What is an NFT? A comment to the EUIPO Guidance on NFTs

by Paolo Maria Gangi (pmgangi), EU lawyer, LexDAO member

This article has been originally posted in The IPKat and is here republished with no changes (apart from the images that have been used in The IPKat article) under CC BY-NC 4.0.

As The IPKat reported a few days ago here, the European Intellectual Property Office (EUIPO) has recently released some guidance notes on its approach to the classification of non-fungible tokens (NFTs). In the notes, the EUIPO provides the following definition of NFTs: “unique digital certificates registered in a blockchain, which authenticate digital items but as distinct from those digital items”. 

The EUIPO also clarifies that “for the Office, the term non fungible tokens on its own is not acceptable. The type of digital item authenticated by the NFT must be specified”.

The notes further state that “the 12th Edition of the Nice Classification will incorporate the term downloadable digital files authenticated by non-fungible tokens in Class 9”.

Comments on the EUIPO’s definition of NFT

The EUIPO’s definition of an NFT partially resembles that of the United States Patents and Trademarks Office (USPTO), which states that “non-fungible tokens (NFTs) are maintained on a blockchain and typically represent digital items and authenticate their ownership”. The USPTO guidance also discusses a number of classes related to NFTs (see here), notably classes 9 (goods) and 35 (services). 

All this said, the EUIPO’s definition arguably presents some shortcomings.  

First, the EUIPO describes NFTs as “certificates registered in a blockchain” but this sounds a bit like a devaluation of what an NFT is, since it is primarily a “token”, meaning a digital asset created using some specific technological standards, the most common being ERC-721 and ERC-1155, and which can be traded or transferred within a blockchain (or a market place) eco-system according to specific rules written in the smart contract (like the automatic payment of royalties to the NFT creator). A definition of NFTs only centred on the concept of “certificate” unduly suggests that NFTs are only written declarations registered in a blockchain. Although it is understandable that the EUIPO adopts a technologically-agnostic definition, the complexity of the token economy of which NFTs are a fundamental pillar appears unduly overlooked. 

Secondly, NFTs have recently been considered by various courts, in cases of scams or frauds, as “property” from a legal point of view. The most relevant instance has been the injunction recently issued by HHJ Pelling QC in the case brought by Lavinia Deborah Osbourne against OpenSea (DBA of “Ozone Networks”). In all these instances, what has been considered as “legal property” is the token generated through the smart contract and not the digital file linked (or “authenticated”, to refer to the EUIPO’s own wording) to it. A definition of NFTs as certificates “which authenticate digital items” implies that the NFT is ancillary to the digital file which authenticates. All this is at odds with the understanding of NFTs as property. 

Thirdly, NFTs include digital items such as art image, collectibles or music files but can also incorporate the right to receive some utilities (in many cases, NFTs include a combination of artworks or collectibles and utilities). For example, NFTs can be used, and have been already widely used, to represent an association membership – particularly in the case of decentralized autonomous organizations (DAO). In most of these cases, the digital file “authenticated” by the NFT is meaningless, while the value of the NFT lies in the right incorporated in the NFT itself like the right to be member of an association. 

Finally, given the fact that the proposed EU Markets in Crypto Asset Regulation (MICA) contains a specific definition of crypto asset applicable to both fungible and non-fungible tokens, the EUIPO definition could have taken into account the definition provided therein: “crypto-asset means a digital representation of a value or a right that uses cryptography for security and is in the form of a coin or a token or any other digital medium which may be transferred and stored electronically, using distributed ledger technology or similar technology”. As it can be seen, in MICA definition the element of the transferability of a token is clearly specified. 

The classification as downloadable digital files authenticated by NFTs in class 9

As noted, the EUIPO guidance specifies that “the 12th Edition of the Nice Classification will incorporate the term downloadable digital files authenticated by non-fungible tokens in Class 9”. The EUIPO guidance seems to indicate that NFTs shall be mainly, if not solely, included in class 9 as “downloadable digital files authenticated by non-fungible tokens”. However, as stated, many NFTs incorporate the right to a utility, whether the utility of being a member of an association or of participating in an event. In these cases, the classification of NFTs as “downloadable digital files authenticated by non-fungible tokens” centred on the digital file linked to the NFT would be practically of limited relevance. The EUIPO guidance also specifies that “services relating to virtual goods and NFTs will be classified in line with the established principles of classification for services” – but the services related to NFTs, like the NFTs marketplaces, are different from the utility which some NFTs can provide. 

The real point is that, given the complexity of NFTs, which substantially lie at the foundation of the new token-economy and can incorporate digital artworks as well as collectibles but also various types of utility, their classification should not probably be limited to the term “downloadable digital files authenticated by non-fungible tokens in Class 9”. 

Conclusion

The EUIPO guidance on NFTs appears inspired by the first application of NFTs, namely the creation of NFTs incorporating digital art (like the renowned NFT of Beeple, which sold for USD 69 million) but spectrum of other possible uses of NFTs within the token-economy is broader, ranging from RWA NFTs (real world assets NFTs, i.e. NFTs representing real word assets) to NFTs representing an utility and everything in-between.