“In the world of crypto and NFTs, everyone has a shot a being a hedge fund billionaire—or at least appears to…. What smart people in the IP community should be considering right now is how to direct their involvement in NFTs and other web3 activities in a way that makes sense for their particular rights and stakeholders.”
The rise in the value of crypto currencies in just three years to $3 trillion is vexing to businesses, investors and IP professionals who are struggling to understand where they fit in. The ascendance of non-fungible tokens (NFTs) as an asset class also has caught practically everyone off-guard. Many intellectual property owners believe that these blockchain-based disruptions have created opportunity, while others see a darker and more impermeant scenario. People want to know if NFTs and distributed ledgers are good for IP rights and creators – a self-proclaimed boon to innovation and access – or are they a passing storm?
Many advocates of strong patent and copyright protections and fairer application of the law are quick to dismiss blockchain as a confusing fad for the privileged. While their skepticism is not without reason, it is unsettling that knowledgeable people see danger where others proclaim opportunity. The source of the disconnect is complex. It is possible that they both could be right and wrong at the same time.
Crypto currencies, NFTs and activities on a more disintermediated, less centrally managed, internet are a theoretical safe space. They exist in part as an alternative to Facebook, Google and other information aggregators that charge for access less by selling ads than by availing themselves of user data. They are also a response to the unchallenged role of financial institutions as intermediaries and their questionable behavior associated with the 2008 financial crisis.
NFTs and crypto are among the least tangible of intangible assets. A patent, at least, is a highly specific, government-issued right to own an invention, albeit a worthless one much of the time, in exchange for disclosure. An NFT is little more than a fragment of code relating to copyright or brand but that probably can’t itself be copyrighted. NFTs currently are represented mostly by collectibles like art and related memes that are recorded on a blockchain. Not everything on a blockchain, however, is an NFT or a currency like Bitcoin or Ethereum. An NFT’s strength is its provenance and authenticity, which can be established without the need for a centralized authority, like an auction house or bank, or Amazon.com. Like other assets, NFT value reflects a combination of scarcity, loyalty and demand – in this case, social media-propelled, celebrity-endorsed, greed-fueled, buyer demand.
Regarded as “the Emperors’ New Codes,” NFTs are not so very different from a share of stock that unpredictably sells at 40 times price earnings, or that is priced at eight times book to market. Perception has a lot to do with it.
Most assets require a narrative to give them meaning. NFTs, because of their complexity, even more so. The story surrounding many of these assets, unfortunately, often inflates their meaning. This has as much to do with what buyers want to believe as what sellers have to say. Investors, even sophisticated ones, are bound to get burned. They did in the first internet bubble in the 1990s. For every Amazon.com and Google, there were dozens of businesses that flew high and crashed, like Pets.com and Webvan. That does not mean, then, that all internet or e-commerce businesses are rubbish.
The new digital assets should not be confused with digitized content, computer stored photos, audio files or company documents. They have more to do with the decentralized internet and digitized payments. Some pro-IP skeptics of NFTs believe they undermine IP like copyrights and trademarks by implying ownership interest where there is none. To them, NFTs are a trap perpetuated by power investors to ensnare the young and hungry. There may be some truth to that. Others, including creators and an increasing number of global brands and financial institutions, have begun to embrace NFTs as they come to better understand their limitations. Settlers, they reason, fare better than pioneers.
How NFTs Create IP Value
At the recent Intellectual Property Awareness Summit, held at UC Berkeley’s Haas School of Business by the Center for IP Understanding, both of the featured speakers and one of the four panels addressed the role of the new digital assets in creating IP value. Tiffany Norwood, Cornell University Entrepreneur of the Year [Qualcomm founder and ex-CEO Irwin Jacobs and Sandy Weill, ex-Chairman of Citigroup, are among those who preceded her] and a serial entrepreneur who raised $670 million for a satellite startup in her twenties, is working on a sports company that issues NFTs. Norwood is the first black woman to receive the Cornell entrepreneur honors.
Copyright advocate Jonathan Taplin, another featured IPAS speaker, is a Hollywood producer who thinks NFTs and the people who issue them are bad actors. Taplin believes that the metaverse is the evil expression of big tech and Bitcoin-obsessed billionaires, hoping that greed and video games will defeat eager 20-somethings. His 2017 book eviscerating big tech, Move Fast and Break Things, was a Financial Times top-ten book. Taplin is an avid supporter of creators, especially musicians, and has campaigned for changes in copyright law, especially Section 201 and the DMCA.
Taplin believes that successful Web2 techcos will pivot and ultimately be the ones who profit most from web3 and NFTs. These businesses include names like Cuban, Thiel and Andreessen, all OpenSea investors. They are supported by athletes (Durant and Curry) and other celebs (Fallon, Kutcher) cashing in on their fan-base. Disintermediated transactions on a blockchain and web3, Taplin says, will not be that different from old school transactions that are heavily influenced by those with the most leverage. The revolution will not be televised, nor will it downloadable on a Chrome browser.
Ed Lee, a professor at Chicago-Kent College of Law, Illinois Institute of Technology, moderated the “Digital Assets” panel at IPAS. Lee is a long-time observer of IP and copyright, especially as they relate to music and entertainment. He has spent much of the past two years writing about NFTs. His controversial paper, “NFTs as Decentralized Intellectual Property,” suggests that tokens are less a replacement for IP rights than an alternative way of looking at them. Lee, who publishes the blog www.nouNFT.com, believes NFT issuers, like Bored Ape Yacht Club, can and occasionally do offer some or all underlying IP rights, if they choose, and if enough buyers require it. NFTs are merely a filing system, he says, and can be structured around just about anything in a way that is attractive to the parties. Despite the structure of early issuances, NFTs need not be offered separate from IP rights; they can be packaged with them if the price is right and buyers know what is a reasonable request.
The earliest meme assets in the 1960s involved Pop Art. Andy Warhol helped to create and elevate these seeming throw-away images to high art status by associating them with celebrity and lifestyle. Pop Art pieces have endured surprisingly well, both as aesthetic and as appreciable assets. Warhol’s iconic portrait of Marilyn Monroe, “Shot Sage Blue Marilyn,” is on the auction block and will sell for an estimated $200 million when it’s up for bid this month. History has shown Warhol to be a far more serious purveyor of the future than many had initially given him credit for.
‘A Marketing Opportunity for IP Holders’
Another panelist at IPAS 2022, Talal Shamoon, is CEO of Intertrust, a digital rights management company that is owned in part by Philips and Sony. A Ph.D. engineer and inventor with a number of patents, Shamoon believes that NFTs are “a marketing opportunity for smart IP rights holders.” Currently, the brands seem to be getting the message. NFTs encourage smart buyers and investors to look carefully at what they own and do not; what the related IP rights offer, and should they be thinking about securing a license or even part ownership. These are not questions that Web2 investors ask. That NFT buyers will have to consider them is a major step forward for IP.
The focus today has been on activities like CryptoPunks, Bored Ape Yacht Club, which is on OpenSea, the most active re-seller of NFTs, and artists like Beeple, whose $69 million sale of code received wide attention. These and other headline-grabbing transactions have served to burnish blockchain’s Wild West reputation. Dramatic fluctuations in the price of a Bitcoin, currently around $41,000, may have created a few overnight cyber millionaires but have served to threaten the blockchain’s credibility.
In December 2020, Twitter founder Jack Dorsey created a non-fungible token (NFT) out of his first-ever post. He turned a static image of a five-word tweet into a digital file stored on a blockchain and an NFT was born. A few months later, the image sold for $2.9 million. Yet in an auction early this month, reports Forbes, no one bid more than $280 for the tweet code. And even current bids on OpenSea only amount to about $10,000, a 99% drop in value. Where there are big winners there are likely to be big losers.
Despite the volatility, brands like Nike, Taco Bell, Coca-Cola, the NBA and some content owners like photographers have been getting more comfortable with the distributed ledger concept. Gucci, Burberry and Louis Vuitton are among the luxury brands already involved, sometimes awarding buyers with NFTs. Content holders like the film industry and Asian businesses are becoming more active. Patents are less clearly a treatment for digital investing, but owners appear to be tipping their toes in the water. Erich Spangenberg’s IPwe and IBM are said to be working on patent transactions using NFTs less for provenance than as a reliable information source and transaction platform, offering greater transparency, speed, and lower cost. There have been no announced deals.
NFTs as a topic have just sort of crept up out of nowhere, like the internet in the 1990s. Creators, lawyers and investors can no longer ignore distributed ledger transactions. The New York Times’ recent ‘Latecomers Guide to Crypto’ in a stand-alone insert seems especially designed for naysayers. On the IPAS 2022 website, there are nine articles and papers that are worthwhile background. The last source is a podcast interview I conducted woth CoinDesk Senior Vice President Sam Ewen for ‘Understanding IP Matters,’ which IPWatchdog covered recently. CoinDesk is a kind of Bloomberg for the Cyber age offering pricing information, analytics and insight. Ewen says “the genie is out of the bottle” when it comes to decentralized finance, with former skeptics like JP Morgan Chase and Goldman Sachs now dealing in crypto and toying with NFTs.
Earlier this year, JP Morgan opened the first bank in the metaverse. “In the virtual lounge, you can buy virtual plots of land with non-fungible tokens, or NFTs, and make other purchases using cryptocurrency,” explains a euronews.next article.
The New Intangibles
Digital assets on a blockchain are intangible assets not totally unlike intellectual property, such as trademarks and patents, and dependent on them for meaning. Some may become standalone rights. They are tied to IP but for the most part separate from it. Buying an NFT does not typically confer any copyright or brand rights – but it may. And—you heard it here first—in the future, many will.
Not all NFT transactions fail to include license or ownership rights in the underlying IP. It is pretty clear by now that the Top Shot NFT issued by the NBA relating to a copyright it owns of a Lebron James iconic dunk provides no interest in the copyrights or licenses – but wouldn’t it be nice? Buyers already are starting to seek more and issuers might want to provide it – for a price. Purchasing NFT code is a little bit like collecting a rare manuscript. Buying the book, no matter how costly, does not confer ownership of the copyrighted contents – but it could, if it were not already in the public domain and the owner could benefit appropriately. It will be a challenge to strike the right balance.
There is always a danger when the public gets involved in an unfamiliar and unregulated asset class. That has not stopped them from participating in markets from Chinese antiquities to pork belly futures to street art. What turns people off about NFTs, web3 and the metaverse, Sam Ewen believes, is the complex jargon, like “Decentralized Autonomous Organization,” or DAO, and “non-fungible token,” which is little more than a unique digital identifier that cannot be copied, substituted (“non-fungible”) or subdivided. It is recorded on a blockchain that is used to certify authenticity and track ownership and NFTs can be traded like other assets. (Tracking patent owners is no easy feat.) Ewen thinks crypto and NFTs today are about where the internet was in 1998, when the first bubble was about to burst. It did not end the internet, but it did take out a lot of marginal players. It also set in motion companies like Amazon, Facebook and Google.
Over-40 types can forget there is a generational divide when it comes to accepting what is seen and believed digitally. People who grew up with the web and playing The Simms often are more comfortable in the metaverse than in reality as we know it. Now they can own digital real estate and participate in it. The highly specific rules and established protocols of meta make sense to those who spend much of their time in front of a computer or device. Have you recently asked someone under 30 to make a business phone call? It’s not how they roll. They will buy a car without personal contact and maybe a house. Why not a digital asset? It’s a different world. Whether or not this willingness to accept what is seen digitally as accurate encourages “fake” news and other myths is something with which regulators will soon need to grapple.
As far as many young people are concerned it is the idiosyncratic equity and opaque bond markets that are the scam, not distributed ledger, where available information and transaction history are irrefutable and there are few or no intermediaries poised to exact a commission.
Drawing on the Power of Social Media
Social media’s outsized role in creating digital asset value is difficult for us to fathom. It has the power to make a little into a lot and nothing into something. Loyalty is everything for digital buyers and it comes in strange, sometimes incomprehensible, ways—Twitter and Instagram being two of them. Demand is what makes markets, and social media and loyalty are what create demand. Many digital asset buyers believe it is the stock, bond and other markets that are suspect. Like Pop Art, Bored Apes thumb their collective nose in the face of “serious” assets, like stocks and bonds.
To them, the market will determine value, no matter how absurd, not financial institutions; not cash rich tech companies; not heavily invested pension funds. Why is a stock’s book value $10 and its market value $50? It is perception filtered through analysts in pursuit of investment banking business, balance sheets which only reveal so much, rumors and the media. The equity markets have a limited appeal for most players, but they have established an orderliness over time that has enabled small investors to benefit enough to keep them in the game (isn’t that what Las Vegas is famous for?). Digital assets have not yet mastered this. If issuers can learn from their early mistakes and those of other asset classes, they will be fine. Let us hope that investors at the forefront are not so short-sighted as to destroy digital assets as a class before they really begin.
In the world of crypto and NFTs, everyone has a shot at being a hedge fund billionaire—or at least appears to. Will the reality of inflation and higher interest rates, instability in Europe and China, a weaker economy and challenges in diversity and inclusion deflate the digital asset bubble? Perhaps somewhat. But the blockchain for transactions makes too much sense and the momentum is too strong for it to peter out. What smart people in the IP community should be considering right now is how to direct their involvement in NFTs and other web3 activities in a way that makes sense for their particular rights and stakeholders. Bored Apes and CyberPunks are a small part of a very big jungle.
*Full disclosure: I own no crytpo currencies or NFTs, although many think I am crazy not to. I will probably come to regret it.
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