Bitcoin NFTs Raise Unique Legal Issues. Here’s What You Need To Know – Trademark

While non-fungible tokens (NFTs) originally gained popularity on
smart-contract platforms such as Ethereum and Solana, creators can
now mint and transfer digital artifacts on the Bitcoin blockchain.
But even though outwardly all those NFTs seem similar, the
differences in how these digital assets are minted raise different
intellectual property law issues — in particular, regarding
the patent eligibility of applications related to NFTs.

Investors as well as NFT creators and buyers alike should be
aware of these differences, to make sure they are protected by IP
laws as well as beware of limitations, to decrease the likelihood
of a potential infringer being able to avoid liability.

Differences between Bitcoin and smart-contract NFTs

Bitcoin NFTs are created in a much different way than NFTs on
other blockchains. For example, NFTs can be inscribed into the
Bitcoin blockchain as Ordinals. To inscribe an Ordinal, a user sends
a transaction to a Taproot address and includes an asset/digital
artifact such as a text or an image in the witness data section of
the transaction. The witness data section can store up to 4 MB of data, which is generally large enough
for most images and other digital artifacts.

But Ordinals aren’t the only way to mint NFTs on the Bitcoin
blockchain. Alternatively, users can mint NFTs using the STAMPS (Secure Tradeable Art Maintained
Securely) protocol, which stores digital artifacts within the
Unspent Transaction Output (UTXO) portion of the transaction.
Proponents of the STAMPS protocol argue that because witness data
can be pruned over time, Ordinals are not immutable. By including
an encoding of a digital artifact within the UTXO portion of the
transaction, the digital artifact cannot be pruned from the Bitcoin
blockchain. Also, instead of using the order in which a Satoshi was
mined as a unique identifier for the digital artifact, the STAMPS
protocol includes an asset identifier in the UTXO with the digital
artifact. When the asset identifier is transferred to another user,
the user takes ownership of the digital artifact.

The user also sends a Satoshi (1/100,000,000th of a Bitcoin) in
the transaction, where each Satoshi is numbered in the order in
which it was mined. For example, the first Satoshi ever mined is
Ordinal number 1, the millionth Satoshi mined is ordinal number
1,000,000, and so on. The Satoshi (identified by its ordinal
number) is then associated with the digital artifact so that the
Ordinal number acts as a unique identifier on the Bitcoin
blockchain for the digital artifact. Then when the user transfers
the satoshi, the recipient becomes the owner of the digital
artifact.

Bitcoin NFTs are also structured differently than other types of
NFTs. For example, other types of NFTs are typically created with a
unique token identifier and an associated set of properties, such
as a name, a link to a digital image, etc. On the other hand, a
user does not create a unique token identifier or a token at all
when inscribing an Ordinal. Instead, the digital asset is inscribed
with an existing Satoshi.

Arguably, the Satoshi does not have a unique token identifier,
as it is originally mined as a fungible token which then takes on
some non-fungible properties by being numbered in the order it was
mined. Recently, developers have created a protocol using Ordinals
for BRC-20 tokens, which is a reference to
Ethereum’s ERC-20 tokens. These BRC-20 tokens are fungible tokens created and transferred using
Ordinals, thereby adding further confusion when determining the
fungibility of a Satoshi used to inscribe fungible tokens.

Also, the Satoshi does not have off-chain metadata like an NFT
on other blockchains, which includes a set of properties of the
NFT. Instead, the digital artifact is directly inscribed into the
witness data section (or the UTXO section in the STAMPS protocol)
of a transaction.

Legal ramifications of those differences

Patents that only describe NFTs as they exist on smart-contract
platforms (e.g., having a unique identifier and a set of properties
that describes the digital artifact that they represent) may be
vulnerable to a design around by a potential infringer that alters
their software so that digital artifacts are minted and transferred
on the Bitcoin blockchain instead of on Ethereum, Solana, or
another smart contract platform. If the patent claims some use of
NFTs, the potential infringer may argue that their digital
artifacts on the Bitcoin blockchain are not NFTs since they may not
have a unique token identifier, may not be represented by a
non-fungible token, and/or do not have off-chain metadata.

Accordingly, it is important to consider including a description
of Bitcoin NFTs as well as smart contract platform NFTs in the
patent description. For example, NFTs can be defined to include any
digital artifact stored on a blockchain or referenced by a
blockchain (in the case where a smart-contract platform NFT
includes a link to the digital artifact) regardless of whether it
is associated with a token or a unique token identifier.

Addressing these legal ramifications in the patent description
may also have some benefits later on when the United States Patent
and Trademark Office determines whether to grant the patent. For
example, U.S. patent law requires that patents claim eligible subject matter. In some instances,
patent claims — particularly when they involve software
— may fall under a judicial exception to patent eligibility, which
can be very difficult to overcome. However, a claim is
patent-eligible if the claim, for example, improves a
technical field. By describing Bitcoin NFTs and their technical
advantages, the legal team for NFT creators may have the proper
ammunition for overcoming these eligibility concerns.

For example, Bitcoin NFTs improve upon smart contract platform
NFTs by including the digital artifacts directly on the blockchain
rather than including a reference or pointer to the digital
artifacts. Because the Bitcoin blockchain is immutable, the digital
artifacts stored on the Bitcoin blockchain are likely to remain on
the blockchain forever unchanged. Bitcoin NFT owners do not have to
worry about a centralized entity taking down or altering the
digital artifacts so that they no longer have proof of ownership of
the original. This also reduces the opportunity for fraud by
selling an NFT that the seller claims to reference a particular
digital artifact in a centralized storage or decentralized file
storage system but does not actually reference the particular
digital artifact. Instead, users can verify an inscription or STAMP
on the public blockchain.

Conclusion

The advent of the Bitcoin NFT may create some extra work for NFT
creators and their lawyers to ensure that potential infringers
aren’t able to work around patents by launching their NFTs on
the Bitcoin blockchain. However, with this extra work comes an
increased likelihood of success at reaching allowance on patent
applications that describe NFTs by being able to highlight the new
technical advantages of Bitcoin NFTs.

While NFT thieves may still have other ways to avoid liability
for infringement, attorneys who specialize in blockchain
intellectual property and patents should do their best to stay
up-to-date with the latest in this rapidly developing and
ever-evolving technology so that creators can enjoy the fullest
protection under the law, no matter what the innovation.

Originally published by Forkast and Yahoo! Finance.

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