Non-fungible tokens (NFTs) have been making waves in the digital world and it’s no surprise why – they’re a revolutionary way to collect and trade digital art, music, and other unique digital assets. But what do you actually own when you buy an NFT? And how can you prove that you are the rightful owner of one?

To answer these questions, let's look at the mechanics of NFT ownership and the major role that smart contracts play. 

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What is an NFT?

An NFT is a unique digital asset (e.g. an mp4, gif, jpg, png, etc.) represented by blockchain technology. One example is Snoop Doggs’ Stash Box. Each stash box contains an NFT of one of the 18 tracks from Snoop’s latest album, plus three exclusive bonus tracks. 

Because NFTs are created using blockchain technology, they benefit from secure ownership and transferability.

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The role of smart contracts in NFT ownership

Smart contracts play an essential role in NFT ownership.

What are smart contracts? Smart contracts are pieces of code that run on a blockchain. The code serves as a self-executing program that automatically carries out actions according to the terms of a contract or agreement. These contracts are designed to verify, facilitate, and enforce the negotiation, or execution, of a contract without the need for intermediaries or centralized authorities. 

Smart contracts are:

• Autonomous – They self-execute once pre-defined conditions are met.
• Secure  – They’re based on blockchain so once deployed they cannot be altered.
• Trustless – They eliminate the need for trust between parties, all parties can verify the outcome without knowing each other.
• Quick to execute – they reduce the need for manual processes as they don’t require human intervention.

When it comes to NFTs, the smart contract is responsible for automatically transferring ownership from the seller to the buyer. So if you buy an NFT, you’re essentially initiating a transaction in a smart contract that assigns you ownership of an NFT by giving you a unique token ID.

A common misconception about NFTs is that after you buy one, it “lives” in your digital wallet. This isn’t actually true. Your wallet only stores your public and private keys. Your private key provides you access to your digital wallet, which then allows the owner to approve transactions. The reference to the location of the NFT on the blockchain is stored in your digital wallet. This reference is what allows you to access and transfer ownership of the NFT. 

Another misconception about NFTs is that ownership is based solely on the possession of digital assets. In fact, ownership of an NFT is based on the smart contracts which govern it.

In essence, the smart contract holds all information that characterizes an NFT collection. The ownership rights, transfers, and all essential aspects of the NFT are tied into the smart contract. The code of the smart contract defines the rules for who controls the NFT and what kind of control is possible. 

For all the detail of the technical mechanisms behind NFTs, check out this Stanford Journal of Blockchain Law & Policy article.

Are NFTs considered IP?

The World Intellectual Property Organization (WIPO) defines intellectual property as “creations of the mind, such as inventions; literary and artistic works; designs; and symbols, names, and images used in commerce.”

IP is protected by law, the most common types being:

• Patents
• Copyright
• Trademarks 

So are NFTs categorized as IP, or not? This is a little tricky to answer because an NFT can represent ownership of a piece of digital content that would otherwise be considered IP. However, the NFT itself is not the IP – it’s simply a record of ownership. While NFTs are closely related to IP, they’re not exactly the same thing. 

In terms of copyright, copyright protection exists in the US from when an NFT is created. If the NFT is sold, copyright ownership typically does not necessarily transfer with the NFT unless specifically stated – the copyright typically resides with the NFT creator. 

When buying an NFT you’ll need to check what rights, if any, come with your new purchase. Most NFT creators restrict commercial use of their NFTs – permitting the NFT buyer to only use, copy and display the NFT. But in some cases, NFT holders do have full access to commercial rights for their NFTs. For example, last year Yuga Labs, the creators behind the Bored Ape Yacht Club (BAYC) collection acquired another popular collection CryptoPunks. Just as they had done for their BAYC and MAYC collections they chose to give full commercial rights to the holders. 

In other instances, NFT holders do have broad access to their NFT’s IP with some limitations in place. CryptoKitties holders can use their own NFT commercially, as long as gross revenues don’t exceed $100,000 annually. 

Recently, the first trademark case of NFTs concluded in the USA. The case involved the luxury brand Hermès and the NFT project MetaBirkins. In this case, MetaBirkins was creating digital images of Hermès’ Birkin bags, and selling them as NFTs. Hermès argued that the MetaBirkins project infringed on their trademark, as it used the Birkin name and image without permission. 

The judge ruled in favor of Hermès, stating that the MetaBirkins project infringed on Hermès’ trademark and awarded the company $133k in damages. This highlights the importance of ensuring that your NFT projects do not infringe on the intellectual property of others.

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Planning to make an NFT?

Firstly it’s a good idea to consult with a legal expert when creating and selling NFTs, particularly if you're dealing with complex intellectual property or ownership issues. 

It’s important to ensure that you have the legal right to create and sell the NFT. If the artwork or other assets used to create the NFT are owned by someone else, you’ll need to obtain permission or a license to use them. 

For customer clarity, it’s crucial you clearly outline the terms, including any underlying intellectual property rights such as copyright or trademark, and what the customer can and cannot do with the NFT. 

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Conclusion

Owning an NFT means owning a unique digital asset that is recorded on the blockchain using smart contracts. It’s important to be aware of the legal implications of NFTs. The recent precedent set by the Hermès case is promising and beneficial to brands and creators yet to enter into the Web3 and NFT space. As they know that they can choose to move into NFTs or the metaverse without having fear of someone else taking their IP.

NFTs are closely related to IP, but they’re not exactly the same thing. If you’re creating NFTs for your customers, be sure to follow best practices and create unique, valuable digital content.