Don’t Treat NFTs As Traditional Intellectual Property.
Is an NFT a copyright, a trademark, a patent, or some amalgamation of these (and other) intellectual property rights? As NFTs increase in popularity and price, it’s worth considering which legal standards may be applied in digital disputes to predict how the courts will rule.
An NFT is a digital object that can be owned. Most people focus their attention on the word “digital,” which naturally gilds NFTs with the glimmer of intellectual property. But adjectives rarely give us answers. For that, we look to the verb: own.
Ownership squarely puts NFTs in the jurisdiction of property law. This area “deals with the relationships between and among members of a society with respect to things.” It defines what it means to own something and clarifies what these owners can and can’t do with their possessions, which can be tangible items we can touch, and hold or intangible, like stocks, bonds, bank accounts, and now, NFTs.
The first use cases of NFTs support this very premise. Buying, selling, and holding NFTs is more indicative of what one does with personal property rather than any of the core intellectual property rights like copyrights, trademarks, or patents. Questions will naturally arise around what constitutes intention, possession, and control. These will most likely be settled in the same way. Some NFTs are being written to include royalties that revert back to the creator when the NFT itself has been sold on a secondary market. Great for the creator, even better for the IRS. And in the age of meme stocks like GME and AMC, it’s not hard to imagine a situation of a meme-NFT that gets passed around thousands of times in a short amount of time, incurring taxes on the original hodler… err… holder.
More pressing is the transfer of NFTs between families and across generations. What happens to your NFT when you die? When the estate lawyer reads the randomly generated 12–24 words that are making more and more appearances on wills, does taking ownership of an NFT trigger an inheritance tax? What are the loopholes for handing down a priceless Beeple to preserve generational wealth? Does that Aphex Twin NFT go into escrow if family members can’t agree on who gets what, and what is equitable fractionalization of that NFT look like? Wills, trusts, and estate laws are due for major updates.
If we escape the legal quagmire death triggers for a moment and focus on the present, we are witnessing the decentralized finance space (defi, going forward) exploring new ways of utilizing NFTs. Defi is pushing the NFT owner’s right to derive income. Breaking up NFTs into smaller fractions and using NFTs as collateral for borrowing/lending come to mind, with the results and public interest yet to be finalized. If successful, it’ll probably be only a matter of time before someone or someDAO develops timeshares for NFTs. But I digress.
Once again, we find ourselves with a budding growth of options: if/then statements that are the bane of law school students everywhere. NFTs being borrowed out simply, subject to condition subsequent, or with an executory interest (springing). This is a natural fit for virtual lands, which are already being shown by virtual real estate agents and are subject to discussions about zoning laws. TL;DR there’s a lot of different ways to structure what you can do with your property. Yes, this complexity can be coded into smart contracts to ensure enforceability, but the takeaway here is that lawyers and developers will have a much closer relationship than exists at present.
Admittedly, property law in and of itself won’t be sufficient to satisfy all NFT disputes. There will no doubt be elements of intellectual property law that will need to be untangled in cases, so lawyers shouldn’t go throwing out their copyright and trademark case law books if they wish to argue these digital cases successfully. And that’s no surprise: areas of the law frequently overlap each other.
However, because NFTs share more in common with property rights than intellectual property rights, courts will most likely rule using property law, or until legislation is written to encompass NFTs. At the very least, those wishing to litigate NFTs would be well to do to review main legal property rights.