INTRODUCTION
The tremendous advancement in Information Technology has given rise to a lot of emerging digital assets such as Non – Fungible Tokens (NFTs), Crypto currency and many more. These assets are completely intangible as they exist only in the virtual or digital world. As their popularity is significantly increasing day by day, a lot of legal issues are also increasing along with it.
NON FUNGIBLE TOKENS (NFT’S)
Non-fungible tokens (NFTs) are assets that have been tokenized via a blockchain. Tokens are unique identification codes created from metadata via an encryption function. These tokens are then stored on a blockchain, while the assets themselves are stored in other places. The connection between the token and the asset is what makes them unique
Cryptocurrencies are tokens as well; however, the key difference is that two cryptocurrencies from the same blockchain are interchangeable—they are fungible. Two NFTs from the same blockchain can look identical, but they are not interchangeable
NFTs are created through a process called minting, in which the asset's information is encrypted and recorded on a blockchain. At a high level, the minting process entails a new block being created, NFT information being validated by a validator, and the block being closed. This minting process often entails incorporating smart contracts that assign ownership and manage NFT transfers.
As tokens are minted, they are assigned a unique identifier directly linked to one blockchain address. Each token has an owner, and the ownership information (i.e., the address in which the minted token resides) is publicly available. Even if 5,000 NFTs of the same exact item are minted (similar to general admission tickets to a movie), each token has a unique identifier and can be distinguished from the others.
Many blockchains can create NFTs, but they might be called something different. For instance, on the Bitcoin blockchain, they are called Ordinals. Like an Ethereum-based NFT, a Bitcoin Ordinal can be bought, sold, and traded. The difference is Ethereum creates tokens for the asset, while Ordinals have serial numbers (called identifiers) assigned to satoshis—the smallest bitcoin denomination.
An NFT is a digital asset that represents real-world objects like art, music, in-game items and videos. NFTs have caught the eyes of the people as early as 2012; however, it took the world by storm in 2017, when Dapper Labs initiated the sale of NFTs linked with rare digital cat cartoons named Crypto Kitties that allowed people to trade virtual kittens over the internet, making people turn head-over-heels. This significantly suggested that anything— such as music, drawings, gifs, games, or even a tweet — was worth becoming a money-earning NFT. Since these transactions are tracked on blockchain ledged, individuals can identify the creator’s originality or avoid fraudulent purchases. Common NFT marketplaces such as OpenSea, Rarible, NiftyGateway, etc., allow creators to collect a royalty on subsequent resales of the original work within an NFT.
Not just monetarily, but the blockchain-based NFT also promotes the creative ecosystem. Grammy Winner Imogen Heap once wrote, “Blockchain has the potential to provide a more quick and seamless experience for anyone involved with creating or interacting with music,” thereby embracing blockchain systems in the music industry. In the tokenization realm, Bitcoin Founder Satoshi Nakamoto appreciated the NFT system by stating that an “electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.” The company, Valuable, even quoted:
‘Owning any digital content can be a financial investment, hold sentimental value, and create a relationship between collector and creator. Like an autograph on a baseball card, the NFT itself is the creator’s autograph on the content, making it scarce, unique, and valuable.’
Nevertheless, as the popularity bubble of NFTs rises higher the tokenization process comes up with several challenges to ownership and potential infringement issues intertwined with their asset. Therefore, it becomes essential for individual creators and companies to overview the tender dynamics of NFT protections in their intellectual property protection strategies.
NFT’S THROUGH THE IPR PERSPECTIVE
Copyrights
When someone purchases an NFT, the purchaser only gets the ownership of the particular copy of the NFT in the form of a cryptographically signed receipt. Here, two confusions must be clarified: first, the purchaser gets no proprietary right to every copy of the purchased work, and second, the purchaser gets only ownership of the purchased work and not its original copyright vested with the creator. For example, a person who paid thousands of dollars to purchase the NFT of an animated digital cartoon, Nyan Cat, owns the copy of that. The original copyright is still in the hands of Christopher Torres, who made the original doodle of Nyan Cat. This is because of the following basics: each NFT has a one-of-a-kind serial number or “fingerprint” (hash) that cannot be duplicated. Because a hash is a cryptographic key produced from a single digital file, it will only equal one copy of that material. It, however, suggests that ownership of NFT is not necessarily beneficial. Nevertheless, here is where licensing and smart contracts help.
Ownership of the underlying rights will only transfer in the case of copyright if the creator of the original work specifically agrees to transfer those rights to the NFT owner. If and when copyright is transferred through licensing, an NFT owner can be disallowed to reproduce, share copies, publicly perform, exhibit, or create derivatives of the original asset, depending on the circumstances of the transfer.
The copyright owner possesses numerous rights, inclusive of the right to create reproductions and modifications, under Section 14 of the Indian Copyright Act of 1957. The customer obtains a copy of the underlying work (in some digital format, e.g. jpeg, pdf, or.mp4) as well as the NFT itself, i.e., tokens when they acquire an NFT that corresponds to creative work. Any unauthorized reproduction, distribution, or adaptation of an NFT may be considered copyright infringement because it entails copying the creative work and sending it to the customer. Due to NFT ownership’s decentralized nature and immutability of blockchain transactions, enforcing IP rights against a purchaser can be challenging once the NFT is sold. An NFT is usually linked to a digital wallet address (just like a bank account), but without sophisticated digital forensics, determining the wallet owner’s identity might be difficult. Therefore, using strong (but legal) takedown notices could prevent the NFT from being sold in the first place.
Trademarks
When a business person tries minting an NFT for an underlying asset, his first and foremost strategy would be to be unique in the marketplace. However, when an unauthorized or competitor party tries minting, selling, or re-selling that NFT using the asset owner’s registered trademarks without the asset owner’s permission, the act results in trademark infringement. For example, as the owners of big fashion companies such as Tiffany, Louis Vuitton, and Dom Perigon are using the AURA blockchain for consumers to trace the authenticity of their branded NFTs, a key question arises that whether the business owns NFTs over trademarks or the assets being sold?
This dilemma can be significantly resolved if industry players expand their trademark registrations to incorporate NFTs in their trademark maneuver and classifications. They may also opt to link their brand with specific styles or trade dresses. Where relevant, design patents should also be considered since their revenue profit and sales are often significant.
Patents
With the help of patents, an NFT blockchain owner is able to licence the technology that powers their NFT and give customers access to real collectibles of the brand. Famous shoe company Nike, for instance, has a patent on creating "cryptographic digital assets for footwear," which enables customers to ensure the authenticity of the purchased item while also carrying a digital collectible version of their shoe in their wallet (Cryptokicks). It is important to remember that a patented idea must be new and qualified for patent protection.
NAVIGATING NFT LEGALITY: EXPLORING INTELLECTUAL PROPERTY RIGHTS AND GREY AREAS
While NFT transactions can significantly alter the art market by making transactions more accessible and secure, there are still questions about the seller’s genuineness. It is common to witness manifestations of this problem, such as when someone tokenizes an artwork that does not belong to them and sells it while masquerading themselves as the original owner. In such cases, the copyright owner has civil or criminal remedies available under Section 55 or Section 63 of the copyright laws, respectively. To evaluate whether an infringement has occurred and whether it falls as per Section 52 of the Copyright Act, the principles of copyright infringement outlined in Section 51 of the Copyright Act will be applied.
According to Section 79 of the Information Technology Act of 2000 and the Intermediaries Guidelines/Rules, the obligation will also lie on the NFT marketplaces and platforms. These provisions jointly impose a duty on intermediary platforms to exercise due diligence and act quickly if they become aware that their platform is being used to support an illegal act. They become responsible as a facilitator of the act if they fail to do so.
Nevertheless, there stand more hurdles to the win. Even though NFTs have reaped enough popularity and usage across the globe, there are no rules in India that control the trade of NFTs. The legal ambiguity surrounding the legality of cryptocurrencies in India is perhaps the most significant impediment to NFT trading because NFTs are only sellable in cryptocurrencies. As a bill in 2019 called the Banning of Cryptocurrency and Regulation of Official Digital Currency Bill was introduced, advocacy for a complete ban on cryptocurrencies veiled, including the NFTs. According to the draft bill, any direct or indirect deals in digital money would be subject to criminal penalties, including up to ten years in prison.
Aside from the bill in question, the Reserve Bank of India (RBI) attempted to ban the use of virtual or cryptocurrencies in 2018. The Internet and Mobile Association of India, other organizations, and a few enterprises that manage online crypto-assets exchange platforms, filed appeals in response to the said order.
The Apex Court threw aside the notice on the grounds of proportionality after considering various considerations in India and worldwide. The three-judge bench stated that the RBI could not place limitations on cryptocurrency trading because there was no legislation prohibiting the purchase or sale of these currencies. The court found that such restrictions would infringe on persons’ fundamental right to engage in any lawfully permitted trade. Although IP rights can be claimed under the Indian Copyright Act, 1957, the regulatory issues pose an unclear risk to new NFT investors and purchasers.
CONCLUSION
The mechanics of demand and supply drive the ownership of an NFT, much like any other asset in the real world. Because NFTs are one-of-a-kind, there is a sense that their rarity adds to their worth. An NFT can be a financial investment, a means of creating a link between a collector and an artist, or carrying sentimental worth in the art world, much like any tangible painting or sculpture. Nevertheless, it all comes with IP rights issues and ownership dilemmas. Therefore, when considering the intellectual property implications of NFTs, it is essential to distinguish between the ownership of the NFT and the intellectual property that underpins it. The rights granted by an NFT seller are decided by rights transferred through a license or assignment, which can vary from one NFT to the next. India should also learn from countries with well-balanced legal and regulatory environments, such as Singapore, Canada, Japan, and Switzerland. The legalization of cryptocurrencies is required for the seamless trading of NFTs in India. As a result, what is required is a solid legislative stance on this issue and a clear statutory framework.
While NFTs have become more prevalent in recent months, their future remains questionable. Critics worry that the NFT market is a bubble ready to burst or become oversaturated with tens of thousands of digital assets. The folly of selling ownership in digital art for excessive rates has been widely discussed on social and news media, with many jokes 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. Businesses are only now starting to invest in and utilize blockchain technology in general. However, given the technology’s potential and, admittedly, absurdity, it appears to be here to stay. Therefore, securing one’s IP rights is essential to prevent being knocked off in the market.
REFERENCE
Written By
Purva Dhamale
Intern, Chanchlani Law World
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