiction wise chart representing number of NFTs-related patents per jurisdiction.


As can be seen from the chart, US holds the greatest number of patent applications (~600) followed by China (~350) in the NFT domain.


In the US, IBM has partnered with a start-up IPWe to represent their patents as NFTs and store the digital records on a blockchain network.


Further, Microsoft also has four patent applications regarding asset tokens, including one for a customizable creation template. The aforementioned technology became useful for Microsoft’s partnership with blockchain developer Enjin (February 2021) to launch a browser game that rewards players with cross-platform NFTs.


These development show that big companies have started focusing on NFT domain.


NFTs development in China

According to a report, NFT market in China is expected to reach USD 4.64 billion annually by 2026. Further, the Chinese government has highlighted the development of blockchain technology as one of the key foci of its 14th Five Year Plan. The Chinese government is supporting the NFT market in following ways:

  • They are supporting its own, state-backed blockchain (the Blockchain Services Network, BSN), that will allow for NFTs that are fully integrated with the Chinese yuan, and used by government agencies alongside private enterprises and individuals.

  • They are taking steps to form a regulated NFT market, in which speculative trading, through secondary markets, is either absent or kept to a minimum.

  • They are integrating existing IP protections over creative content – most importantly, copyright – with the content tied to NFTs. This means that only creative content free of copyright infringement will qualify for placement on any Chinese NFT market.


China’s NFT market different from rest of the world

Blockchains in the rest of the world are decentralised (there are no sole decision-making authorities when it comes to their direction or maintenance). However, in China, even the non-government created blockchains, such as Alibaba’s JingTan or Tencent’s Huanhe, are supervised.


China has a strict ban on owning or trading cryptocurrency (involving NFTs). This is different from rest of the world, given that most of the world’s NFT marketplaces process the majority of their transactions using cryptocurrencies.


China’s NFT market future

The future for NFTs in China is uncertain. This is due to the fact that the centralized and regulated approach can restrict the growth of a new and economically significant technology. Further, a more regulated approach protects the market and consumers against volatility. By delinking NFTs from cryptocurrency, their value is insulated from the wild fluctuations seen in the crypto market.


Key NFT players in China

  1. Jingtan, AKA Topnod (previously Antchain Fan Points): It is an Ant Group’s platform for distributing and purchasing of NFTs. Integrated with Alipay, it collaborates with museums and brands.

  2. Huanhe: It is Tencent’s digital collectible platform. Similar to Jingtan, it works with brands, museums and artists.

  3. NFTCN: It is the only marketplace in China where NFTs can be traded. There is some degree of integration with the Ethereum network, allowing for international verification of digital tokens.


Future of NFT

It seems like a beginning of a new era of technology and to predict when it will reach a plateau condition looks difficult. Right now, the technology and intricacies of this asset are getting unfolded and NFT technology is moving at a fast pace. NFTs can likely be grouped in with blockchain technology because the two are very similar. The NFTs ability to impact number of application areas make it a futuristic technology.


Below are the major application areas of the NFTs:

Gaming: Blockchain gaming combined with NFTs is likely to be a huge growth point for the industry in the next few years

NFTs + DeFi: One of the uses of NFT is a fusion of NFTs and decentralized finance (DeFi). This works by allowing NFT holders to put up their NFT as collateral for loans.

Real Estate: Real estate NFTs work by turning the physical deed of a house into an NFT deed. This NFT deed can then be traded like a normal token.

Music: NFTs can be used with music by turning songs into NFTs, attaching song rights to NFTs, and attaching other benefits to ownership of the NFT.


Conclusion

The major market of NFT is concentrated in only a few countries, particularly in the US and a few Asian countries. The industries in European countries seem to be playing a wait and watch game. NFTs can be bought, sold, or exchanged on any NFT market based on the same blockchain. It is the scarcity and uniqueness of the token created on a blockchain as digital asset that leads to its high value. Therefore, if these NFTs cryptographic assets, can be patented, protected as copyright or trademark, they can become valuable IP assets for the owners. However, it is important to understand that the ownership of an NFT and ownership of the IP associated with the NFT may be two separate things. Therefore, caution must be exercised when transacting, using, or reproducing an NFT.


References:

[1] https://tokenizedhq.com/nft-market-size/

[2] https://www.coindesk.com/business/2021/12/09/microsoft-leads-27m-funding-round-for-palm-nft-studio/

[3] https://technode.com/2022/03/15/chinas-nft-market-who-are-the-major-players-and-what-makes-them-different/

[4] https://www.sekkeistudio.com/blog/the-nft-market-in-china-in-2022/

[5] https://www.patentforecast.com/2021/07/13/gaming-companies-rush-to-capitalize-on-nfts/

[6] https://www.reuters.com/legal/legalindustry/demystifying-nfts-intellectual-property-what-you-need-know-2022-05-10/

[7] https://www.lexology.com/library/detail.aspx?g=e9c8fc34-5858-4390-96df-1015a2c0a3f0