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NFTs Present Opportunities and Challenges for IP Rights Holders | PRO Insight

Non-Fungible Tokens (“NFTs”) are a relatively recent technology garnering significant attention as a way for copyright and trademark owners to exploit and protect their rights. While developed several years ago, interest in NFTs has increased in just the past few weeks as big names make splashy transactions for millions of dollars using NFTs. But as with any new technology, its adoption raises several questions that implicate intellectual property rights.

What Are NFTs?

NFTs are based on blockchain technology, like cryptocurrency (e.g., Bitcoin), that allow users to buy, sell and trade them completely digitally. Like cryptocurrency, information about the ownership of the NFT is stored on the blockchain, making it nearly impossible to create counterfeits or to illicitly transfer NFTs outside of approved exchanges. Unlike cryptocurrency, though, each NFT is unique, is not interchangeable, and rises or falls in value independently of each other. They are thus seen more as collectibles. Because each is unique, they can derive value based on digital scarcity, as well as proof of ownership and authenticity.

NFTs were first developed in 2017 and saw early use in collectible digital art and online video games. In gaming, the game publisher could reward players with unique prizes, in-game items, or collectibles, each of which are tied to a particular NFT.

An artist, on the other hand, can create a digital piece of art connected to an NFT. The artist could sell the piece, recording the transaction in the blockchain, after which the buyer would have a unique artwork whose authenticity and ownership are also digitally recorded. That NFT rises or falls in value based solely on what someone would be willing to pay for the artwork. If the buyer sells the piece, the new owner is assured of purchasing an authentic work. The artist could also create numerous copies of the piece, each recorded on its own NFT, and each of which can be bought or sold independently of each other, and for different values.

Given that nearly anything digital can be linked to an NFT, rights holders have a lot of flexibility in monetizing their works and brands in the future.

Recent NFT Developments — How Can Rights Holders Benefit From NFTs?

In the past several months, and particularly in recent weeks, artists and companies have taken advantage of NFTs in a variety of ways.

Artists are selling digital pieces for millions of dollars, as investors are purchasing them like speculative commodities. Digital artist Beeple, for example, posted a new piece of artwork online every day for 5,000 days. Those pieces were auctioned as an NFT-linked collage by Christie’s and ended up selling for $69 million. While anyone can copy and paste the image from the auction listing and obtain an unauthorized copy of the work (which some already claim to have done), the buyer will have the NFT, whose transaction history is recorded on the blockchain, and thus will be the only person with the authentic original whose provenance can be easily shown. Anyone can likewise own a copy of the Mona Lisa, but that does not impact the value of the original, which is estimated to be over $700 million.

Digital goods company Top Shot sells sports collectibles that feature short basketball video highlights that are sold much like digital trading cards, each based on its own NFT. The rarest of these highlights (a LeBron James slam dunk from last season, for example) are selling for over $200,000 in the company’s secondary market. While anyone might have a copy of the video of the play itself, it is the rare nature of the collectible (for which ownership can always be tracked, and for which an illegal copy will have no value because it cannot pass as the original) that creates value, and that value is whatever someone will pay for it. In the past few days, Kansas City Chiefs quarterback Patrick Mahomes and Tampa Bay Buccaneers tight end Rob Gronkowski have announced they will be offering their own NFT-based artwork and collectibles for purchase.

Not to be outdone, Twitter founder and CEO Jack Dorsey generated a lot of buzz when he stated his intention to create his own sort of collectible — offering to sell his first-ever tweet as an NFT. Early bidding placed the item at over $2.5 million.

Musicians have recently experimented with NFTs to sell albums. The musician Justin Blake, known as 3LAU, recently allowed fans to bid on 33 NFTs, each of which could then be exchanged for special edition vinyl albums, unreleased music, and other goods. The rock band Kings of Leon is likewise selling various NFTs, some of which can be exchanged for an album, while others will offer perks like front-row concert seats for life and exclusive digital artwork. Musicians like Portugal. The Man, Shawn Mendes, Grimes and Mike Shinoda have also recently announced plans to release music via NFTs.

Musicians and artists (and likewise, soon, other content creators) see potential value in NFTs for a few reasons. First, it allows them to sell their works directly to consumers, and realize revenues from those sales immediately. A musician, for example, need not wait for SoundScan or Spotify royalty reports to filter through their label, while waiting months for a royalty check from album sales. The musician could also sell NFTs redeemable for concert tickets without waiting for the ticket company to pay out sales after the event has finished, or even limited-edition merchandise, all directly to fans. If tied to an NFT, the tickets would be nearly impossible to counterfeit, saving fans the danger of purchasing fake tickets on the secondary market. The musician could even prevent/limit markup or resale of the NFTs to ensure ticket resellers are not purchasing all the tickets and selling them for highly inflated prices to true fans.

Artists and musicians could also build in the ability to receive a royalty from subsequent sales of the work. When one sells a piece of artwork, for example, it could be bought and sold dozens of times, but — with limited exceptions in other countries — the artist only benefits from the first sale. With an NFT, on the other hand, the seller might structure the token so that the artist receives a portion of any additional sales, so as to benefit from the increased value of their works. The mechanism for paying such a royalty differs by platform, as some allow the seller to set an automatic royalty if the token is resold and others do not offer a royalty at all. The process must also still be developed in many circumstances, e.g., if the token is transferred for a cash payment or is sold on a platform that does not offer royalties. Nonetheless, it is a benefit that creators are working to establish, and which many in the crypto community appear to support. In this manner, an artist might not object to high ticket resale prices if the artist is able to benefit through higher royalties.

Brand and patent owners might take advantage of the technology as well. For example, Nike recently obtained a patent for what it calls CryptoKicks – physical shoes that are also tied to NFTs. As Nike’s patent explains, “When a consumer buys a genuine pair of shoes — colloquially known as ‘kicks’ — a digital representation of a shoe may be generated, linked with the consumer, and assigned a cryptographic token, where the digital shoe and cryptographic token collectively represent a CryptoKick.” The CryptoKick would track not only the digital version of the shoe, but also the ownership of the physical shoes. A consumer could sell the shoes, both physically and on the blockchain, and the buyer would be assured that the shoes are not counterfeits.

Given that the counterfeit sneaker market is in the hundreds of billions of dollars (a Federal complaint filed against one counterfeiter last year claimed that for the 22 containers of counterfeit shoes seized in one transaction, the MSRP of the shoes, had they been genuine, would have been $472 million), the ability for brands to sell products that are identifiably authentic could be a game-changer in the fight against counterfeiting. Similarly, a patent owner might sell genuine products that are linked to an NFT whereas infringing products would not be. NFTs will not be appropriate for all goods, but they have the potential to enhance intellectual property protections in the right circumstances.

What Should Rights Holders Be Aware Of?

Blockchain technology is still largely unregulated and is often compared to the wild west. Thus, before NFTs can benefit from widespread adoption for rights holders, there are a number of questions and issues that must be addressed.

Given that intellectual property rights are jurisdictional and blockchain technology is not so limited, there may be challenges to enforce rights to U.S. intellectual property against someone copying the IP who purchased the NFT in another country. Indeed, current uses of NFTs suggest that there may be a way to exploit one’s rights and prevent copying of the NFT itself, without any mechanism for protecting the underlying intellectual property. In some ways, in practice, this is no different than U.S. goods or copyrighted works being sold to buyers in foreign countries who likewise may not feel bound by U.S. intellectual property laws. But, given the anonymous nature of blockchain lockers and wallets, creators selling NFTs have no way to prevent reselling into foreign countries where they may have little or no intellectual property protection. It would also be difficult for a copyright owner to prevent public performances of the work, as there might be no method of tracking the identity of the person who purchased each token (since crypto wallets are anonymous).

On the opposite side of the coin, IP rights owners may have a difficult time enforcing their rights against infringing uses in NFTs. For example, if a digital movie is distributed through an NFT, but uses a song for which the copyright is owned by another party, the copyright owner may be hard-pressed to enforce its rights against the potentially anonymous infringer. If that same movie depicted branded products without permission in a way that led consumers to believe the use was authorized, the trademark owner may have challenges enforcing its rights against an anonymous original seller.

Along those lines, distributing movies, music, or other works through NFTs is only feasible (legally) if the one selling the tokens owns all the intellectual property rights in what is being sold. A musician, for example, might be precluded from selling an album on an NFT if the record label owns digital distribution rights, or if the songwriter owns the copyright to the music or lyrics. In this way, NFTs might be more likely to benefit independent artists and creators, who are more likely to own all the rights. Major label musicians, for example, will likely need to work out new agreements and find ways to ensure all stakeholders obtain the benefits to which they are entitled.

Further, although the notion of selling concert tickets through an NFT might be great for musicians, in practice, dividing the revenues among all entitled to a share (from the promoter to the venue, and from stagehands to insurance companies) will require new means of tracking revenue and ensuring it is divided appropriately.

Likewise, actors negotiating for royalties for the distribution of movies or shows in which they appear will need to have a means for tracking sales to ensure they are paid appropriate royalties. While the public nature of blockchain allows one to track the disposition of NFTs, if a movie is distributed through thousands or millions of tokens, tracking them all may be impossible.

NFTs hold much promise, and with the flexibility, tracking, and instant payment for sales of works, it is easy to see why they have generated such attention in a relatively short period of time. But these, and a myriad of other questions, must be answered before widespread adoption can occur.

Related stories from TheWrap:

Inside Hollywood's Rush to Cash in on NFTs

NFT Fever: NY Times Column About NFTs Sold for $560,000 as an NFT

Twitter CEO Jack Dorsey Just Sold His First Tweet for $2.8 Million as an NFT

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