Creativity and flexibility… Doing what matters… Shape the globe perspective… Is it your dream or daily routine already? Wow! Digital art marketplace is rapidly growing, ensuring an innovative & transparent approach with NFTs. How can we make it legally accessible and strategically? Let's discover together!

What is an NFT & key objectives?

NFT, or Non-Fungible Token, as defined by Investopedia, is a unique digital asset like a piece of art, digital content, or video that has been tokenized via a blockchain that certifies ownership and authenticity.

The main difference between cryptocurrencies like Bitcoin and Ethereum is that NFTs are distinct and cannot be exchanged equivalently. They can represent digital or real-world items like artwork and real estate but never replicated.

If you think that NFTs are only for music or gaming entertainment, we will share an empowering review about top-5 startups by StartUs that use NFT-based digital art solutions to impact business and global plenary.

As considered, NFT is the proof of authenticity on the blockchain for the digital record of transactions. The blockchain works as a list or ledger, storing information such as:

• proof of ownership - who owns the digital asset;
• when it was purchased;
• when it was sold and to whom it was sold.

These records cannot be forged because the record of information is maintained by thousands of computers and nodes around the world on a public ledger, which ensures authenticity and security.

Digital artwork is still artwork, so it needs tools to verify its originality. The rule is that only one person can own the token.

The key objectives of NFTs are to provide ownership and authenticity for digital assets.

• NFTs can also be used to create new forms of digital objects and experiences. For example, NFTs can be used to represent in-game items, characters, or even entire worlds.
• NFT allows players to truly own and trade their digital assets, creating a more immersive and valuable gaming experience. NFTs can also represent virtual land or properties in metaverse platforms.
• Concerning digital art, NFTs can be used to create interactive or generative art pieces. An NFT could represent a piece of art that changes over time based on user input or external factors.

Legal outlook on NFTs

The regulatory framework for NFTs is still unclear. While NFTs are not specifically regulated by laws, some legal obligations may yet be imposed.

How does it work?

NFTs may be subject to the provisions of laws by analogy, which means that they can be governed by the laws that regulate similar matters. It also should be kept in mind that NFTs are also governed by contractual obligations between the individuals or companies who sell, create, and buy them. NFT users can face infringement of intellectual property rights or issues related to taxation. All these issues are resolved in accordance with the legislation and contractual obligations of the parties.

Art sphere is increasingly embracing NFTs. NFTs offer a new way for artists to sell and monetize their work. This asset can also help to create new markets for digital art, which is usually traded on special marketplaces, such as OpenSea and Rarible.

The legal framework for these marketplaces includes intellectual property, securities, consumer protection, tax, contract and jurisdictional considerations.

One of the most common legal issues related to NFTs that our clients face is copyright. Buyers of NFTs often assume that they are obtaining copyright to the object identified by the NFT, but in practice, they often do not acquire these rights.

The main regulation of NFTs in the United States is conducted by the Digital Millennium Copyright Act (DMCA), which is codified in the Copyright Law. It stands as a central legislative piece, offering a structure to address copyright matters in the digital domain for the removal of infringing content and provisions against the circumvention of digital rights management (DRM) technologies. NFT platforms and creators have the option to leverage the DMCA to address issues related to copyright infringement.

In EU settings, in terms of copyright protection, NFTs are regulated by a number of directives, such as the “Directive on the harmonization of certain aspects of copyright and related rights in the information society.” But as well as in the USA, purchases and maintenance aren`t regulated fully.

Generally, when purchasing an NFT, the buyer acquires ownership of the NFT itself, not the digital object identified by the NFT. Therefore, for example, when purchasing NFT for a painting, a person does not receive the copyright to this painting, only receives the ownership of the NFT that identifies this painting. Sales of NFT frequently don`t include the copyright to the auctioned work. For example, Linkin Park lead vocalist Mike Shinoda sells his NFTs with the following express terms: “Only limited personal non-commercial use and resale rights in the NFT are granted, and you have no right to license, commercially exploit, reproduce, distribute, prepare derivative works, publicly perform, or publicly display the NFT or the music or the artwork therein. All copyright and other rights are reserved and not granted”.

So, the copyright in the work typically resides with the creator, leaving the buyer with a crypto token that they might be only resold. Therefore, for an NFT auction to assign rights to the copyright, it must include terms for transferring those rights upon sale.

That's why, if it is necessary to obtain a copyright to the Art Object represented by NFT, a separate written agreement for the alienation of copyright must be signed. How to do that and if your business needs it - you can ask for a free initial session with our legal specialists.

Loud cases

Now, let's discover the main lawsuits that influence this topic from a global marketplace perspective.

• Hermès International v. Rothschild

Hermès, a luxury fashion brand known for its iconic Birkin bags, sued Mason Rothschild, a digital artist, for creating and selling NFTs called “MetaBirkin.” These NFTs were digital replicas of Birkin bags intended for use in the meta space. Hermès claimed that Rothschild's MetaBirkins infringed their trademarks and intellectual property rights. They argued that NFTs dilute their brand value and could potentially mislead consumers.

In January 2022, the French luxury brand officially sued Rothschild for trademark infringement, dilution, and cybersquatting, filing their complaint in a New York federal court.

In February 2023, following a several day trial and deliberations, a federal jury unanimously determined that Rothschild had infringed on Hermès’ trademark rights and was guilty of cybersquatting. In doing so, the jurors found that the NFTs were not protected speech under the First Amendment. The jury awarded the brand $133,000 in total damages. The damages consisted of $110,000 of estimated profits from Rothschild’s NFT sales and $23,000 for cybersquatting for registering the metabirkins.com domain.

This case shows us that Intellectual Property law can protect brands in the metaverse.  Luxury brands like Hermès can protect their rights even when their products are replicated digitally.

Also, it appears that NFTs can still infringe on existing trademarks and copyrights. This highlights the importance of understanding and respecting Intellectual Property Rights in the Art NFT sphere.

• Lil Yachty and NFT startup Opulous

US rapper Lil Yachty has sued music NFT start-up Opulous for trademark infringement, alleging that the company “maliciously” used his likeness in media materials without his consent to raise capital.

The rapper learned Opulous raised $6.5 million in venture capital funds after it released “exclusive launch content” from artists such as Lil Yachty and Kyle, through a partnership with Binance NFT Marketplace. But the rapper did not give his consent to this. That's why he filed his lawsuit. Currently, it is reported that the parties have signed a settlement agreement and agreed on some confidential terms that satisfy each party.

The Lil Yachty case highlights the importance of protecting Intellectual Property Rights. This is especially necessary in the Art NFT sphere. It reminds us that even famous individuals can be victims of unauthorized use of their name and likeness. Therefore, NFTs should be handled in accordance with the law. You should also be aware that you have certain available means of protecting and enforcing your copyright in Artworks.

NFT in the art sphere brings unique opportunities, but take into account before purchasing an NFT - you should understand what rights you will receive to the Art represented by this NFT and what rights you have to the NFT itself. Also, when an NFT minting, you should make sure that you do not violate the Intellectual Property Rights of other individuals or companies.

It is also important to note that an NFT can actually grant copyright to the Art that it represents, but only under certain circumstances and as a result of certain actions that are necessary! Embrace the journey with us!