As a startup founder, you might be wondering how you can take advantage of the recent craze surrounding non-fungible tokens (NFTs). Perhaps NFTs can be used to protect your startup’s intellectual property without spending the time and money to secure more formal IP protection. After all, NFTs can be an effective way to enforce a copyright on software without the expenses of litigation or other enforcement actions.
While tempting, startups should be cautious relying solely on NFTs for intellectual property protection. The law is slow to recognize new technologies and even slower to recognize new legal remedies. Therefore, startups that want to use NFTs as part of their intellectual property protection strategy should do so strategically.
What is a non-fungible token (NFT)?
At a high level, a non-fungible token is a unique, digital representation of a physical or digital item such as software, artwork, music and so on. NFTs are permanently recorded in a blockchain, which is a decentralized digital ledger. Once recorded, the NFT cannot be modified or deleted. Therefore, NFTs offer a secure and accurate historical record of transactions.
The NFT itself isn’t entirely valuable. It’s just data. The value arises when the NFT is associated with an item, listed in an online marketplace and used to track or control the distribution or ownership of the item.
An NFT can serve as proof of ownership, past and present, of the underlying work given the nature of blockchain transactions. But that’s just the tip of the iceberg. NFTs can also be used to authenticate items or control how the item can be used by customers. Not only are NFTs subject to the terms of service of the online marketplace, each NFT transaction may require that the purchaser agree to a “smart contract” that defines the terms of purchase or other use of the underlying item. A tech startup, therefore, may employ a smart contract to license (rather than sell) software or other products to a customer.
How can startups use NFTs to attract investors and maximize exit value?
Startup founders are often focused on three goals: attracting investors, increasing market share and maximizing exit value. NFTs might help you further one or more of those goals.
If your tech startup develops software, you can use NFTs to limit and track the distribution of your software. By authenticating ownership of the software tied to the NFT, you can distinguish pirated software from licensed software, leading to increased sales, which both you and your investors will appreciate.
NFTs can also allow tech startups to control use of their software in a more sophisticated way than traditional sales or license agreements. Specifically, NFTs with smart contracts give a tech startup the ability to define how their software is to be used by end customers, monitor compliance with the smart contract, limit the number of software users, and block or limit resale of the software by the customer.
NFTs might also offer startups a way to provide value when raising money though crowdfunding campaigns or more traditional funding rounds. For example, NFTs could theoretically be used to represent ownership in a company as well as collateral for a loan. Just be cautious, because securities are highly regulated and the use of NFTs as such could create significant legal issues if not handled properly. In other words, talk with a securities lawyer before attempting to do anything like that.
Can NFTs replace traditional intellectual property protection?
Startups, particularly those selling software, may wish to consider leveraging NFTs as a temporary substitute for formal intellectual property protection. You might be aware that securing a patent, trademark or copyright takes time: registering a copyright or trademark takes months, while securing a patent takes years. NFTs can offer stopgap intellectual property protection while you wait for the government to grant you more formal protection.
While it may be tempting, startup founders should not forego formal intellectual property protection in favor of NFTs, however. The law does not recognize NFTs as a form of intellectual property protection. Disputes over NFTs, therefore, must be challenged as contract or license disputes. While that may provide your startup with some relief should someone infringe your IP rights, you’ll miss out on some of the advantages granted to patent, trademark and copyright owners.
Another consideration relates to how NFTs will be treated outside the United States. Intellectual property rights are the subject of multiple treaties. NFTs do not — and may never — share that advantage. While the intellectual property laws in every country aren’t completely aligned, the treaties provide enough unity to give startup founders confidence that their intellectual property will be respected in the primary countries in which they seek protection. Unless and until NFTs are subject to worldwide treaties, you may see significant disparity between how NFTs are treated in different parts of the world.
Another important thing to recognize is that willfully infringing the intellectual property of another exposes the infringer to steep penalties in the United States. The law is designed that way to strongly discourage reckless or willful intellectual property infringement. Those remedies aren’t available when someone infringes a contract or license agreement, which is how an NFT must be enforced.
What comes next?
The law surrounding NFTs will take some time to mature. Eventually, NFTs could very well become a meaningful way for startups to quickly protect intellectual property. But for now, startup founders should not forego traditional IP protection in favor of NFTs.