From a legal perspective, one of the most vexing things about the new bumper crop of crypto-driven technologies and currencies is the fact that right now, there simply isn’t much legislation or case law to guide what can and can’t be done within their parameters.
Because the value of NFTs lies in their novelty and scarcity, much of the perceived value of NFTs and crypto seem to reside in the very fact of their newness and the lack of regulation that comes with it. But, although a paper patent will crush an NFT any day, as I’ve pointed out previously, there are some ways in which an NFT could be employed to the benefit of a tech-savvy innovator when they want to sell their intellectual property to others.
Let’s take a look at what you need to make this happen, and then two ways you could do this in the current legal landscape without jeopardizing your rights down the line!
What Makes an NFT Valuable?
A non-fungible token, or NFT, is a special coded entry in a certain type of database known as a blockchain. In itself, an NFT has no value and cannot be exchanged for anything else; its sole value derives from the fact it’s uncommon, restricted or limited, unlike, say, a dollar bill, which is always worth a dollar anywhere you go that accepts US currency. This entry indicates a specific time, date and data about the specific token, such as what it’s intended for and what property it represents. Once the NFT is entered into the blockchain, it can be used as evidence of an ownership interest in a specific item or piece of artwork, such as The Wu-Tang Clan’s only existing copy of the Once Upon a Time In Shaolin album, notoriously once owned by disgraced pharmatech mogul Martin Shkreli.
But a bit of code by itself proves nothing at all—except that you have a bit of code CLAIMING an ownership interest in something. Sorry, tech apologists, but you’re still going to need the “dead-tree” stuff, such as proof of ownership of the patent, copyright or trademark, plus a legally executed contract that demonstrates transfer of ownership of the intellectual property in question.
I’m sure at some point, someone will try to use the simple fact of having a blockchain entry and associated NFT as “proof” of ownership—and I’m equally certain that without the proper backing documentation, the courts are going to toss the case faster than a bored high-school freshman drops third-period French, leaving the person arguing the NFT proves anything with a depleted bank account, huge legal fees and an expensive lesson learned.
So, with no paper trail, the NFT is literally not worth the energy it took to create, let alone the dizzying sums of money people are spending for NFTs as pride pieces in the current landscape.
I’ve got the “dead-tree” stuff I need. Now what?
Okay. So you’ve gone through all the right processes and procedures to secure your innovation and prove ownership to the government. You’ve been awarded the appropriate certificate for the type of IP in question. In the eyes of the law, you are the rightful owner of the IP and, as such, can do whatever you like with it. You can sell it. You can keep it all to yourself. You can sell off pieces of your ownership stake. You can give it away, if you wish. It’s YOUR IP and YOU get the final say.
Now you want to create an NFT that validates transfer of ownership, in whole or part, to someone else. With the right paperwork, this is no problem, and here are the two ways you can do that.
Option One: “One NFT to Rule Them All”
Like Frodo’s Ring in The Lord of the Rings, in this case, you’re playing (or selling) for all the marbles. In exchange for a given sum of money, property, stock or other considerations, you’re creating one NFT that covers all rights to your intellectual property and can transfer those rights to some other person or entity. No problem!
When you create an NFT in this case, in addition to the actual paperwork, you’ll need what is known as a “smart contract” attached to your NFT’s blockchain entry. When you hand over the paperwork and receive whatever the payment for the IP might be, another entry is made “down the chain,” demonstrating that the person who purchased your NFT, and thus the IP in question, is now the rightful owner. BUT!
This means you will need a new paper contract which has been properly executed and witnessed, giving up your rights to the property in question in exchange for whatever medium of exchange you elected to use for the transaction; a new “smart contract” which reinforces your quitclaim on the IP; and of course the NFT’s history must be updated and amended to demonstrate you have done these things.
This scenario is fairly cut-and-dried. In fact, this is literally done every day, give or take the extra steps involved in updating the blockchain. In the eyes of the law, there’s no problem here. However, both parties to the transaction will need to retain the paper copies of everything they did as evidence in case of nonpayment or other delinquency or breach of contract, should they need to enforce their rights later.
An NFT, even with a “smart contract,” is useless without the paper to back it up!
Option Two: Shares
Note: This section deals with valuation and licensure of IP assets in a general manner and is presented for informational purposes only. For detailed information on how to properly value, benefit from and protect your intellectual property, it is strongly recommended that you meet with a financial adviser and an attorney with a suitable background in financial and property law.
Again, the buying and selling of shares is a commonplace tactic that literally happens every day. With an NFT-based share system, the basic idea and mechanics are the same as if you wanted to sell one singular NFT, but there are some extra steps you must take to make the sale valid.
For our purposes, we’re going to say that you want to sell NFT shares of an invention to raise a total of $1,000,000. But you want to retain a majority ownership interest in your invention, or 51% of the total value. Again, this is done every day. You set the total valuation of your innovation at $2.04 million, and then sell 490,000 NFTs at $2.04 each. Given an appropriately executed paper contract, a properly certified proof of ownership and the right blockchain entries and smart contracts on the buyer’s end, this is not a problem.
However, there are a couple of potential stumbling blocks to consider here. If you post NFTs for sale on a given blockchain, you may be required to accept compensation in the native cryptocurrency of that blockchain. For example, Etherium may require you to accept $2.04 worth of Ether at the time of sale, which is a risky proposition given that cryptocurrency values are always fluctuating. So, for purposes of this example, someone buys a share and you get $2.04 worth of Ether at 12pm. At 6pm you go to convert that Ether into cash—and find out it’s now only worth $1.81! You’ve lost roughly 10% of the money you thought you had—but the buyer still has an NFT backed by a smart contract that they can theoretically enforce in court to demonstrate a valid license, as long as the paperwork backs up their claim. Sure, the value of the cryptocurrency could go up, but either way it’s a gamble.
Another point of concern is, how enforceable are NFTs as licenses, with or without a smart contract? In the current absence of substantive legislative guidance and/or case law to circumscribe what is and is not allowed, the courts are likely to adopt the most conservative possible reading, which is to say that the original paper documents must take precedence in the absence of other enforceables, such as Terms and Conditions of a given marketplace.
And all this assumes that the blockchain entry and smart contracts were properly executed without errors of any kind that could weaken or even sink a case one way or the other, including missing or incorrect spelling or punctuation!
The Bottom Line
As far as I can see, NFTs and crypto-based currencies are unlikely to make any sweeping changes in the IP arena anytime soon. There may come a day when NFTs strengthen or weaken claims of infringement, IP misuse or theft as additional evidence in favor of one side or the other in a legal dispute, but for now, they’re only as good as the actual paperwork backing them up.
None of this is to say that you can’t or shouldn’t use NFTs, if you’re so inclined. However, until legislation is established backing the usefulness of NFTs as proof of ownership, I’m going to tell you what any attorney worth their shingle would and counsel caution and a healthy skepticism with regard to NFTs. There’s simply not enough settled case law and precedent to predict what the future might hold for these, and I would strongly caution you not to pin your innovation’s future too heavily on tech-based modes of demonstrating or yielding ownership.
Caveat emptor et caveat venditor!
Let the buyer, AND seller, beware.
John Rizvi is a Registered and Board Certified Patent Attorney, Adjunct Professor of Intellectual Property Law, best-selling author, and featured speaker on topics of interest to inventors and entrepreneurs (including TEDx).
His books include “Escaping the Gray” and “Think and Grow Rich for Inventors” and have won critical acclaim including an endorsement from Kevin Harrington, one of the original sharks on the hit TV show – Shark Tank, responsible for the successful launch of over 500 products resulting in more than $5 billion in sales worldwide. You can learn more about Professor Rizvi his patent law practice at www.ThePatentProfessor.com