Securities laws issues have often driven crypto policy, but when it comes to non-fungible tokens, we need to prioritize intellectual property interests. Treating all NFTs as financial assets will compromise the U.S.’ position as the gold standard of intellectual property (IP) protection and enforcement.
The immediate danger of this one-size-fits-all approach is that it will damage the commercial prospects of this emerging technology. NFTs are a medium for not only evolving the way we create, use and monetize IP, but also how artists and brands engage with their audiences. It is critical that policy efforts encourage and protect U.S. IP rights holders who are expanding their creative portfolios through NFTs.
This article is part of CoinDesk’s Policy Week. Diana Stern is general counsel at Palm NFT Studio.
IP is a critical part of the U.S. economy. According to the U.S. Patent and Trademark Office (USPTO), industries that intensively use IP protection, which include manufacturers, broadcasters and independent artists, account for over 41% of U.S. gross domestic product (GDP) and employ one-third of the total workforce. American IP is worth $6.6 trillion, more than the nominal GDP of any other country in the world, and accounts for 52% of all U.S. merchandise exports, per the Chamber of Commerce’s Global IP Center (GIPC).
An effective IP regime incentivizes creators and companies to generate new IP and capitalize on their rights in innovative ways. We are just starting to see how rights holders will do this by unlocking the potential of NFTs, which is part of the reason the USPTO requested information on this burgeoning industry last year.
In corporate America, NFTs are crossing the chasm from novelty research and development (R&D) initiatives, to meaningful digital marketing spend that outperforms traditional channels and even to entirely new ways to monetize IP portfolios. In 2022, Nike, Tiffany & Co. and other household names sold NFTs resulting in tens of millions of dollars in revenue, and in Nike’s case over $1 billion in sales volume.
NFTs are contributing directly to the bottom line and transforming how companies connect with their audiences. Where in the past fan fiction may have resulted in a cease-and-desist letter or even a lawsuit from the IP rightsholder, today the preeminent U.S. comic book publisher DC Comics worked with Palm NFT Studio to create one of the largest writers’ rooms by inviting holders of its NFTs to shape the story of future comics. Companies have activated entire communities of brand ambassadors overnight through NFT drops, and holders can remain engaged over time through experiences only made available to them.
Individual artists are also deepening their fan bases with engaging experiments. Digital illustrator Yam Karkai and her co-founders created the World of Women NFTs (WoW), a collection that celebrates art, representation, inclusivity and equal opportunities. WoW joined famed manager Guy Oseary’s star-studded clientele, inked a deal with Reese Witherspoon’s media company Hello Sunshine, and started a foundation dedicated to empowering women in Web3. U.S.-based artists Tyler Hobbs and Dandelion Wist Mané created QQL, a project that invites collectors to become co-creators by using the algorithm they designed to add an NFT to the collection. It successfully sold out to the tune of nearly $17 million in late 2022 when NFT sales had already cooled off, revealing potentially evergreen demand for innovative, IP-driven NFTs.
Creators are already using copyright and trademark law to enforce their rights as they stake out their turf in the metaverse. For example, in Yuga Labs v. Ryder Ripps, a U.S. startup most recently valued at $4 billion, sued conceptual artist Ripps for trademark infringement when he made copies of their NFTs. In Nike v. StockX, Nike alleged that StockX infringed its trademarks when StockX made NFTs corresponding to physical shoes sold on its marketplace, which StockX argues is permitted under the first-sale doctrine.
On the other end of the spectrum, the Creative Commons license known as CC0, whereby the work is made available for unrestricted reuse, has gained popularity within the NFT world.
Not only is the U.S. IP rights regime supporting greater commercialization of IP portfolios through NFTs, but NFTs themselves can be part of the enforcement toolkit. Service of process has been given via NFT, and use cases for combating counterfeit and pirated goods are in the works.
However, I would not suggest leaning into NFTs and the smart contracts we use to transact them as traditional digital rights management (DRM) tools, like software that prevents you from copying a song and sending it to a friend. You can right-click to copy and paste an image associated with an NFT. That does not mean you can use the NFT to access all the experiences verified holders can engage with, or that it will retain any value whatsoever. Ripping the image from an NFT is like having a photocopy of signed memorabilia with no certificate of authenticity. From an IP perspective, it does not mean you are now the legal owner of the image. Depending on how the NFT is licensed, you may have infringed the rights of the creator.
Not all NFTs are like the IP-focused examples described here. Last year we saw the rise of financialized NFTs, including platforms where borrowers can use NFTs as collateral and projects offering high returns to “investors.” These may be subject to lending, securities and/or other financial regulations.
The current chairman of the Securities and Exchange Commission (SEC), Gary Gensler, has taken the position that most fungible tokens are securities. If the SEC and state securities regulators take a similarly sweeping view of the NFT market, it will chill the momentum of IP-driven NFTs. Regulatory constraints specific to securities would be imposed because of the technology these NFTs use, not because they are fit for purpose. Among other drawbacks, transferability of creative works would be severely limited and artists could inadvertently become investment companies.
Forcing all NFTs into a securities box will disincentivize enterprises and creators from taking advantage of new technologies and cut against the economic gains achieved by the U.S.’s IP regime. Economies with effective IP protection, like the U.S. today, are 70% more likely to produce more innovative output and nearly 40% more likely to attract venture capital and private equity, according to the GIPC.
Furthermore, securities laws are not the appropriate framework for addressing the main regulatory risk present for IP-centric NFTs: potential consumer harm. Similar to other nascent industries, scammers are waiting in the wings to take advantage of newcomers and buggy beta tools.
At the peak of inflated expectations for NFTs in 2021, many projects launched with grandiose claims and roadmap promises that went unfulfilled when the founders disappeared with purchasers’ funds – aka a “rug pull.” This should be stopped, and the U.S. Department of Justice demonstrated that it can – and will – effectively combat rug pulls when it brought criminal charges against the NFT projects known as Frosties and Mutant Ape Planet.
See also: Should You Copyright Your NFTs? | Opinion
There is also a strong system for consumer protection in the U.S. under the authority of the Federal Trade Commission and state Attorneys General. Many rights holders are already familiar with consumer protection laws applying to their products and services, and can adjust existing guidelines, controls and review processes for NFTs.
Rather than have the SEC lead the NFT space with a regulation by enforcement approach as it has with fungible tokens, the growth of NFTs should be guided by an IP-aware policy approach that addresses consumer harm while incentivizing artists, brands and fans to break open the possibilities offered by new technologies, ushering in the next wave of valuable IP.
Otherwise, we will see runaway production of NFTs before we’ve seen a fraction of what U.S. creators and IP rights holders can do with them.