Non-Fungible Tokens and IP Rights

Fungible tokens (FT) are tokens that enable one part or quantity to be exchanged by another equal part or quantity which means that the tokens can be easily exchanged for another item of value. Every token is the same as every other token and is capable of mutual substitution. For example, if someone borrows 1 ether (ETH – a cryptocurrency) then they will most likely spend that 1 ETH and give back another 1 ETH of the same value. The borrower can also return for example 0.5 ETH twice as the fungible tokens are divisible. Coins, such as Euro coins, for example, are also “fungible” in this respect since the coins can be spent (or exchanged) for small value items – (even if collectors would probably object that some rare years or minting errors make individual coins non-fungible as they have an enhanced value.

On the other hand, non-fungible tokens (NFT) are unique items that cannot be exchanged for the same amount of the same kind, because they are unique, possibly rare (scarce) and each NFT has several different functionalities and characteristics. An example of this would be an item that cannot be replaced by another similar item, like the picture of the Mona Lisa hanging in the Louvre in Paris. If someone borrows this picture, then they have to return the exact same picture.

One of the main differences between fungible and non-fungible tokens is the fact that FT’s are divisible whereas NFT’s are not. FT’s can be borrowed, returned and otherwise transferred in parts, whereas NFT’s cannot be divided into parts. As such each of the NFT’s are distinguished from each other.

There are countless uses of non-fungible tokens. We can see the trend for “tokenization” continuing and the NFTS will be used to tokenize practically anything that is possible to tokenize. In this respect, the concept of ”tokenization” means replacing valuable and/or sensitive data, assets, rights, payments cards etc. with a less sensitive digital form. The FT’s are used for digital collectibles or gaming props, such as weapons, clothes, and other items. The NFT’s can represent a painting, a song, real-estate, precious items, vehicles, and all other property. It is also possible to use the NFT’s to verify a person’s identity or represent birth certificates, licenses, academic credentials as well as for ticketing events or even voting in election.

The positive side of NFT’s is that they are unique, scarce, durable and extensible.

Not convinced yet? On March 11, 2021, a work of art called “Everydays: The first 5000 days″ by creator Mike Winkelmann (artist name “Beeple″) was auctioned by Christie’s auction house for USD 69,346,250. What’s special about this work of art is that not a single drop of real paint was used for marking the artwork. The original exists only as a digital signature in a blockchain as an NFT paid with Ether.

Are NFTs only for crypto-nerds? Who else would spend millions of dollars on a virtual piece of art? The tokenization of digital works makes perfect sense: While an original always exists in the case of physically created works of art and this original piece can be distinguished from reproductions at any time, no counterpart in the sense of a “digital original” exists in the digital space as yet. Digital works are basically freely reproducible and copies always resemble the original 1:1. With NFTs, “digital originals” can now be created and traded for the first time.

IPwe, a platform for the world’s intellectual property ecosystem, recently announced that it plans to begin representing corporate patents as non-fungible tokens in collaboration with the computer company IBM. The tokenization of intellectual property will, according to the announcement, help position patents to be easily sold, traded, commercialized or otherwise monetized. In other words, turning patents into NFTs makes it easier to have those patents reach the market.

“The use of NFTs to represent patent will help create completely new ways to interact with intellectual property,” said IPwe CEO Erich Spangenberg. IPwe expects tokenized intellectual property on the platform to be “commercially available” in the fourth quarter of 2021.

However, there are numerous legal questions, e.g., regarding financial obligations, copyright classification as well as civil law, criminal law and data protection challenges.
Let’s imagine that you bought a Mickey Mouse plush toy for your child. If someone asked you if you own that plush toy, your answer would be an unequivocal “yes!” But what if you wanted to take the Mickey Mouse design from the plush toy, put the design on a T-shirt, and then sell that shirt? Well, you aren’t allowed to do that. Why? Because the design is Disney’s intellectual property, and they guard it carefully. You may own the plush toy, but Disney still owns the rights to the design.
With NFTs, that traditional model of copyright enforcement goes out the window.

The NFT’s usefulness when it comes to IP rights is currently limited, and even problematic. The dilemma here is that ownership of the NFT does not translate into ownership of an original work. In other words, buying an NFT does not mean that the purchaser is buying the underlying IP rights in a given content. Buying a piece of art does not mean that the copyright to that artwork is transferred to the buyer.

From the perspective of copyright, an NFT is a simply digital receipt showing that the holder owns a version of a work. The buyers’ “beliefs” about what they own do not translate to legal reality.

Copyright law in Germany and Europe, for example, generally provides that creators can participate in any subsequent increase in the value of their works (Section 32a German Copyright Law). This is quite likely in the case of traded NFTs. It would be necessary, for example, to allow the creator to participate automatically in increases in the value of his work when NFTs are resold, by transferring part of the sales proceeds or the increase in value to the creator automatically via smart contracts.

Most blockchains are publicly viewable, i.e. transactions can be traced by anyone. The participants are only pseudonymized, not anonymized, so that in Germany, for example, the European General Data Protection Regulation and other local laws can apply in principle. There are already numerous analytics services that evaluate blockchains and especially bitcoin transactions. These services can even create profiles about investor behavior, and so data processing on a blockchain should not be neglected from a legal point of view.

Even though non-fungible tokens are still rather new invention, it is important to create and launch them with diligence and care. The regulation of such tokens is still not developed. Even in the case where your NTF does not grant any kind of property or monetary rights, it is important to carefully consider your token economics and to comply with the relevant international and national laws.

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