CRYPTO LAW – NFT2
non fungible token - NFTs are the talk of the town
Everydays: The first 5000 Days
In March 2021, a digital artwork “EVERYDAYS: THE FIRST 5000 DAYS” by the artist Beeple was sold for 69 million US dollars at Christie’s. The metaverse became an exciting new area for many companies. The IP world is also watching the developments around NFTs and related new technologies with great interest.
NFTs and trademark protection
In the meantime, a court in New York decided on the scope of trademark protection in the virtual world – particularly in relation to the use of NFTs. It was about the infringement of Hermès’ trademark “Birkin”. The artist Mason Rothschild created 100 NFTs of Hermès’ famous handbags “Birkin” on the NFT trading platform “OpenSea” and offered them as “MetaBirkins”, i.e. as a “virtual Birkin”.
Mason Rothschild has already earned more than one million US dollars by selling these virtual handbags. Hermès went to court in New York claiming the infringement of its brand. The court ruled in favor of Hermès confirming the trademark infringement.
So far, there are very few decisions on this matter, especially in Europe, so this decision could be a groundbreaking one.
What is an NFT?
NFT has a distinct value and cannot be exchanged on a like-for-like basis with other NFTs.
NFT, Non-Fungible Token, is a token that cannot be exchanged with or replaced by other NFTs on a like-for-like basis (i.e., non-fungible). However, it is not easy to translate this into the legal world. There are currently still very few regulations on this new technology around cryptocurrencies and blockchains. Due to this and a changing understanding of art and values, NFTs or digital artworks are sold for sums that were unthinkable a few years ago.
Acquisition of physical objects
In “real” life, where an artist sells a painting, the purchaser of the painting becomes the owner, and the artist remains the author of the work. The artist remains the author because copyright can per se not be sold. Only the right to use can be granted; third parties can thus obtain the right to reproduce, publish or adapt the work.
Transfer of NFTs and their legal classification
NFTs do not have a physical or spatial presence. They are essentially a unique string of data stored on a blockchain ledger, and they are not stored on a physical data carrier, such as a hard drive or a piece of paper. For this reason, it is currently assumed that they do not qualify as physical objects/”real” objects.
This is why NFTs cannot be owned in the legal sense; however, they might be considered as a “sonstige Rechte” (other right) under § 823 para. 1 of the German Civil Code (BGB).
There are further related questions such as how to transfer a NFT, how to take action against the unauthorized creation of an NFT, etc.
What is transferred?
In simple terms, when you purchase an NFT, you receive a certificate that confirms the authenticity of the (digital) work of art/music/event and with which certain rights of use are associated, such as the right to publish or resell or participate in the event.
Do you have questions about NFTs or need legal support? We are happy to answer them and provide you with further advice!
Certificate of authenticity
With the help of blockchain technology, you may prove the right to the NFT and transfer it. In a blockchain, entries and transactions relating to an NFT are stored in an unalterable manner. The origin of a digital work, its history of ownership or the existing rights to the digital work can thus be proven.
The purchaser will get the certificate of authenticity for a digital work of art (an image, video, or audio file), but not the intellectual creation behind it.
Transfer of NFTs through smart contracts
So-called smart contracts are used to transfer NFTs. However, these are not usual contracts; it is rather a contract management i.e., a set of conditions that determine the scope of the NFT and the work/event associated with it.
Seller and purchaser of an NFT need to determine which rights are transferred since not all rights of use will be automatically transferred. Similar to a license agreement, you have several options, and it is necessary to make sure that the use you wish to obtain corresponds to the agreed use.
Although there are no specific legal regulations on NFTs, contracts concluded in this area are legally binding and can be enforced in court.
Do you have questions about NFTs or need legal support? We are happy to answer them and provide you with further advice!
Copyright and rights of use on the NFT
Copyright also plays an important role in this area. The original authorship remains where an NFT (that for example belongs to an image) has been transferred. The purchaser of the NFT obtains the certificate of authenticity (NFT) for the image, and a (copyright) right to use (Section 31 (1) of the German Copyright Act (UrhG)). Details about the right to use are part of the license agreement.
Minting NFTs
Only the author may create an NFT for his work – unless other rights of use have been granted. The so-called minting of the NFT, i.e. the creation of the token on the blockchain, is a type of reproduction within the meaning of Section 16 (2) of the German Copyright Act (UrhG).
Amendments to contracts with regard to the author’s remuneration
In case of NFT trading, Section 32a of the German Copyright Act (UrhG) might apply. In this case, the author may ask for amending the contract where the remuneration is disproportionately low in comparison to the revenues and benefits deriving from the use of the work. This is to ensure that the author is adequately remunerated.
Trademark law and NFT
Recent developments show how important it is to protect your products in the virtual world. It might be interesting to consider extending your trademark portfolio to include virtual goods.
Well-known companies such as Nike and L’Oréal have already applied for and registered their trademarks for “virtual goods” (e.g. for footwear, clothing, etc.).
Do you have questions about NFTs or need legal support? We are happy to answer them and provide you with further advice!
