CAI0043

Written evidence submitted, on behalf of Bournemouth University, to the Treasury Committee’s call for evidence into the crypto-asset industry.

This evidence is being submitted to highlight the opportunities and risks presented as a result of crypto-assets and Non-Fungible Tokens (NFTs) from the perspective of intellectual property (IP) law. Ownership of these assets and the value in creating them gives rise to many IP questions which are addressed here. Furthermore, the evidence presents the steps which the Government can take to address these issues.

Dinusha Mendis is Professor of Intellectual Property & Innovation Law and Director of the Centre for Intellectual Property Policy and Management (CIPPM) at Bournemouth University.

Dinusha is an internationally recognised author in relation to new technologies and IP law and has carried out commissioned research for both the UK Government and the European Commission. She has authored articles on NFTs and IP law and is a member of the Metaverse Governance Team at the World Economic Forum. You can find out more about Dinusha here.

Executive Summary

• There is currently a lack of legal understanding, surrounding intellectual property rights and data, when an NFT is purchased. It has created a surge of litigation in the US. There is the opportunity to take small actions to prevent this happening in the UK.
• Implementing a mandatory awareness statement that must be acknowledged at point of minting (publishing on the blockchain) as well as sale would raise consumer awareness of the authenticity of the item being sold and purchased preventing confusion in relation to piracy/counterfeiting and ownership of the NFT including the underlying work (i.e., artwork, music etc.)
• The scamming of crypto-assets and NFTs results in a significant financial loss to the UK (in the millions). From a property law perspective including NFTs as a ‘third type’ of personal property, distinct to things in possession and things in action, would better protect businesses and consumers from these losses and provide a clear recourse to compensation.   
• It is unclear whether Article 17 (Right to Erasure, also known as the Right to be Forgotten) of General Data Protection Regulation (GDPR) will apply to the blockchain. Clarity is needed to understand whether pirated/counterfeited transactions which are permanently on the blockchain, can either be ‘forgotten’ or ‘unlinked’ if it cannot be completely erased and whether it should be instigated through a Court order. Even if the unlinking process is clarified, unlinking data from the blockchain may not be practical, is counterintuitive to the immutability of the blockchain and could be very costly. Furthermore, in the case of public blockchains, it will be almost impossible to identify a ‘central data controller’ responsible for compliance due to its decentralised nature thereby leaving open the question as to who should deal with the unlinking of the data.
• There is an opportunity for collective management organisations (CMOs) such as Design and Artists Copyright Society (DACS) to incorporate blockchain technology into their day-to-day practice to allow for a more streamlined and effective way of dealing with crypto art. This will allow artists to be paid directly (which is not possible at present as all transactions have to be directed through a CMO) and will remove much of the administrative burden and costs which CMOs face.
• Crypto-assets and NFTs could easily be incorporated into the current Government review of the ‘exhaustion doctrine’ under the copyright framework to ensure that there is clarity in the sale of digital assets in the metaverse.

Intellectual Property as it relates to crypto-assets can be a confusing area to understand. If I can be of further help to the Committee, by providing more detail or discussing any of the issues outlined below, please do contact me and I will be happy to support your request.

Q5. What opportunities and risks could the use of crypto-assets – including Non-Fungible Token – pose for individuals, the economy, and the workings of both the public and private sectors?

1. One of the main benefits of crypto-assets including Non-Fungible Tokens (NFTs) is the transparency it affords when buying and selling digital assets, through the recording of each transaction on the blockchain.

• Being a decentralised transparent ledger, the blockchain has the benefit of not only being transparent but also ensuring that the transactions are immutable and recorded permanently on the blockchain – which means tampering with the transactions becomes almost impossible. For consumers and businesses this can be highly advantageous.

2. Crypto-assets and particularly NFTs are highly advantageous in the public sector, such as for cultural heritage organisations, as well as for the private sector, for example auction houses, particularly in the area of art. Authenticating a genuine piece of art has so far been a challenge.

• However, tokenising a piece of art as an NFT, allows that piece of art to be sold and authenticated by the NFT’s unique TokenID which is then recorded on the transparent and immutable blockchain. It also opens doors for artists (and other creators) to be paid directly, without having to rely on a middle-man, such as a collective management organisation.

3. At the same time, there are a number of risks that crypto-assets can present. Whilst the risks arising from investment, advertising and finance have been well-documented[1], the risks associated from a lack of understanding of Intellectual Property (IP) laws have been less well covered.

• For example, when someone buys an NFT, they do not automatically own the copyright to the underlying work (i.e., artwork, music etc.) as has been misunderstood by some NFT purchasers.[2] Put simply, a NFT holder does not automatically gain permission to make copies of the work, distribute it or adapt it, amongst others. These rights are reserved for the copyright holder.
• The only mechanism for such rights to be transferred will depend on the smart contract that is embedded within the NFT. Many do not understand this and believe that buying an NFT gives them the rights to the underlying work. This lack of understanding of IP laws and law generally (terms and conditions when buying or investing in NFTs) has led to a stream of litigation, mainly emanating from the USA[3].
• Such litigation will eventually reach the UK, leading to a detrimental impact on businesses and consumers alike, unless steps are taken to raise more awareness. The awareness-raising can be done either by a Governmental body such as the UK Intellectual Property Office or could also be carried out by a non-governmental body. 

4. Another risk for individuals and the economy affecting both public and private sectors is the scamming of crypto-assets and NFTs, leading to consumers and businesses losing millions of pounds. Once again, there has been much focus on this issue from the perspective of the financial sector[4] – but less so, from a property law point of view.

• Yet, since 2019, a series of decisions from the High Court in England & Wales has recognised crypto-assets and NFTs as a type of personal property.[5] 
• In July 2022, the Law Commission of England & Wales called for reform of property law in recognising crypto-assets including NFTs as a ‘third type’ of personal property, distinct to things in possession and things in action.[6] 

I would strongly recommend that the Government implements this reform to recognise a third type of property law (distinct to things in possession and things in action) as set out by the Law Commission, so that consumers and businesses in the UK are better protected and have clear recourse to compensation.   

Q6. What work has the Government (and its associated bodies) done to understand, prepare for and, where relevant, encourage changes that may be brought about by increased adoption of crypto-assets?

5. Much work has been carried out by the Government (and its associated bodies) in relation to the UK’s regulatory approach to crypto-assets, particularly in recognising stablecoins as a regulated means of payment[7]. Furthermore, the UK Jurisdiction Taskforce Report of 2019 set out actions to maintain the UK’s international reputation as a safe and transparent place to do business in financial services; ensure high regulatory standards in financial markets; protect consumers; guard against threats to financial stability and so on.[8]

6. However, to date, steps have not been taken to protect against threats such as scamming, piracy and counterfeiting from the point of view of intellectual property (IP) laws. In this context, and as set out below, the Government can prepare for and encourage changes which can be brought in through small tweaks to the law.

• As set out above in response to Q5, the Government should strongly consider recognising crypto-assets and NFTs as a third type of personal property, distinct to things in possession and things in action, as called for by the Law Commission of England & Wales. This will allow individuals and businesses to be better protected whilst determining a clear recourse to compensation in circumstances where consumers have been scammed. Such scams are damaging for the UK economy and can run to millions of pounds, as seen in recent cases from 2019 to 2022.

• Raise awareness in relation to the ownership of crypto-assets and NFTs from the perspective of IP law, so that buyers and sellers understand that they do not have the right to reproduce, adapt, and distribute etc. the underlying work in accordance with copyright law, unless stipulated in the terms and conditions. This lack of understanding has led to a stream of cases in the USA and unless steps are taken in the UK, the litigation will soon move here also.
• Raising awareness amongst consumers is a difficult task. However, in this instance there is a simple solution. The awareness could be raised by implementing a mandatory acknowledgement tick box at the point of minting the work (publishing on the blockchain) and sale of the cryptoasset or NFT, clearly requesting sellers to take responsibility for selling authentic and original works (not those that are pirated or counterfeited) and stipulating that purchasers’ do not have the right to reproduce the underlying work etc.
  This pro-active approach which focuses on informed awareness is currently seen when carrying out transactions via online banking or visiting a website containing cookies. It makes both the seller and purchaser pause before confirming the financial transaction. Furthermore, by separating the tick box and statement out into its own step within the sale and purchasing process, without other items on the webpage to distract, it brings the information directly to the consumer’s attention. Whereas simply having a section on ‘Intellectual Property’ under the lengthy Terms of Use, is insufficient (as many consumers do not read the Terms). This tick box is a proactive action which sellers and purchasers make at the point of sale and purchase, and it is a cheap and easy policy solution which may prevent litigation.
• The blockchain is a permanent record of every transaction but it cannot know whether the digital asset/underlying work is ‘original’ (i.e., that it has not been pirated or counterfeited). This means that someone can reproduce another person’s work and upload it to the blockchain, leaving a permanent record of the transaction. In such a situation, it is unclear whether Article 17 (Right to Erasure) of General Data Protection Regulation (GDPR) will apply to the blockchain.
• The Right to Erasure also known as Right to be Forgotten, introduces a right for individuals to have their personal data erased where it has been processed unlawfully. A request for it to be actioned, can be done verbally or in writing. Although “there is a general belief that that blockchain technology uses anonymous data … that is not really the case”[9] and this legal uncertainty can be "a reason not to use the blockchain”[10] even though the technology presents many benefits. At the same time, in a handful of cases, including in the case of Google Spain[11] the Court demonstrated that data can be ‘forgotten’ or ‘unlinked’ even it cannot be completely erased. As such, this judgment moved away from ‘erasure’ towards ‘forgetting’ demonstrating how data can be unlinked from the original source.
• Even if ‘forgetting’ were possible through a Court order, it may not be practical. It is counterintuitive to the immutability of the blockchain and could be very costly. Furthermore, in the case of public blockchains open for anyone to join, it is almost impossible to identify a ‘central data controller’ responsible for compliance due to its decentralised nature, which leaves it unclear as to who should deal with the unlinking of the data. This leaves Article 17 and its applicability to blockchain technology unresolved in many aspects and the legal application is of concern. The Committee might wish to suggest to the Law Commission of England & Wales or the UK Intellectual Property Office that they address this grey area and recommend a way forward to prevent litigation and legal loopholes.

• Artist’s Resale Rights 2006, which currently exists under the copyright framework, grants artists and their heirs the right to receive a fee on the resale of their artwork and can be used in the sale of crypto art and NFT art as the blockchain provides a straightforward mechanism for artists to authenticate their work by providing the buyers with a certificate of authenticity. It can reduce the administrative burden on collective management organisations (CMOs) such as Design and Artists Copyright Society (DACS). Therefore, the Committee may wish to recommend that CMOs such as DACS take forward the initiative to incorporate blockchain technology[12] into their day-to-day practice to allow for a more streamlined and effective way of dealing with crypto and NFT art. This will allow artists to be paid directly, rather than directing all transactions through a CMO. This will remove much of the administrative burden and costs which CMOs face.

• According to recent case law[13], it is clear that the first sale of a computer program will ‘exhaust’ the distribution right. This is less clear in the case of e-books and other digital assets[14] - which in effect has an impact on crypto-assets and NFTs. Therefore, I recommend that the Government reviews the ‘exhaustion doctrine’ under the copyright framework to ensure that there is clarity in the sale of digital assets in the metaverse. Following Brexit, the UK’s exhaustion doctrine is already under review; meaning this is the perfect opportunity to incorporate and consider crypto-assets and NFTs as part of the existing review.
• Marketplaces which facilitate the buying and selling of crypto-assets and NFTs should strengthen their terms and conditions because they are currently not robust and do not provide enough protection for consumers. This, alongside a lack of awareness of their rights, causes many users to fall victim to fraud theft, piracy and counterfeiting. Furthermore, the EU’s DSM Directive which came into force in 2019 (although not adopted by the UK) does not place liability on marketplaces according to Article 17.
  Irrespective of whether UK adopts Article 17 or not, following Brexit, it is imperative that consumers using these marketplaces are better protected. In conjunction with how these marketplaces can raise awareness about IP ownership as outlined above, an acknowledgement tick-box can be adopted, which will lead consumers to make a proactive and informed decision, at the point of sale. This can be accomplished by reading a few important statements (summarised from the marketplaces terms and conditions) to acknowledge consumers understand about ownership of the cryptoasset or NFT (based on IP law), data protection, piracy and counterfeiting and risk of being scammed, before progressing to make the purchase.

Recommendations for Action

• Implementing a mandatory awareness statement at point of minting and purchase to raise consumer understanding and prevent piracy and counterfeiting – reducing future litigation.
• Adopt crypto-assets and NFTs as a ‘third type’ of personal property to protect businesses and consumers and provide a clear recourse to compensation.   
• Call for clarity to confirm whether Article 17 of General Data Protection Regulation (GDPR) will apply to the blockchain to prevent costly litigation and business losses.
• Recommend that collective management organisations (CMOs) such as Design and Artists Copyright Society (DACS) incorporate blockchain technology into their daily business to streamline artists’ payments and reduce administrative burden.
• Incorporate crypto-assets and NFTs into the current Government review of the ‘exhaustion doctrine’ under the copyright framework to ensure that there is clarity in the sale of digital assets in the metaverse.

References

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