The Sale of Patents and NFTs
By: Micah Drayton
Patents and other intellectual property (IP) assets are among the most valuable and readily transferrable resources possessed by many firms. Transfer of IP and its use in financing agreements is an increasingly vital engine for capital investment and growth. Blockchains have revolutionized asset exchange by permitting open yet secure transfer of property rights through mechanisms such as non-fungible tokens (NFTS). Now IP assets are beginning to be traded and leveraged on the blockchain using NFTs.
A non-fungible token (NFT) is an element of data on a blockchain which is linked to an item (usually in digital form). The NFT can be transferred on the blockchain from one owner to another using smart contracts. Ownership of an NFT can be interpreted as indicating ownership of some right in the item the NFT represents, although no mechanism inherent to NFTs actually enforces such ownership rights.
NFTs generally contain a unique identifier and an identification of the item that they represent, and are associated with at least one digital signature indicating a current owner of the NFT. The unique identifier includes an identifier of the contract controlling the NFT and the unique identifier of the NFT itself. The former can specify what property rights accrue to the NFT and transactions operating on the NFT in the blockchain, while the latter creates the ability to identify the asset in question on the blockchain in a way that can be tracked and verified. Creation of multiple NFTs for any given item is possible, and the meaning in terms of property rights that is conveyed by an NFT depends on its extrinsic interpretation.
NFTs change hands by being signed with a new digital signature created by the current owner and designating a new owner. Consideration for transfer of an NFT can either be described in the transaction transferring the NFT, or can be absent from the transfer in the block chain. The identification of the item represented by the NFT can be in one of three basic forms: (1) the item can be cryptographically hashed itself, (2) a uniform resource locator (URL) or other data path to a location of the item can be hashed, or (3) no hash at all. Where present, the hash may be included in the NFT.
Some efforts are now underway to use NFT technology for control and use of IP assets. For instance, IBM has been exploring the possibility of using NFT technology to identify and track IP assets. Artificial intelligence algorithms developed by IBM may be used to analyze the value of the assets, and the NFTs provide a way to identify them and track their exchange. As noted above, NFTs do not convey information concerning the value of the items they pertain to, or enforce any property interests in such items. As a result, the use of NFTs successfully will depend, as in any attempt to monetize patent assets, on the accuracy of the underlying patent valuation process. Anybody with experience in that field will attest to the notorious complexity and subtlety of questions of patent value. Whether an AI program can ever hope to perform such a challenging analytical task remains an open question.
As is so often the case, the success or failure of this latest experiment in smart contracts will likely depend on what happens outside the blockchain, from the ability of the AI to provide useful information regarding the complex topic of IP valuation, to the willingness of investors and business leaders to utilize this new approach to capital and asset IP management. It remains to be seen whether the current experiment is the beginning of a new paradigm in IP capitalization, or yet another footnote to the complex and ever-changing relationship between business and new technology.
To learn more about NFTs, click here: The Interplay of NFTs in Intellectual Property Law