Non-fungible tokens (NFTs): benefits and challenges for companies to protect their brands

February 6, 2023

Author: Eduardo Rodríguez

The digital business revolution: NFTs, blockchains, metaverse, smart contracts and web3
In recent years, the blockchain, cryptocurrencies, metaverse, NFTs (non-fungible tokens), smart contracts, Web 3, among others, are the new technologies that have become the center of attention due to their lucrative characteristics and innovation. In this way, they opened the door to the development of various markets and new business opportunities.

Although NFTs were created in 2014, they have recently been the subject of much discussion, mainly due to the large sums involved in the transactions for their acquisition. NFTs are active in a digital space, related to an etherium code (a type of cryptocurrency) on the blockchain and signed through a smart contract. Indeed, an NFT can represent practically everything from art, music, and images; to digital real estate, avatars, among others.

Benefits of NFTs for companies
These benefits have made NFTs attractive to individuals and companies. Being a technology that has grown substantially in the last 2 years, some companies have ventured into NFTs for their various benefits:

– Generate sales and expand customer bases.

– Eliminate intermediaries in transactions carried out with smart contracts.

– It is safe and traceable, because it uses the blockchain.

– In copyright, the creator of an NFT can generate commission for each transaction that involves their tokens.

– By creating an NFT that links their brand, innovative opportunities to market their products will emerge. This opens the doors of exchanging them with real world products, collaborations with musicians, influencers or others, creating interactive programs or loyalty programs related to their brands, among others.

– It allows to raise funds for charitable causes and social work.

For people, NFTs can also be a business opportunity, since creating an NFT creates a work of art, which can be marketed and exchanged for sums of money. Art is an open market where any person or company can create a token, however there is imminent legal risk involving and harming the big brand holders in the real world.

Unregulated virtual goods: legal challenge to protect your rights
NFTs are an unregulated sector, which is a difficult task in the legal field due to its complexity and relationship with the digital world, where ambiguity prevails regarding the territoriality of the laws. Consequently, this creates uncertainty in certain branches of law, mainly industrial and intellectual property.

For example, there are cases of third parties creating an NFT, replicating and infringing a registered intellectual property right, to make a profit by trading the token. This is an obvious detriment to the holders of intellectual property rights, who are affected and are in an unfavorable position, for not taking legal measures to safeguard their intellectual property rights.

Although NFTs are a new technology, in the real world they are subject to the same legal regulations as brands. The most effective way to minimize the risks that violate your rights is to register trademarks to obtain priority, regardless of whether or not you use NFTs.

Mechanisms for legal protection in the digital market
The main recommendation is to extend the protection of trademark registrations, so that they include the international classes related to these products. The advantages of making this type of registration include the following:

– Create a public and legally documented ownership of the name, as part of your business. This can be a tangible and valuable asset, especially as business opportunities increase with the implementation and development of digital businesses.

– It provides a powerful legal tool to defend or prevent someone from harming the integrity of a registered name.

– It allows you to legally defend yourself against any party trying to register a sign, using a similar denomination or design.

– Inapplicability of the trademark specialty principle.

The suggested measures put the company in a better legal position, in case of a trademark infringement litigation. These legal measures protect you if a third party replicates a distinctive sign that does not belong to him through an NFT and, equally in the entire digital realm, including the metaverse and Web3.

Trademark infringements are contained in Law No. 20-00, where pecuniary sanctions and imprisonment are imposed on those who -without the consent of the holder of a distinctive sign- use an identical sign, a registered trademark, a servile copy, or fraudulent imitation of that mark.

The law emphasizes that said use must be related to the products or services that the brand distinguishes or similar products and services. This shows that for the trademark infringement to be attributable, the products and services must be related, otherwise the principle of specialty applies.

By registering their distinctive signs, companies from various sectors have prioritized their legal protection in digital media. In practice, we see this trend in the banking, financial, food and beverage, restaurant, art, music and entertainment, sports, events, cosmetics, toys, vehicle brands, clothing and accessories, tourism and hotel, retail, and also artists sectors and public figures, among others.

Timely legal actions: the key to prevent economic losses in trademark infringements
While NFTs are an unregulated sector, they are permeated with some legal uncertainty. Until Dominican legislation is issued that regulates the markets of the virtual world, the current legal mechanisms are extensive to provide some legal certainty.

The main suggestion will be to include the brands in classes 9, 35, 41 and 42, to include “virtual goods” in legal protection. Also, records of essential elements (such as labels and designs of your products) should be included, to get a better position if a trademark infringement occurs and, at the same time, to anticipate a trademark counterfeiting.

Currently, large companies are litigating trademark infringements and counterfeiting in the metaverse, carried out by an NFT. The solution to these cases will serve as a precedent in comparative jurisprudence, however, because they do not have a registry that includes these virtual goods, they are in an unfavorable position with respect to the offender.

Trademark infringements in digital markets are increasingly common, due to their attractive market value and novelty factor. Therefore, we urge companies to remain vigilant. Making registrations, keeping watch and prosecuting the unauthorized use of your intellectual property rights are vital to avoid damage and economic loss in a trademark infringement through digital goods and markets.