[This piece has been authored by Deoswaroop Gupta, a student at the KIIT School of Law, Bhubaneswar.]

Introduction:

This previously unknown form of owning digital assets has taken the world by storm in the past year, with companies and famous individuals promoting it to extract more and more value from such digital assets. As creative artistic work enters the NFT market, it becomes crucial to analyse the issues about the Intellectual Property Rights of such works that do not have the same relationship with IP protection as traditional works do. This essay aims to inquire about the basics of how NFTs work using blockchain technology. It also tries to examine the complexity of securing NFTs under Intellectual Property Laws such as Copyright Law, Trademarks, etc.

Understanding the basics of NFTs and Blockchain:

Non-Fungible Tokens or NFTs can be understood as non-exchangeable tokens that have an underlying asset. This means that, unlike Cash, NFTs cannot be interchanged. These are created through a process known as “minting,” in which the unique token is generated as per the blockchain’s standard.  This is done with the help of blockchain technology, through which it can be verified as to who is the original owner of the work. A blockchain is simply a database or a collection of large amounts of information stored electronically in an organised structure, such as a blockchain Each block contains data pieces, such as random numbers or letters (hash), that are unique within the block and are linked together in a chain. When data within a block changes, so does its hash. This makes a difference throughout the entire chain. This makes it almost impossible to hack and the only way to do so is to have control of at least 50% of the total database of millions of computer networks around the world. This makes the whole system secure and fool proof.

How NFTs work:

NFTs are unique. Some specific attributes make it different from traditional assets. Firstly, they are intangible, meaning that they are digital. This might be anything; an artwork, a jpeg image, a GIF (Graphic Interchange Format), or virtual items in a video game. For example, if someone owns an artwork, he owns that work in a much narrower sense. This does not give the person any commercial rights over that piece of work, because he does not own it in an actual sense, it just proves that the person has the ‘bragging’ ownership of what might be one of such copies of thousands of exactly similar pieces of artwork.

Such a digital asset can be uniquely identified and has a non-fungible authenticity certificate thanks to minting. Because a copy of an NFT will not have the same certificate, it will be identified as counterfeit.

Such non-fungible tokens can then be exchanged in the form of smart contracts. These replace the long and tedious contracts with short details of the underlying asset that is attached to the NFT, such as the software codes, the unique identification number, the rules, and rights of the NFT holder, the royalty payment, bonds, invoices, etc. This helps both the buyer as well as the original creator of the NFT.

Reason for the popularity of NFTs:

Unlike traditional forms of transactions and buying and selling of goods; NFTs are a form of electronic payment system based on cryptographic proof instead of trust, which allows two parties to transact with each other directly without any need for a third party.

NFTs may hold sentimental value for some people or for some, they can be a good source of financial investment. This creates a relationship between the creator and the collector, making the NFT unique or even valuable in few cases.  

 But NFTs seem to pose a threat to the rights of copyright holders. It isn’t a mere speculation but a fact that the works of the authors are already being misappropriated and minted into an NFT without the author’s permission. Many artists throughout the globe have reported that digital copies of their works have been sold through scam accounts without their knowledge. In this background, it becomes relevant to consider the potential remedies available to copyright holders.

The Indian Dilemma:

While Non-Fungible Tokens have been around for a while now, their popularity for it in India has recently gathered steam. There have been digital marketplaces established which provide users with the ability to buy NFTs from their favourite artists, using cryptocurrencies. Herein lies the problem.

Because there are no proper laws to regulate cryptocurrencies and NFTs in India, there is much confusion regarding the credibility of the ownership of such digital assets. So, for protection, individuals and companies will have to rely on the existing IP laws.

For creators of NFTs, The Copyright Act of 1957 may help to some extent. As is with creators of any traditional artwork, the creators of such digital assets (NFTs) can be protected under the Copyright Act. Section 57 of the Act provides for ‘Author’s special rights. These uphold the moral rights of his work; the same can be done in the case of NFTs, where the author will have the right to claim authorship of his work and the right to prevent anyone from mutilating, distorting, or modifying it. This also gives him numerous rights under Section 14 of the Act.

 NFT owners can include consumer-market brands with logos and trademarks, book authors, movie actors, songwriters, game companies, and even physical art-producing artists. These owners are likely to share their assets with others, which others can mint as an NFT, potentially infringing on the owner’s rights. Nonetheless, NFTs do not come with IP rights by default.

There is a misconception that when NFTs are bought, the copyright of the work is also transferred, giving the person intellectual property rights. This is wrong. As explained before, owning an NFT entails owning a specific digital copy of the work, and it is a digital certificate registered in a blockchain that authenticates only the digital version. In this case, the property itself, creative work, is not transferred. This means that, in most cases, the underlying copyright remains with the author of the original work, unless it is also transferred along with the NFT.

So, in cases of NFTs, the Copyright still rests with the creator of that NFT, rather than the buyer, who only gets a copy of that work in form of a token. Due to the decentralized and discreet nature of blockchain technology, it may be difficult to trace any kind of unauthorized use of NFTs by the purchaser against the terms and conditions of the creator.

NFTs and Trademarks: The use of a mark during business to identify the source of products and/or services and to distinguish between goods and services from different sellers is covered by trademark law i.e., via Trademarks Act, 1999 in India. The Federal District Court in Alibaba Group Holding Ltd. v. Alibaba coin Foundation held that a cryptocurrency could be regarded as a well capable of bearing its trademark. This should give some perspective on the protection of trademarks in the case of NFTs as they are identical to certificates of authenticity and can be trademarked using the same principle that applies in the above case.

Patents and NFTs: The Patents act, of 1970 does not mention anything about NFTs or such digital assets. Patents allow an NFT blockchain owner to license the technology they use for their NFT and let the consumers possess genuine collectables of the brand. For example, the famous shoe brand Nike owns a patent to generate “cryptographic digital assets for footwear,” which allows the consumers to guarantee the originality of the purchased product while also having a digital collectable version of their shoe in their wallet (Cryptokicks). However, it is pertinent to note that the patented invention needs to be novel and eligible to own patent protection.

Conclusion:

NFTs have a huge potential, as more and more people are considering transactions through cryptocurrencies. Still, there is apprehension in India because of the lacunae of specific IP laws dedicated to handling such digital transactions. In a system where anyone can create and sell tokens of any asset, it is critical to consider more serious legal issues such as copyright rights. A minter must understand the underlying copyright condition when creating an NFT. As a buyer, you should be aware of unauthorised NFTs and their consequences. Furthermore, understanding the terms of an NFT’s use is critical for avoiding unwarranted legal action. As Cryptocurrencies is the way that NFTs can be traded, the Government must make laws for both and should amend the existing IP laws to include NFTs to exclude any kind of inconsistency and redundancy to suit the new technology.