Ab Initio

Non-Fungible Token’s (NFTs) is data that is added to a file that creates a unique signature, which can be a song, an image file, a text, a tweet or any other digital format. It has been in making since 2012 and took the world by storm in 2017, when Twitter’s CEO, Jack Dorsey, sold an NFT of his first-ever tweet for USD 2.9 million and the sales of NFTs between January 2021 to March 2021, rose close to 2000%. This indicated that anything – like music, drawing, gifts or even a tweet holding sentimental value or creates a relation between the collector and the creator was worth becoming tool for earning money. The process of creating a particular NFT involves identification of a potential asset that shall be digitalized, subsequent to which the same shall be minted. The process of minting is based on the blockchain technology used in the creation and several platforms which are available and allow holder of the asset to tokenize the same. The first concern that NFTs bring about is the right the buyer gets with the purchase of an NFT. Since an NFT is a representation of an underlying work of art, its purchase might not transfer the underlying intellectual property rights to the buyer. The actual question bombing the purchasing community is – what do you own by purchasing an NFT? Do you become the holder of the IP’s involved in the NFT? When you consider the intellectual property implication of NFTs it is essential to distinguish between the ownership of the NFT and the intellectual property that underpins it. NFT is different from the work minted in the NFT. The IP is not on the NFT but on the work that is minted on the token which makes the token non- fungible.  Since, the NFT are based on blockchains designed to be decentralised and independent of third party controls, the assets can be replicated, duplicated and forwarded to an infinite extent. Creation of fraudulent NFTs or creating NFT from a copies/ stolen work is possible due to the creation options available on these platforms. The purchaser of the NFT does not own any copyright associated with the particular asset and the purchaser owns only a form of license and just a mere transfer of on NFT does not qualify as transfer of IP. NFTs being the recent development most companies have not preferred to protect their marks in classes related to virtual goods/ services, metaverse or digital commodities. NFT’s does not grant copyright privileges and the buyer is only vested with ownership of the digital asset much like a painter continues to enjoy copyright of his work even after the physical painting is sold to the buyer. The purchaser gets no proprietary rights to every copy of the purchased work, and gets only ownership of the purchased work and its original copyright vested with the creator. It has become very common to witness manifestation of this problem where someone tokenizes an artwork that does not belong to them and sells it while masquerading themselves as the original owner. Many platforms due to such issue have started picking limited users who can create the NFT’s and do not allow every user to create NFTs on their platform.

LEGAL LACUNA

The absence of legal framework leads to classification issues in India. In the current form, the legislation applicable for NFT seems to be Securities Contract Regulation Act, 1956 (SCRA) which defines derivative as a contract which derives its value from the prices, or index of prices, of underlying securities. In the broadest interpretation, NFT’s are essentially fitting this description of derivatives, section 18A of SCRA makes contract in derivatives legal only if they are traded on a recognised stock exchange. Which, due to lack of brevity, points that NFTs, currently fit derivatives as per the SCRA. Additionally, provisions in the SCRA would render NFTs as derivative only if they are on a recognised stock exchange, which does not exist for NFTs yet and are still traded only on the virtual platforms which are not recognised by SEBI and RBI. Under such circumstance, the platform where NFTs are traded will have to apply for recognition as Stock Exchange with the Central Government. Due to lack of governing legislation in relation to NFTs we see a lot of token minted by third parties which are either identical or similar to an existing well established trademark, which ultimately leads to the infringement of the holder’s trademark. Famous footwear manufacturer Nike sued a company for selling unauthorised images of Nike shoes in the form of NFTs. Nike claimed that the NFT infringed its trademark and are likely to confuse consumers leading to an assumption that the NFTs are being created and sold by the brand itself, which ultimately leads to financial loss in a consumer based brand. The actual subject matter of the NFT can be protected under the Intellectual Property subject to the fact that the same ought to fulfil the requirement to be protected. The process of minting or creating a particular NFT shall be protected under the Patents law in case the same falls under the category of patentable subject matter. In USA, the NFTs themselves are likely not copyrightable, given that the law allows copyright on “tangible medium of expression” to be eligible for copyright protection. NFTs themselves are intangible and are therefore outside the scope of U.S. copyright law. The legal implication of NFT ownership still remain murky as far as “ownership” under law is concerned it will in all probability take a couple of landmark and defining court decision to help owner and enthusiasts to navigate the water.

IMPACT OF WEB 3.0

Web3 consists of applications and data produced on a decentralised technology. On a broader spectrum it includes cryptocurrency, Decentralised Autonomous Organisations (DAO) and digital assets like NFTs. The concept of virtual reality and augmented reality got modified with emergence of metaverse with more interactive options. Web3 is internet owned and built through users’ generated tokens. Web3 got tremendous boost in 2022 with the introduction of NFTs and gaming industry in the system. Users are now creating NFT gaming avatars and trading on Web3 creating a USD10 billion industry within the first quarter of 2022. Developers are preselling gaming avatars in the domain to fund development of games and projects. Web3 could become a major monetization hub for items of value in future. Though at nascent stage, Web3 could revolutionise the internet in future. As major servers are controlled by big tech companies, control over user data remains scarce. Open-source domain with tighter data security with help of different nodes in the blockchain could provide greater user data security. The ownership over the NFT/data will always remain with the user without any third-party infringements. GIFs, Jpegs have become the new form of artwork in the virtual sphere. There has been significant shift from traditional modes of painting to paintings created on blockchain. There has been significant rise in short still and clips being sold on the internet which can be obtained for significant less money. NFTs are being used by luxury brands like Louis Vuitton, Prada to track legitimacy of products stored on AURA Blockchain.

NFT AND IP RELATIONS

Any NFT buyer only receives a cryptographically signed receipt proving they are the rightful owner of that specific copy of the NFT. This needs to be understood more precisely as the buyer receives merely ownership of the purchased work and not the original copyright that belongs to the author; For instance, the NFT of the animated digital cartoon Nyan Cat is owned by a person who paid thousands of dollars for it. Christopher Torres, who created the original doodle of Nyan Cat, still holds the original copyright. This is due to the following fundamentals: Every NFT has a unique serial number or hash which cannot be duplicated. A single digital file creates one specific hash and cannot be replicated or reproduced. The ownership of the NFT pertaining to the copyright gets transferred only when the original author transfers those rights to the NFT owner. If transfer is made through license various restrictions including reproduction, sharing copies or creating derivatives could be restricted based on nature of transfer. The owner of the NFT having copyrights have all the rights provided under Section 14 of the Indian Copyrights Act 1957 including reproductions and modifications. The question of enforcement arises as NFT ownerships is bound by decentralised nature of blockchain making all transactions immutable.

CONCLUSION

NFTs are financial instruments and driven by demand and supply mechanics. It also comes with significant Intellectual property rights issues and ownership confusions. The effective way to decrease such issues is to create distinction between ownership and property implication of NFT. Requisite regulations and broadening the scope of current legislation remains need of the hour. Taxation of cryptocurrency is one step towards recognition of crypto in the sector. Deepening crisis in term of crypto valuation could prove to be major hindrance in adoption of NFTs on the longer run. The daftness of selling ownership in digital art for excessive rates has been widely talked about topic on social media and news media suggesting owning digital art is worthless. The more practical, real world value of NFTs as a means of authenticating physical items- is, interestingly, even less certain. Therefore, securing one’s IP rights is essential to prevent being knocked off in the real world.