Spotlight have recently been casted on NFTs and its potential applications in the Metaverse. While this may revolutionize the online marketing landscape and the business environment, this also call for changes in the intellectual property protection strategy to cater for this new wave of technological revolution. This article walks through the basics about NFT and the Metaverse and discuss how brands may position their intellectual property protection strategy.
I. NFT EXPLAINED: WHAT IT IS AND HOW IT WORKS?
Non-fungible tokens, NTFs, are data stored on blockchains with unique addresses. As suggested by the term “non-fungible”, each NFT is unique and is not interchangeable with other NFTs, which is to be contrasted with its fungible counterparts, e.g. cryptocurrencies. The lack of interchangeability makes NFTs valuable. Ethereum is by far the most popular blockchain system supporting NFTs.
Any digital content, e.g. photos, artworks, songs, videos, collectible cards, or even social media posts, can become NFTs. An NFT may also be a digital link to a tangible asset, say via a QR code. When someone creates an NFT, they create a file on a blockchain, which serves as a decentralized ledger, and the file so created cannot be edited or deleted. All transfers will be recorded on the blockchain. This thus distinguishes NFTs from traditional digital files – digital files can be copied as many times as you want, whereas the chains of ownership of the NFTs recorded on the blockchain cannot be copied. Accordingly, two NFTs with the same digital content may be valued differently due to the differences in the chains of ownership.
II. THE LEGAL STATUS OF NFT IN CHINA
The state entities published the Announcement on Preventing the Financing Risks of Initial Coin Offerings in 2017 and the Notice on Further Preventing and Resolving the Risks of Virtual Currency Trading and Speculation in September 2021, stipulating that virtual currencies cannot be circulated as currency in the market and that virtual currency-related activities are illegal financial activities, including buying, selling and exchanging virtual currencies.
Given the nature of NFTs, which are not interchangeable, and the content, which are commonly associated with arts or other collectibles, it is arguable that NFTs do not fall within the definition of virtual currencies and hence may not be subject to the aforesaid prohibitions. Having said that, following the ban on cryptocurrency, the Chinese market tries to emphasize the distinction between NFTs and cryptocurrencies. Chinese technology giants, Tencent, Alibaba and Ant Group, have changed the name for NFTs to “digital collectibles” and emphasized their digital collectibles have no attributes of currency. They have also imposed restrictions on the transfer of digital collectibles to help curb speculation.
Against this backdrop, NFTs are in the grey area of Chinese laws. Subject to further clarification that may be published by the government, NFTs purely for the purpose of collection may arguably be permissible.
III. NFTS AND METAVERSE
As mentioned, any digital content can become NFTs. Many brands have set foot in the world of NFT, launching digital arts and other digital collectibles connected to NFTs. NFT is also seen as a key to access the Metaverse. The Metaverse is often described as a virtual world supported by technologies like virtual and augmented reality. It is envisaged that the Metaverse will be an extension of the real world, which provides a virtual space where people, perhaps in the form of avatars, can interact with each other as well as virtual objects.
With the rise of the Metaverse, not only business activities will go virtual, but also products. As the Metaverse can be seen as a replica of the real world, it is expected that brands in the real world will also go virtual and launch the virtual version of their products. You may have already come across the news of the sale of a virtual Gucci handbag on an online game platform at the price of US$4,000, which is more expensive than the physical counterpart.
NFTs can kick in by serving as virtual title deeds as records of authorship and transfer of ownership will be stored on blockchain. The non-interchangeability of NFTs provides a means for people to prove the authenticity of the virtual goods. It also allows virtual goods become valuable through verifiable scarcity. The games industry has now been applying NFTs to virtual in-game items. Further applications of NFTs in relation to the Metaverse are expected.
IV. “DIGITALIZING” YOUR INTELLECTUAL PROPERTY PORTFOLIO
To ride on this wave of NFT and the Metaverse, apart from focusing on developing new digital marketing strategies, brand owners should also review existing intellectual property portfolios to see if they are sufficiently covered for provisions of NFTs and Metaverse-related goods and services.
Indeed, we are now seeing brands begin to expand their protection by filing new trademark applications to cover Metaverse-related goods and services. At the same time, squatters in China are also taking steps to file bad faith applications in the hope that their applications can block brand owners’ applications, thus making a profit by selling their applications.
From our experience in dealing with trademark squatting in China, we cannot emphasize more the importance of securing trademark registrations in China as soon as possible to minimize the risk of your core marks being squatted. Even if you do not have any concrete plans to launch any NFTs or Metaverse-related goods and services yet, you may still want to preserve the rights to stop others from using your brand in the virtual world. The starting point is to securing protection for your house mark or core marks and its Chinese equivalent in the relevant classes in China.
Based on the current market trend, the International Classes 9, 41 and 42 are most relevant or at least ancillary to the provision of NFT and Metaverse-related goods and services. Class 9 is the home for software, mobile applications and virtual goods. Class 41 covers, inter alia, entertainment services, whereas Class 42 covers, inter alia, computer-related services. It has been reported that brands are now partnering with gaming platforms to facilitate their entry into the Metaverse. Brands also begin to host virtual events and invest more on developing virtual reality and augmented reality applications to cater to consumers accustomed to digital realms.
If you are to launch digital artworks or virtual goods, you may also consider copyright recordals in China. Digital artworks and virtual goods constitute artworks under the PRC Copyright Law and hence copyrightable. China provides a copyright recordal system, which allows copyright owners to voluntarily record their works. Certificates of copyright recordal can serve as prima facie evidence of ownership of the works, which are useful for future enforcement actions. If such artworks and designs of virtual goods are distinctive, it is also possible to file 2D or 3D trademark applications to confer trademark protection on them.
Given the infinite possibilities in the Metaverse, brand owners should ensure their intellectual property portfolios are up-to-date to cover any contemplated and potential business activities. This article introduces typical ways to protect brand assets in the Metaverse environment and is not intended to be exhaustive, and the actual intellectual property protection strategy may vary based on the business goals, the nature of the virtual goods and services to be provided as well as the change in regulatory landscape. We have long been devising intellectual property protection strategies for multinational brands from different industries to cope with market changes and advancements and will be happy to formulate a tailor-made intellectual property protection solution for you.