What is an NFT? NFTs are unique encryption codes generated using blockchain technology that allow verification of the authenticity and ownership of the artwork attached to it – from anywhere. An NFT is neither a thing nor a right. However, it can be linked to any type of work, from a digital or analogue work of visual art to a song, an entire album or a fashion item. Through tokenisation, the token [1], which is legally neutral in itself, is “charged” with an asset outside the blockchain by means of a legal link. Unlike cryptocurrencies such as Bitcoin or Ethereum, however, NFTs are not exchangeable (“fungible tokens”), as they have a unique identification code and metadata that distinguish one NFT from another. It is also possible to build contractual terms into an NFT by means of so-called “smart contracts”, in which, for example, sales shares are stipulated through which the artist automatically receives a certain percentage of the resale price in the event of a resale. Furthermore, this type of trade has the advantage for the artist that no intermediary is needed to sell the works together with the NFTs.
While from a legal point of view there are still various questions in connection with NFTs that are currently not conclusively clarified, e.g. the platform linkage or server resilience for their tradability, the following will briefly address the extent to which NFTs affect existing intellectual property rights.
Rights may have to be considered both in the NFT itself and in the work linked to it. First, copyrights may exist in the NFT, i.e. its code. Since each NFT is unique and can be designed with various clauses via smart contracts, among other things, there is much to suggest that the code underlying the NFT is copyrightable as a computer program. Then there is the work linked to the NFT, for which copyright, design or trademark rights can also be claimed. And this is where the questions already begin: If one acquires an NFT, does one thereby also acquire all rights to the work linked to it? Or – if there are copyrights to the work in question – only simple rights of use? At least according to the German reading, property rights in digital works are out of the question; such rights could only be acquired in the data carrier if the work linked to the NFT is on it. The moral rights and, if applicable, the further rights of use and exploitation lie in any case originally with the author. The buyer of an NFT linked to a digital work thus only acquires a right of use to it. The exact scope of this right of use should be apparent from the smart contracts if this point is regulated therein. However, this is not always the case. One quickly realises that more would have to be regulated than just the link to a specific work.
What about when the rights of the works linked to an NFT are held by a third party? In principle, according to Section 16 (1) UrhG, only the author of a work is permitted to make copies of his work, and thus a copy of his work associated with an NFT. But what are the legal issues when the rights to a work are not held by the creator of the NFT? Such a case is currently being fought out in the USA in the case Hermès International and others v Mason Rothschild (https://www.documentcloud.org/documents/21181175-hermes-international-vs-mason-rothschild?responsive=1&title=1), in which the claimant sees its famous handbag trademark “BIRKIN” infringed in Mr Rothschild’s NFTs, which have precisely these Birkin bags – in various designs – as their subject matter. Hermès sees here not only their well-known brand, but also the worldwide known design of the Birkin bag infringed by the unauthorised takeover by Mr Rothschild, who is trying to profit from it. A case in the UK also made waves, where an alleged Bansky NFT was purchased for GBP 244,000, which, however, did not originate from the artist Bansky at all (https://www.theguardian.com/technology/2021/sep/01/collector-buys-fake-banksy-nft-for-244000). NFTs can be used to prove the authenticity of a work, but not that the rights to the attached work also belong to the creator of the NFT. The mere fact that a work is linked to an NFT does not change the basic premise that third party rights may not be used without the corresponding permission of the respective right holder. Particularly in the case of well-known trademarks or designs, claims for unfair conduct may apply here in addition to the relevant claims under the Trademark or Design Act if no corresponding rights of use were obtained from the right holder for the creation of an NFT. Thus, there are constellations in which, on the one hand, one can prove by means of an NFT that one is the owner of the work linked to it; at the same time, however, this infringes the rights of third parties because no rights were granted by the right holder for the creation of the NFT and these cannot be acquired in good faith either.
The fact is, NFTs are currently a global trend. Whether this trend will continue is an open question. However, the introduction of NFTs has the potential to advance digitisation in various areas, not only for the creators of artworks, but also for users as diverse as public authorities or event organisers. For example, this technology could also be used to ensure the authenticity of vaccination certificates, tickets for music or sporting events, digital identity documents and much more.
What is already clear, however, are the manifold legal issues involved in the commercialisation of this form of blockchain technology when it comes to ownership, third-party rights, applicable law or the enforcement of any claims. A blockchain network is decentralised and stored on many computers in different countries, so without appropriate regulation under the NFT, it is not certain which law will apply. The tamper-proof certification by the NFT is of course of value to the owner of the work linked to it; however, it does not automatically guarantee that the originator of the NFT was also entitled to link a particular work to it. All in all, this is a very rich breeding ground not only for investors and creators, but also for the legislature and the judiciary, which are called upon to clarify a wide range of regulatory and substantive issues.
We at Preu Bohlig will continue to stay on the ball for you on this topic.
[1] A token represents an asset, asset or economic good. In the world of cryptocurrencies, tokens are fundamental building blocks for operations with crypto assets. A crypto token is a digitized representation of assets stored on a blockchain of assets stored in a decentralized manner. They are assigned a specific function or value. These values can represent a wide variety of properties, functionalities or rights (see https://www.bafin.de/SharedDocs/Downloads/EN/Merkblatt/WA/dl_wa_merkblatt_ICOs_en.html
