Canada’s Intellectual Property Law Firm

Background

Non-Fungible Tokens (NFTs) are the latest development in disruptive blockchain technology innovations, this time in the world of digital art, collectibles, and even luxury goods. Traditional auction houses have already started leveraging the technology, with one piece of digital artwork being sold for $69 million on Christie’s,1 and a visualization of the source code for the internet being sold for $5 million on Sotheby’s.2 Luxury brands, like LVMH, are collaborating to develop the world’s first global luxury blockchain which utilizes NFTs.3 But what exactly are NFTs, and why are they currently drawing so much attention?

NFTs are digital tokens that can be used to represent ownership of unique digital assets on the Ethereum blockchain.

As the name implies, NFTs are “non-fungible” in that they are not interchangeable for other items because of their unique properties, similar to the ownership of a car with a unique Vehicle Identification Number. Any digital asset may be “tokenized” into an NFT through the “minting” process, which involves executing a piece of code (a Smart Contract) on the Ethereum blockchain to assign ownership and manage the transferability of the asset. As a result of the success and interest, several other blockchains are also now adding NFT functionality. A key characteristic of blockchains is that the record of ownership cannot be altered. As such, an NFT provides a verifiable and reliable claim of ownership over that tokenized digital asset.

What Is Ethereum?

Ethereum is a blockchain platform with its own cryptocurrency, called Ether (ETH) or Ethereum, and its own programming language, called Solidity.

As a blockchain network, Ethereum is a decentralized public ledger for verifying and recording transactions. The network's users can create, publish, monetize, and use applications on the platform, and use its Ether cryptocurrency as payment. Insiders call the decentralized applications on the network "dApps."

As a cryptocurrency, Ethereum is second in market value only to Bitcoin, as of May 2021.

Owning an NFT is not the same as owning the underlying digital asset.

Purchasers of NFTs should be aware that even though ownership of the authentic digital asset is established through ownership of the NFT, the digital asset itself may be viewed, downloaded, and enjoyed by anyone (for example, the artwork sold on Christie’s can be found online4 ). In fact, Christie’s conditions of sale clearly states:5

“Your purchase of the lot does not provide any rights, express or implied, in (including, without limitation, any copyrights or other intellectual property rights in and to) the digital asset underlying the NFT…”

Drawing parallels from the physical art world, owning an NFT is like owning a unique print of a piece of art signed by the artist, while multiple other individuals may simultaneously own identical unsigned prints. As discussed below, the artist retains the copyright in the underlying work.

Purchasing an NFT does not confer the underlying copyright in the digital work.

In Canada, for copyright to be transferred to the purchaser, the copyright owner of the work must provide an express written assignment. Such an assignment could optionally be included in the Smart Contract executed to mint the NFT, but this has generally not been the case to date. If the purchaser desires the copyright, due diligence will have to be conducted to ensure the contract includes such rights. As noted above, the transfer of rights may also be clarified by the conditions of sale of the auction house, which are separate from the contract attached to the NFT. For example, Christie’s states the rights that a purchaser does not obtain:

“… you do not have the right to distribute, or otherwise commercialize the digital asset, or to represent or imply any sort of sponsorship, endorsement, affiliation, or other relationship with the seller and/or the creator of the digital asset without the prior authorization of the seller or the party(ies) that holds such rights.”

NFT buyers beware: displaying, copying, or minting a digital artwork may constitute copyright infringement.

The digital and accessible nature of NFTs creates a risk of inadvertently infringing the underlying copyright of the digital work. Like any online image, NFTs may be physically printed, displayed in digital frames,6 or shared on online forums with ease, after accessing the digital work through the link specified in the NFT transaction (which is open to inspection on the Ethereum blockchain by anyone – for example, see the transaction for the artwork sold on Christie’s7 ). It is an infringement to do with a work an act that only the copyright owner has the right to do unless such acts are authorized or fall within a fair dealing exception. Further, individuals may believe that a digital work that they possess (but did not author) can be minted and sold as an NFT. However, this would also likely infringe the copyright since by doing so they would be distributing the work and making it accessible to the public without authorization.

Conclusion

NFTs are creating an emerging market for artists and collectors to sell their unique “signed” digital assets in a manner that also makes unsigned copies available to the public. Sellers and purchasers of NFTs should ensure that they understand the copyright implications of the transaction. In addition, any member of the public seeking to make any significant use of an NFT image (e.g. sell, distribute or archive copies) should seek competent legal advice to ensure they have addressed any issues of copyright.

For further information, please contact a member of our firm’s Copyright Litigation & Enforcement team.

The preceding is intended as a timely update on Canadian intellectual property and technology law. The content is informational only and does not constitute legal or professional advice. To obtain such advice, please communicate with our offices directly.

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