18 Dec 2023
Tokenization of intellectual property rights
Intangible assets account for the lion's share of market value of S&P500. Though their value is measured at trillions of dollars, most companies still don't understand how to monetize their intellectual property (IP). As with other RWA, intellectual propert tokenization will facilitate management, valuation and trading of these assets.
Everything points to an upcoming bull market at the moment. The crypto sentiment is highly bullish. Crypto Fear and Greed Index, a key gauge of investor sentiment, is at 65 at the time of this writing which indicates the confidence of investors about the crypto market’s outlook. If none of the “grey swan” events – an event which is foreseeable and can happen but is unlikely to occur – realizes, we’ll have a strong cycle again I believe. And if this bull market is even remotely similar to that of 2021, NFTs do have the potential to be at the center of mania. It’s time to talk about various applications of NFTs in case we’ll have a full-blown NFT craze once again. This article is about one of the most interesting use cases of non-fungible tokens – tokenization of intellectual property rights.
According to World Trade Organization’s definition, “intellectual property” refers to creations of the mind. These creations can be in many forms – signs, symbols, artistic works, names used in design and commerce. To prevent others from using these creations governments provide rights to the creators of inventions, designs and other creations. These rights are called intellectual property (IP) rights. IP rights protect the creator and ensure that they can use these rights to demand payment from others for employing their works. IP rights “give the creator an exclusive right over the use of his/her creation for a certain period of time.” IP rights covers two types of rights: copyright, which includes artistic and literary creations, and industrial property, which includes trademarks, inventions (patents) and industrial design.
Though tokenization of intangible assets – IP rights are an intangible asset indeed – can be hard to understand, the concept is not that dissimilar to that of tangible assets. Tokenization of intellectual property rights can be defined as the process of representing ownership to IP assets in the form of digital tokens created (minted) on a blockchain. Tokenization allows token issuers – who are creators or owners of IP rights – to distribute ownership, use and monetization to rights to multiple investors who then receive a share of revenue generated by that IP.
Efficiency. Tokenization can ease the process of transferring IP rights. Instead of relying on intermediaries, everything will be executed by smart contracts. This can also be a more cost-efficient way of selling or transferring IP rights. Legal fees are the significant part of transaction costs in licensing IP. Tokenization reduces the need for negotiations and agreements.
Fractional ownership, made possible by tokenization, allows multiple investors to own a share of intellectual property. This increases liquidity of an asset class which is not traded easily.
However, there are some challenges and considerations that should not be overlooked:
Regulations on securities, especially tokenized securities, and intellectual property rights vary by jurisdiction. As already mentioned in the article, there is no a global entity governing patents or trademarks. Therefore, what works in one country may not work in another country. Add to this the ever-changing nature of regulations.
That there is no standard for tokenization of IP rights means that interoperability between different blockchain networks is hard.
Literary works are minted in the form of literary NFTs. Literary NFTs challenge the traditional publishing model which doesn’t favor authors who typically earn limited royalties. Tokenizing books allows authors engage directly with the audience while controlling the rights and distribution of their works. Furthermore, authors can offer additional benefits to NFT holders, such as an exclusive and early access to the sequel of a book, or a personal chat. One prominent player in the space of literary NFTs is Creatokia. It is a dedicated platform where one can mint, trade and collect NFT books.
There are already protocols tokenizing songs or even whole albums and fractionalizing them which allows retail investors to buy a share of music assets. Though there can be some slight differences in implementation, the business model of these protocols is mostly the same. Traditional holders of music rights can sell part of their royalties, like other securities. If they choose to do so, these platforms can buy those royalty rights and fractionalize them in the form of NFTs. Royalties generated by songs backed by those are distributed to token holders. Like other NFTs, these tokens can also be traded in secondary market, either in those platform’s marketplaces or in popular NFT marketplaces, such as OpenSea. In the article on tokenization of music assets, I already wrote about how the platforms, such as Royal, Bolero, and JKBX transform music industry by fractionalizing music rights.
Industrial property rights need to be registered in the patent office or trademark office of the respective country if their owner aims to prevent others from using their creations. The protection granted by the government tends to be limited to the jurisdiction of that country, and doesn’t protect the creator of a patent, a trademark or a design in another country. Therefore, if the owner of industrial property rights wants to prevent third parties from using their creations in other countries, they should apply for registration in those countries as well. That there is no global trademark or patent law leads to different countries having different rules and procedures. That’s why registering patents or trademarks in multiple countries takes a lot of time and money resources.
Patent tokenization involves dividing an active (note that a patent typically expires after 20 years) into digital tokens representing fractional ownership. For businesses, it is a novel way of protecting IP rights and monetizing their patents. You can allow others to use your creation in exchange for monetary compensation while without relinquishing ownership. That tokenization is implemented on blockchain makes the process more secure and transparent.
One of the leading players in the space is IPwe, a global platform powered by artificial intelligence, predictive analytics, and blockchain technology around smart intangible asset management. Founders, companies choosing to share the right to license their patents, contribute to Smart Pools while preserving their control over IP rights. Members get access to these patents and technologies paying an annual fee.
The company has one of the most extensive patent databases: its system contains 80% of the world’s patents. Leveraging artificial intelligence and blockchain technology IPwe created the first Global Data Registry in the world. Now collaborating with IBM, the company aims to advance the tokenization of patents which will facilitate trading, transferring and licensing of patents. In January 2023, the company announced that it will convert 25 million patents to dynamic NFTs with the technical assistance of Casper Labs.
IP-NFT is a novel idea developed by Molecule, “a technology platform with an incentive-aligned, community-driven approach”. It is a platform focused on biotech research which links researchers with funders.
IP-NFTs represent data access and legal IP rights to scientific research, or to biomedical research to be precise. The way it works is as follows. When an NFT is minted, an entity – let’s say a DAO – funds the research of a scientific lab which transfers access to future data and IP rights to the DAO. First IP-NFT was minted in August 2021 when VitaDAO started funding longevity research Scheibye-Knudsen Laboratory at University of Copenhagen. VitaDAO is a community owned collective funding early stage longevity research about which our community already wrote extensively. You can read about VitaDAO in this article and in this one.
Molecule, wants to be “an OpenSea of biotech IP”, aims to create a marketplace of IP-NFTs where those really enthusiastic about biomedical research support and fund it.
IP-NFTs have the potential of being the future of decentralized research because it allows biomedical researchers to fundraise. This makes patenting or launching a startup unnecessary. They will also enable researchers and biotech companies to create new funding sources through data marketplaces.
Acxyn seems to operate at the intersection of two strong Web3 trends: real world asset tokenization and gaming. Acxyn, through its plug-and-play-platform, enables seamless connecting of all games into Web3. It works in the following way. Suppose you are an indie game developer who released a new video game. You realize that you don’t have resources to compete with big game studios who spend millions of dollars on development, improvement and marketing of games. By connecting your game to Acxyn you tokenize your game’s IP which enables raising funds without the need of your game becoming popular. I like the idea, and since this is mostly a market with an untapped potential, I think Acxyn has the first mover advantage.
Tokenization of intellectual property rights is an evolving field. In a nutshell, it refers to the process of representing ownership to IP assets in the form of digital tokens created on a blockchain. Tokenization streamlines managing and transferring of IP rights through cutting operational costs and increasing efficiency. It has its unique challenges especially legal and regulatory, and technical issues. Successful solution of these issues will transform how intellectual property is managed and traded across many industries.
Disclaimer: Nothing on this site should be construed as a financial investment recommendation. It’s important to understand that investing is a high-risk activity. Investments expose money to potential loss.