As we progress into 2022, the beat of the drum of the cryptocurrency and broader digital asset industry continues and, with it, has come the rise in popularity of non-fungible tokens (NFTs). In fact, NFT market is now worth more than $7 billion, but according to JP Morgan legal issues facing the nascent sector could hinder its growth.

Today to discuss the legal considerations faced by NFT Platforms, NFT Issues and NFT purchasers; I am delighted to be joined a prominent selection of IP and Securities lawyers, from across the globe, who will surely give some deep insights into this fascinating area.

What is a NFT?

An NFT is a type of cryptocurrency asset wherein each item, or token, is unique. It is not easily exchangeable for another value or item. An NFT is also a digital certificate of ownership for any designated digital asset. It is like a smart contract written by assembling parts of open-source code found in platforms such as GitHub. The written code is then permanently published into a token on a blockchain.

How do they differ from Fungible Tokens?

NFTs are different from fungible tokens (FTs) which are tokens with a part or quantity that is exchangeable by another equal part or quantity. The reason for this is that every FT token is identical to other tokens. An NFT, on the other hand, is unique.

NFTs also differ from FTs in terms of divisibility. If one borrows something with an NFT, it needs to be returned as a whole because NFTs are indivisible. An FT can be lent to somebody as long as the borrower returns it as a whole or in parts.

Due to how NFTs work and how they are used, they have legal implications relative to intellectual property (IP).

Where do Artists Mint and Sell NFTs?

IP Owners

There are many IP owners who are looking to capitalise on the NFT craze:-

• brands that have famous trademarks, logos, and other brand identifiers;

• game companies that have unique characters or game art

• book, movie and other publishers that have unique characters and other IP;

• artists who created have physical or digital works;

• other IP owners

Choosing the right Platform

In order to select the best NFT Platform, the artist would have to look at the Marketplace terms and conditions, which will stipulate who and what can be listed on their platform.

For example SuperRare is extremely limiting, as it requires approved artists who are ‘Whitelisted’ and granted permission to mint ‘Superare Items’ to ‘only mint works that they personally created’. The SuperRare Copyright and Community Guidelines thoughtfully address ‘Works Made for Hire’ by encouraging artists to consider whether their contribution forms part of an employment or ‘works made for hire’ arrangement.

Bespoke Websites

One way IP owners can overcome this, is by creating their own sites for the sale of their NFTs.

What happens in the case of Cybersquatting?

Cybersquatting

Cybersquatting is the practise of registering an internet domain name that is likely to be desired by another individual, company, or organisation in the hopes of selling it for a profit to another person, business, or organisation.14 It entails the registration of trademarks and trade names as domain names by third parties that do not own the trademarks or trade names. In India, the Hon'ble Supreme Court in Satyam Infoway Ltd vs Sifynet Solutions

NFTMorganStanley.com

In May 2021, the National Arbitration Forum of the United States handed down a decision against Joseph Masci, who registered the domain ‘NFTMorganStanley.com’ in a complaint instituted by Morgan Stanley.17 The Court ruled that the registration by the defendant is in bad faith and the use of the domain name which is identical to the trademark of the complainant is likely to deceive the public and therefore ordered the defendant to transfer the domain name to the respondent.

How can Collaborative works of Art be Minted?

Collaborative art is a form of art where many individuals contribute to a single piece of art.

Layered Art

One cool feature of NFT-based digital art technology is layered art. This technology enables a single work to include multiple layers of art, each created by a different artist. Each layer may be tokenized and owned by a different entity. And the work as a whole can also be tokenized and that token can be owned by yet a different entity. Due to this feature of digital art, you should consider the scope of the license you grant to prevent art based on your IP from being associated with works that you find undesirable. For example, without appropriate limitations, your licensee may create one layer of such a work based on your IP, while other layers may include offensive materials or other content that you would not want associated with your IP.

Can Computed Generated Works of Art be Minted?

Generative Art

Generative art uses AI or other algorithms to create or modify art. In some cases, an artist specifies some of the inputs or starting points for the art, then the algorithm takes over. Depending on the effect of the algorithm, if generative art is based on your IP as an input, this too could lead to some undesired representations of your IP.

Crypto Punks

A pioneering Generative art project was CryptoPunk, which randomly generated from a list of dozens of attributes, which means there's an array of designs: people, zombies, apes, and even aliens. The aliens and zombies are among the most popular avatars that have commanded some of the highest sale prices to date.

Programmable Art

Another interesting genre of digital art is programmable art. Programmable art may be autonomous or not. In either case, the art is programmed to change based on certain triggers. In a simple case, the work may have two fixed layers and the art may change from one layer to the other based on some fixed event. In this simple example, one layer may be presented during the day and the other at night. In this scenario, there are two fixed layers that are alternately displayed. However, programmable art can be much more complex and can morph a single image in various, sometimes random ways. In some cases, programmability can modify or distort the image. This, too, could lead to some undesired representations of your IP.

Can Clips from Libraries of TV & Film content be minted as an NFT?

Especially in the current NFT environment, it is not difficult to imagine the potential value of tokenized iconic moments from movies and television. Of course, there would be a number of contractual issues for a rightsholder to navigate, which would vary from deal to deal.

Pre-date

Valuable clips might come from movies dating back long before the advent of NFTs, the internet, or even computers. The relevant agreements certainly would not address NFTs, but even analogous provisions might be difficult to identify.

Clip for Promotion

Agreements may refer to “clips,” for example, but typically a clip is used to promote the full program or film rather than to be monetized on its own.

NBA Top Shot

Depending on what it depicts, an NFT might not be a “clip” at all. Again using NBA Top Shot as an example, a “Moment” is not just a short video excerpt showing a pass or dunk; it is a package of on-court video, still photographs, digital artwork, and game information. Contracts would need to be analyzed to determine if the NFT should be categorized as a clip, a derivative production, merchandising, promotional material, or something else, with potential consequences on the calculation of gross receipts and any corresponding rights to profit participations or Guild royalties.Exclusivity

Exclusivity provisions in film or television licenses to third parties might bar or limit a studio from “minting” an NFT from a work in its library. Other considerations might also limit a rightsholder’s willingness to enter the NFT space. With vast libraries of well-known and high‑quality content, however, studios are better positioned than most to take advantage of the increased interest and marketability of discrete portions of a film or program.

Can Personality and Impact Rights be Minted?

Image Rights

Image or personality rights identify the monetary value of a notable person, representation and preserve their proprietary interest in the profitability of their public reputation or persona.

Right to Publicity

The landmark judgement of the Delhi High Court in the case of Titan Industries Limited vs. M/s Ramkumar Jewellers 18wherein the court held that “when the identity of a famous personality is used in advertising without their permission, the complaint is not that no one should commercialize their identity but that the right to control when, where and how their identity is used should vest with the famous personality. The right to control the commercial use of human identity is the right to publicity.”

Image Rights vs. Trademarks

NFT represents a new marketing tool for athletes, clubs, and various stakeholders to reach wider audiences. In March 2021, NFL players Rob Gronkowski and Patrick Mahomes released digital memorabilia of themselves. The NFL has not licensed these items, and as such, they do not carry the logo of the teams/clubs on them19. An interesting question that arises with regards to the interplay between NFT and NIL rights is the use of NIL rights in a non

commercial background. Since the use of NIL rights only requires the prior permission of the famous personality in a commercial setting, the use of such rights in a non-commercial setting is at a nascent stage.

Who creates the licensing agreement? And what should be included?

Who creates the licensing agreement

Licensing agreements

Licensing agreements must specify exactly which rights each holds, and what the NFT owners can and cannot do with a digital certificate. Most NFT licensing agreements contain several standard clauses:

1. Whether the buyer or licensee may transfer the permissions to a third party, and if so, whether and how the original creator will be compensated.

2. How the NFT may be used, such as in advertisements, marketing campaigns, promotions, or merchandising.

3. If the NFT can be copied and sold (similar to numbered prints of an original painting). If so, how will the revenue be split between the licensee and the creator?

4. Whether the NFT owner can create derivative or modified versions, and how he or she can use them.

Should Artists be concerned about their personal information?

GDPR

Although blockchain technology does not oblige people to disclose their identity, which does not violate the GDPR, the fact that blockchains are immutable and so it is technically impossible to erase personal data stored on them does breach the GDPR. As such, NFTs that contain personal information probably would violate some of the data protection principles and it is advisable for artists to ensure that they do not include personal information with their artwork.

UK Law Commission

The lack of regulation of NFT space raises a lot of concerns. The UK Law Commission is currently working on a reform that would ensure that English law is capable of accommodating digital assets, including NFTs, allowing for the same remedies as tangible assets. This reform would solve some of the above issues, however until then, the above concerns should be kept in mind when dealing with NFTs.

How should artists price their work?

Can artists earn through resales?

Artist’s Resale Right (ARR)

In the traditional art market, an extreme minority of the deals are subject to a resale right benefiting the artist. Most of the time, even though the paintings or sculptures are sold at an increasing price, the artist, and their heirs, do not benefit from the rise in value. Which is pretty unfair compared, for example, to book and music authors.

France 1920

The right on visual art resales (« Droit de suite ») was initiated in 1920 in France. It appeared as a consequence to the blatant gap between the misery in which an artist's family can be and the skyrocketing price related to some art pieces. The Angelus by Jean Francois Millet (today at Orsay Museum) was at the center of such a phenomenon. M. Millet's family was living a miserable life while bids related to their ancestor artwork could not stop going up. The Millet family is at the very origin of the artist's resale rights.

Where are we at, now?

A century later, only 85 Countries have a legislation in place. Among them, no United States of America, Korea or China.

EU & Korea

At that time, although the EU strongly demanded the introduction of the ARR, Korea postponed a decision because the ARR was an unfamiliar system back then; it seemed reckless to accept it without knowing its impact. And until today, no progress has been made. However, in recent years, as the voices demanding ARR are growing and many experts are gathering opinions that ARR legislation is necessary for the protection of the artists’ rights and promotion of art industry, the Ministry of Culture, Sports, and Tourism is examining plans to legislate the ARR.

Resale Royalties on NFT Platforms

One of the benefits for artists tokenising their digital art is that they can get paid at the moment that they first sell their art, and then get royalties each time their work is resold by third parties. Create and sell once – get paid multiple times.

Limitations

However, in almost all cases at the time of writing, the only time you get automated royalty payments is when the NFT is resold through the same NFT platform. So, if a buyer purchases the NFT on marketplace A, transfers it to their digital wallet, and then decides to sell it on marketplace B, the NFT creator gets nothing.

Unpaid Resale Royalties

In the real world, creators have so-called resale rights. However, neither UK, nor US or EU laws recognise resale rights for NFTs and would provide no recourse for unpaid resale royalties.

Do artists have to pay Tax on their NFT earnings?

NFT sellers may have to deal with the tax regimes of different jurisdictions. By their very nature, NFTs are international transactions, but sales tax has to be paid somewhere.

What happens in the case of Counterfeit NFTs?

The author of the Copyright can institute a case for infringement against both the intermediary and the Counterfeiter.

Trademark

The same applies to brands who have trademarked their protected brand mark, to identify the source of goods and/or services and to distinguish between goods/services of different sellers, so as to prevent others from using it if it would cause confusion in the marketplace.

Right holders such as the National Basketball Association (NBA) have filed trademark applications for “NBA Top Shot,” which includes “Downloadable virtual goods, namely, computer programmes for the creation and trade of digital collectibles using blockchain-based software technology and smart contracts, featuring players, games, records, statistics, information, photos, images, game footage, highlight reels, and other digital collectibles, featuring players, games, records, statistics, information, photos, images, game footage, highlight reels, and other digital collectibles”12

Assessment

To assess whether or not infringement has occurred, the following elements of direct infringement must be examined in the light of the facts of the case and the triple identity test should be employed:

(i) did the alleged infringer make unauthorised use of the mark in connection with the delivery, sale, or offering of the goods;

(ii) did the trademark holder asserting the allegation of infringement own a legitimate and legally protectable mark and did the alleged infringer make unauthorised use of the mark in connection with the distribution, sale, or offering of the good sand; and

(iii) is such use by the alleged infringer likely to cause consumer confusion in the marketplace.

The Intermediary

The authenticity and verification of the digital artwork on which the NFT is going to be generated is the responsibility of the intermediary who is listing such an NFT.

Several sites have already have received numerous complaints from artists that people are

counterfeiting their work and uploading the same on blockchain sites which are thereafter generating non-fungible tokens for the same.

The Counterfeiter

Due to the immutability of blockchain transactions and the pseudo-anonymous nature of NFT ownership, enforcing IP rights against a buyer after an NFT is sold can be difficult. An NFT is usually linked to a digital wallet address, but without advanced computer forensics, determining the wallet owner's identity can be difficult.

Does a NFT purchaser have a copyright in the existing artwork or merely in the digital copy owned?

Smart Contract

The terms of the smart contract shall dictate whether the smart contract will operate as a license agreement or an agreement for assignment. In an agreement for assignment the owner of the IP right transfers or assigns all of the rights to the assignee, whereas in a license agreement the owner authorises the licensee to use the rights associated with the IP in particular circumstances.

Does a NFT purchaser have the right to create and sell products with the artwork?

Economic rights

The NFT purchaser may have limited economic rights.

For example - in NBA Top Shot, a template NFT License is used by which the rights holder can distinguish the NFT token from the underlying incorporeal property.8 The license specifies that the buyer of the NFT obtains a personal license to use and exhibit the art associated with the NFT, as well as a commercial license to create products that exhibit the art associated with the NFT, up to a yearly gross revenue limit of US$100,000.9

What happens in the case of resale?

Moral rights

However, irrespective of an agreement for either the author still retains his moral rights as those cannot be transferred by any operation of law.7

Are NFTs deemed Securities?

Definition of a Security

The definition also establishes that transferable securities are only those which are tradable on the capital market, with the exception of instruments of payment. The fact that ""tradability"" requires a minimum degree of standardisation, i.e. that several tokens with identical properties and rights exist which (according to the German Federal Financial Supervisory Authority (BaFin)) are comparable with one other in the sense of a ""class"" would initially seem to argue against the Prospectus Regulation applying to NFTs.

Fungibility

The explanatory memorandum on the German law implementing the former European Prospectus Directive has already emphasised in this respect that fungibility is the decisive factor for the term ""securities"".

Fractional Ownership

NFT issuers also can sell fractional interests in NFTs or groups of NFTs. As prices for some NFTs climb into the stratosphere, this approach becomes more appealing to potential buyers who want a piece of the NFT but are unwilling or unable to pay for the whole thing. According to recent statements by SEC Commissioner Hester Peirce, however, doing so increases the likelihood that the NFT would be deemed a security under the Howey test.[3] That likelihood grows where the NFT issuer or a third party claim to be able to help increase the NFT’s value."

In the case that an NFT is deemed a Security, what are the NFT Marketplaces Obligations?

If an NFT is a security, the offeror must follow securities law disclosure requirements and restrictions on who may invest.

1. Brokering Licence

The most important implication would be that anyone brokering investments in NFTs requires a licence for investment brokering (section 1 (1a) sentence 2 no. 1 German Banking Act (KWG)). Proprietary trading in NFTs or acting as a custodian would also require a licence."

2. Prospectus

There are prospectus obligations under the European Prospectus Regulation (REGULATION 2017/1129) if tokens must be classified as securities. A prospectus obligation means that a securities prospectus must be published before the security is offered to the public for the first time in order to transparently inform investors about content and risks and to enable them to make informed decisions.

3. Know Your Customer (KYC)

NFT offers must comply with KYC.

4. Celebrity Endorsements

Several years ago, in response to celebrity endorsements for cryptocurrency Initial Coin Offerings (ICOs), the SEC warned that “[a]ny celebrity or other individual who promotes a virtual token or coin that is a security must disclose the nature, scope, and amount of compensation received in exchange for the promotion.”[1] A failure to do so would be “a violation of the anti-touting provisions of the federal securities laws.”[2] The same principle would apply to NFTs

Are NFTs Subject to Federal Anti-Money Laundering Laws?

Money Laundering Schemes

It is well known that high value art has been used in money laundering schemes and to circumvent sanctions. The record sums being obtained for some NFTs has caught the attention of FinCEN and OFAC.

FinCEN and OFAC

The Financial Crimes Enforcement Network ("FinCEN") is the bureau of the U.S. Department of Treasury with regulatory authority over the financial system to combat money laundering under the Bank Secrecy Act ("BSA") and other related laws.

Guidance

To date, FinCEN has not issued guidance specific to NFTs, but it has published guidance generally about how the BSA and FinCEN regulations relate to virtual currencies that could apply to NFTs.

Substitutes for Currency

One question is whether FinCEN regards NFTs to be "value that substitutes for currency." If NFTs are considered substitutes for currency, then FinCEN could consider NFTs to be subject to the BSA and FinCEN regulations.

Digital Representations of Ownership

Since many NFTs are more like digital representations of ownership in unique assets than value that substitutes for currency, however, it seems that many NFTs available on the market should not be subject to FinCEN's oversight.