Stronger, tailor-made policies need to be put in place to protect IP rights for NFTs, and an ever-growing industry. Most lawmakers approach crypto policy by looking at securities laws – however, it wholly fails to account for non-fungible tokens, and intellectual property interests.
While some creators and collectors consider their NFTs as financial assets or securities, taking this approach can damage the potential for the commercial use of NFTs for everybody: from creation, monetization, and audience engagement.
On a global scale, it’s important to advocate for policy that can improve and protect IP rights holders, so the creative industry can positively grow in ways we’ve never seen before through NFTs.
But why IP rights?
The US Patent and Trademark Office (USPTO) reports that domestic industries that strongly rely on IP protection account for over 41% of US gross domestic product (GDP), and employ one-third of America’s total workforce. The American IP ecosystem, which includes producers and broadcasters – firm-based and independent, is worth $6.6 trillion, and accounts for 52% of American-made merchandise exports, according to the US Chamber of Commerce’s Global IP Center (GIPC).
If we consider how important IP is to an economic superpower, why can’t policymakers hold the same importance to NFTs?
If effective IP regimes and laws are put in place, it can incentivise creators and companies to foster a competitive creative industry as they generate new IPs. We’re already seeing how NFT IP holders are using their rights to use their NFTs in innovative ways to capitalise on them.
While the USPTO is currently studying how IP law and policy issues are related to NFTs, America’s corporate sector is putting in the effort to research and develop meaningful digital marketing strategies through NFTs and IP rights.
In creating new opportunities (and a new creative class), mainstream brands like Nike, and Tiffany & Co. have sold NFTs for a cumulative for tens of millions of dollars in revenue just in 2022 alone. Household brands can also enlist brand ambassadors almost instantaneously through NFT drops, offering engagement through experiences just by having IP ownership of an NFT, and being part of its community.
Notably, the trend for wanting IP ownership isn’t quite dying down yet. Despite late 2022’s inactivity in the NFT markets, US-based artists Tyler Hobbs and Dandelion Wist Mané’s NFT project QQL successfully sold out for nearly $17 million at the same time. QQL is a collaborative generative art experiment that brings its collectors to become co-creators as they use a specially-designed algorithm to add an NFT to the collection.
If we (or some government entities) put a stamp on top of NFTs, deeming all of them securities, it can hinder how Web3 creative communities can grow and thrive.
How can we establish IP rights for NFTs?
It’s not all hopeless yet. NFT creators and owners are already using what’s in current law books to claim their IP rights in Web3.
Last year, contemporary artist Ryder Ripps had been sued by Yuga Labs for trademark infringement as Ripps made copies of Bored Apes. The stunt was pulled right after Ripps argued with j1mmy.eth, a prominent NFT influencer, as Ripps was trying to prove against claims that owning an NFT gives someone unique ownership over a given NFT’s image, and that his actions fall under the “fair use” clause – where legal copyright is exempted if content is used for education purposes.
“The BAYC images are another story. There’s no real question that they are copyrightable and that RR’s use of them is prima facie infringing,” says Brian Frye, a lawyer and conceptual artist.
“But using a BAYC image to illustrate an NFT available for sale is the same thing the copyright owner is doing in order to monetize the work, so courts are unlikely to see it as a fair use,” he continued.
Nike also experienced its own fair share of problems, when the global sportswear brand alleged that sneaker retailer StockX infringed trademarks upon creating NFTs that correspond to Nike’s existing, physical shoes sold on its webstore – where StockX argues that they are permitted to do so under the first-sale doctrine.
While NFTs themselves have been used in US law enforcement measures, that’s just another use case for NFTs. While some NFTs and their smart contracts can be used as digital rights management (DRM) tools – or anti-piracy tools – it’s only up to how the NFT is licensed to see whether you’ve infringed on the creator’s rights.
Meanwhile, the Creative Commons CC0 licence, has been gaining popularity within the NFT world – where any work under said licence is made available for unrestricted use. Otherwise known as open-source IPs, anyone can use an NFT for commercial purposes without needing to give credit to the original creator, or brand.
Creators have been turning to CC0 for an alternate way for NFT communities to flourish. According to Coakz_lore on Twitter, “CC0 lowers friction to use > more use increases awareness > more awareness increases desirability > more desirability increases price.”
Another popular Creative Commons licence, Attribution-NonCommercial 4.0 International (CC BY-NC 4.0), gives IP owners the right to freely “remix, transform and build” from content, but also requires giving credit to the original creator of the NFT, while not using it for commercial purposes.
How do financialised NFTs come into the mix?
Speaking of other use cases for NFTs, instead of the PFP (profile pic) NFTs out there, 2022 was the year of the rise of the financialised NFT. 2022 brought in new ways to use NFTs as a financial product – as platforms where people can loan and borrow NFTs as collateral became increasingly popular, and projects were promising high returns to their “investors.”
However, the financialization of NFTs can make them subject to securities laws, lending laws, and other financial regulations thrown into the mix.
Because of this new potential and use case for NFTs (on top of pre-existing bias against crypto) the US Securities and Exchange Commission (SEC) Gary Gensler has taken a stance that most tokens – including fungible and non-fungible tokens as securities.
Suppose the SEC will sweep NFTs as a whole under the ‘securities’ category, it can be bad news for the growth of IP-focused NFTs, and the nascent Web3 creative class. Regulatory constraints can be enforced: including limits on transferability, and artists and teams can inadvertently be labelled as investment companies under the SEC’s eyes.
If the SEC decides to take this approach, the US can’t expand its IP industry, and reap the potential of a new creative economy. Lumping in NFTs in the category of securities just because of financialised NFTs will prevent the potential of even more economic growth.
It also goes without saying that securities laws are insufficient to cover the number one risk for IP-focused NFTs: potential consumer harm. The IP NFT world isn’t immune to scammers, and not enough measures are put in place to protect people from taking advantage of new technology through bugs, new users, and not to mention – the “rug pull”.
NFT consumer rights: the first step to NFT IP rights
The US Department of Justice (US DOJ) has already implemented consumer protection laws as it brought criminal charges to NFT projects that have become known to be rug pulls – and it’s time that these consumer protections rights should be adjusted and applied to accommodate for NFTs.
Consumer rights should be pushed to beat the centre for creating policies for NFTs, an industry that needs to motivate artists, brands, and fans to survive. Rather than having entities like the SEC lead crypto and NFT policy through an enforcement-centric approach, NFT IP advocates suggest that US Federal Trade Commission (FTC) laws can also be potentially adjusted and applied to also protect NFT consumer rights.
By protecting the creation of valuable IP rights for NFTs, the ecosystem can grow and continue to thrive – as long as there are measures introduced to appropriately protect IP ownership and rights.