Bitcoin NFTs raise unique legal issues. Here’s what you need to know

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 NFT 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.

Extra work, new advantages

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.

DISCLAIMER: The information contained in this article is for informational purposes only and is not legal advice or a substitute for obtaining legal advice from an attorney. Views expressed are those of the author and are not to be attributed to Marshall, Gerstein & Borun LLP or any of its former, present or future clients.