The rise of NFTs over recent years has garnered attention from not only the tech world but also artists, celebrities, politicians, and their fans. For example, former US President Donald Trump recently released a collection of NFTs depicting himself as fantasy characters, reportedly selling for over $4 million.
So what are NFTs exactly, and how can you exploit the opportunity they represent while mitigating the risks associated?
What is an NFT?
NFTs is an acronym for ‘non-fungible tokens’. Creators generate these files on a blockchain when minting digital assets, including artwork, collectibles, gaming assets, and even virtual real estate.
As NFTs are stored on a blockchain, they can be bought, sold, and traded similarly to cryptocurrencies.
Unsurprisingly, NFTs have gained considerable attention in the art world as they allow artists to create and sell digital art that is unique, indivisible and irreplaceable.
While the power of NFTs for brands is yet to be fully realised, the expansion of the metaverse will present significant opportunities for brands to connect with their customers, and the use of NFTs will assist businesses in protecting their brands.
What is Physical NFT?
While one usually associates NFTs with digital assets, as the name suggests, Physical NFTs can be associated with physical, real-world goods.
Brands can create Physical NFTs in two parts. The first is created on a blockchain, and the second is created using a QR Code that the owner retains. One can only imagine how Physical NFTs will help prevent counterfeiting.
A prime example of a physical NFT is Patrón. The premium alcohol brand launched BlockBar NFT marketplace in 2022 and released 150 NFTs, each NFT representing ownership in a bottle of limited edition ‘Chairman’s Reserve’. The NFT may be traded within the marketplace or redeemed from the brand’s secure premises in Singapore.
A key aspect of NFTs is that they are unique and cannot be replaced or exchanged for other tokens – in other words, they are non-fungible. In contrast, fungible assets, such as conventional money, are divisible and can be exchanged for other notes.
What is Minting?
Minting refers to creating a token on a blockchain. The NFT contains unique metadata associated with a digital asset, often subject to the terms of a smart contract recorded on a blockchain.
What is Gas?
Gas is a transaction fee that creators pay when minting or selling an NFT. Creators usually pay gas in the cryptocurrency native to the blockchain used in the transaction. For example, the NFT marketplace Opensea uses the Ethereum blockchain and accepts Ethereum cryptocurrency as payment for digital assets that artists mint and sell on its NFT marketplace.
Opensea has a ‘lazy minting’ option, which allows the minting of the NFT when a purchaser buys the digital asset from the marketplace. Creators benefit as they only pay gas when the digital asset sells.
Arguments Against NFTs
Some sceptics argue that NFTs have no value and are not unique because they are easy to replicate. This argument is flawed because NFTs are not the artwork or object itself. Instead, each token acts as a ‘digital fingerprint’ permanently associated with a digital asset, verifying the artwork’s authenticity on the blockchain. To illustrate this, imagine two identical paintings by the artist, Renoir, side by side. The version with the certificate of authenticity would have far more value, despite its appearance, because its authenticity can be verified.
Think of an NFT as a digital certificate of authenticity. However, unlike ‘real-world’ certificates of authenticity, criminals cannot forge NFTs because they are immutable when minted on the blockchain.
IP Property Rights in NFTs
Intellectual property rights subsist in digital assets – most often in trade mark and copyright.
Trade Mark Rights in NFTs
Trademark rights protect digital assets and have done for decades. Such rights will continue in the metaverse era. Indeed, IP law is adapting globally to the growing need for trademarks on digital assets and many large brands, including Nike and Converse, are using digital-related trademark classifications.
In Australia, the UFC, a mixed martial arts promotion group that hosts fights between icons of the sport such as Conor McGregor, is among the companies that have begun to protect their brand against infringement in the metaverse. The organisation registered ‘UFC’ as a trade mark with IP Australia in January 2022 in classifications to protect the brand in NFT and cryptocurrency.
However, it is more than just cool, new, and hip brands choosing to protect their trademarks in the digital arena. For example, Australian wine producer, Penfolds, applied for trademarks to protect its name and logo in the digital asset space. In 2022, the wine brand partnered with BlockBar, a platform for trading NFTs of wine and spirits, to produce NFTs of rare, collectible wine linked to the physical bottle. The NFT of the wine is proof of ownership of the real bottle, which is stored in a secure location.
The Hermes v Rothschild Case
The alleged breach of the trademark rights of French luxury fashion brand, Hermès, is in the spotlight and keenly followed by intellectual property lawyers worldwide. In this proceeding, Hermès is suing Mason Rothschild, an artist, for his creation and monetisation of an NFT collection depicting Hermès’ signature handbags that he called ‘MetaBirkins’.
The original, physical Birkin bag is a highly sought-after status symbol in the fashion world, whereas Rothschild’s intangible NFT MetaBirkin artworks of the famous bags are brightly coloured and faux-fur-covered images.
Incredibly, Rothschild has sold MetaBirkin NFTs for similar prices as the physical bags, and he has reportedly made over $1 million. Hermès is seeking damages on several counts. First, the fashion house is suing Rothschild for trademark infringement for his unauthorised use of the Birkin trademark. Hermès is also seeking damages for trademark dilution, as they argue that Rothschild’s NFTs weaken the association between the Birkin trademark and its owner, Hermès. Among the claims, Hermes alleges that Rothschild’s use of the domain metabirkin.com constitutes cybersquatting, as he used the domain with bad faith intent to profit from the Birkin mark and the associated goodwill of the mark.
The case is ongoing, and the outcome will serve as an important precedent in the new intellectual property landscape. Regardless of the outcome of the proceeding, brands must be proactive in protecting their digital assets and the physical representation of those assets in the metaverse, even if they do not want to sell digital assets themselves.
Copyright in NFTs
Under the Copyright Act 1968 (Cth), authors and owners of original ‘works’ have an exclusive right to reproduce, publish, communicate, and adapt copyright material and may also transfer, licence and sell those works.
Section 36 (1) of the Copyright Act provides:
“Subject to this Act, the copyright in a literary, dramatic, musical or artistic work is infringed by a person who, not being the owner of the copyright, and without the licence of the owner of the copyright, does in Australia, or authorises the doing in Australia of, any act comprised in the copyright.”
Therefore, NFT-related artwork has protection under copyright law in Australia. Further, as Australia is a signatory to the Berne Convention, Australian creators can enforce rights in copyright internationally in ‘contracting states’ to the convention.
Buying and Selling NFTs
Smart contracts are self-executing digital contracts that contain the terms of sale, which usually stipulate that the creator of an original work of art retains copyright ownership, including the exclusive right to reproduce, distribute, and sell copies of the work.
Many purchasers of NFT artworks are surprised to find that they have only acquired a non-exclusive licence of the artwork. In other words, they acquire the right to display and enjoy the artwork but not the right to reproduce or distribute copies. While many argue this makes the art worthless, others draw parallels to physical artworks protected with certificates of authenticity.
NFT creators can sell NFTs through marketplaces, including OpenSea, Rarible, and Nifty Gateway. Each of these marketplaces uses the Ethereum blockchain. Therefore, purchasers can use ETH cryptocurrency to purchase licenses of NFT artworks.
Risks for Businesses
The most apparent risk to businesses and artists is copyfraud, whereby a user who is not the copyright holder creates and mints an NFT featuring the copyrighted creative work, falsely claiming to be the genuine rights holder. For example, paintings held by the Rijksmuseum in Amsterdam have been turned into NFTs by a body called the Global Art Museum, which has nothing to do with the museum or the paintings.
One can expect a counter-argument against infringement of NFT reproductions of original works is that an NFT is a digital token containing unique code, not the artwork itself – and the NFT version of the art is a representation of the original.
Although these creative arguments are likely, we have some way to go before seeing such cases play out in court.
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