How NFTs compare to other types of tangible/intangible assets?

Photo by Rob Schreckhise on Unsplash

NFT is definitively an interesting concept worth attention. Especially if you look at it as an asset, or a piece of property. While the value created in NFT space is enormous it seems that the mechanisms for capturing this value are yet to be developed in the future.

What does it mean to be an “owner”

Property is something you own, meaning you can use it any way you want and can enforce your rights if someone misappropriates the thing you own.

As an owner of something tangible (like a house), you can decide whether to sell it, rent it out, give someone temporary access, use for mortgage, destroy it, make changes as you want, etc.

IP stands for “intellectual property”, not physical, but intangible in this case. We can apply similar logic to describe IP. As an owner you can keep the IP for yourself (like, use your patented technology in-house), rent it out (give a license to someone to use your IP), modify your IP. What distinguishes IP from tangibles is that IP is nondepletable. This means you can give unlimited number of licenses covering the same technology and still retain all of your IP rights.

NFT (non-fungible token) is a unique, non-interchangeable unit of data that serves as a cryptographic evidence of “ownership” over a digital asset, often some form of digital art. Generally regarded as “bragging rights” NFTs only confirm ownership of the unique digital asset. The author may still own the related copyrights, or trademark, or any other IP rights. It is like when you buy the only physical copy in existence of Wu Tang Clan’s “Once Upon a Time in Shaolin” — you may keep the copy and play it for you friends, but the artist still retains all the copyrights to music, brands and designs, so you can’t really use the music commercially. Likewise, ownership over an NFT asset does not automatically grant you the right to make the work publicly available or broadcast.

Like with tangible property, NFT is unique. Once you sold an NFT you don’t have it any longer. Following the analogy with physical property, there seem to be a large number of opportunities when it comes to renting NFTs, using them as collateral, co-owning NFTs, including NFTs as property in your will, etc. As you can sell/rent specific rooms in your house to different people, why not distill digital art into separate valuable parts (like you own all possible variations of the character’s head, I own every combination of the character’s body and we collectively rent it out to players in the game)?

Transacting property

Being able to transact property rights is fundamental for its value. When it comes to tangibles and IP there are a number of different contract types to choose from. If a party is in breach of the contract regarding tangible property or IP, the other party has an option to enforce its rights in court. Under certain conditions, the parties may decide to change the terms of the contract, withdraw from a contract or invalidate it.

NFTs are built on smart contracts. A smart contract is self executing code. Once the buyer fulfils all the conditions set in the smart contract, the seller side automatically executes the contract and transfers the NFT to the buyer. The transaction is automatically documented in the blockchain. There is no case law when it comes to smart contracts. At least for now. Nor is it possible to make changes to smart contracts even when both parties want to make amendments. And in general, it is unclear whether a smart contract can be considered as a legally binding agreement.

Enforcement mechanisms

As a part of the bundle of rights given to the owner, the concept of “property” grants you legal mechanisms to enforce your ownership if someone takes it from you:

If someone steals your car — you go to the police

If someone steals your IP — depending on the type of IP, you go to court, customs office, internet providers, law enforcement, use contractual damages

If someone steals your NFT (or any blockchain-based asset for this matter) — well… only the one with the key owns the asset. Maybe law enforcement may help, but would it qualify as theft? Fraud? How would one calculate damages? or how we establish the value of the stolen asset?

The only proven method for protecting your digital blockchain assets is technical — you make sure that you own the key. It is apparent that NFTs have value, so it remains to be seen what other mechanisms can be developed for enforcing your ownership of NFTs.

Things to consider regaring NFTs:

As a buyer — check what is included in the bundle of rights for the NFT, such as:

Third party IP — NFTs may include third party IP, like logos, designs or famous internet memes — you may own the NFT, but you might be infringing on a third party’s IP if you use the NFT commercially (such offering for same or simply demonstrating it on your website).

Rights to modifications — if you buy an NFT with a cool monster in black and white, and want to redesign it into different colours, you may be infringing on original author’s copyright. So, again check which rights or licenses are included.

As a seller you have a possibility to diversify — like having the same monster in different variations sold as separate NFTs; sell an entire collection with all possible variations of a character as a bundle to premium price. You can also create unique works, or make sure you cleared all third part IP rights before you sell — you may thus increase the value of your NFT.

As a contracting party to a smart contract — keep the keys. Beware that there are legal shortcomings to smart contracts and transactions are irreversible.

I'm a curious person. I write about innovation, strategy, related legal & IP issues relevant for cutting edge technologies.