The recent spread of “Non-Fungible Tokens” (“NFTs”) in the luxury business (fashion, art, music, cinema, yachting, etc.) is rapidly changing the perspective of distribution and retail, leading to a new concept of art and luxury, disconnected from the dimensions of time and space of the physical world.
According to a report by Morgan Stanley dated November 11, 2021, metaverse, NFTs and gaming may increase profits of the luxury industry by 25% (representing a revenue opportunity of 5 billion euros) by the end of 203010.
NFTs have captured the world’s attention when Beeple, the famous artist of digital artworks (e.g., pixel on screens) sold the NFT of his artwork “Everyday – The First 5000 Days” (a jpeg file with a digital collage of about 5000 pictures), for more than 69 million US dollars, being the most expensive NFT sold so far.
Other examples include:
- Dolce & Gabbana selling an entire collection of NFTs (virtual pictures of fashion items) for 1,885.719 Ether (5.7 million US dollars).
- NFTs of videos of NBA top shots, such as LeBron James dunking against the Houston Rockets, having an approximate value of 387,000 US dollars.
- Givenchy’s auction of 15 NFTs of artworks, realized by the graphic artist Chito, which proceeds have been devolved to a nonprofit organization fighting ocean pollution.
In parallel with the spreading of NFTs sales, several issues are arising as a consequence of the absence of a specific legal framework, especially in the intellectual property sector. Are NFTs capable of infringing copyright?
Recent controversial cases include:
- Mason Rothschild: after creating and selling the “Metabirkins” bags, i.e., NFTs inspired to the iconic Hermes’ bags, he has been sued before the Southern District of New York by Hermes for copyright infringement;
- Quentin Tarantino: after announcing the creation of an NFT of the Pulp Fiction script, he has been sued by Miramax, based on an alleged breach of contract and copyright and trademark infringement.
These litigations will be particularly challenging as they involve issues never examined before by any tribunal.
BUT WHAT ARE NFTs?
NFTs are crypto-assets created and recorded on a blockchain in order to prove ownership and validate the authenticity of other assets, such as artworks, videogames, songs, fashion items, or even tweets. NFTs may also take the shape of digital collectibles, i.e., in-game items (i.e., Game Collectibles) and/or virtual goods of any kind (i.e., Pure Collectibles), potentially adaptable to the new digital world, the metaverse.
DOES OWNERSHIP OF AN NFT IMPLY OWNERSHIP OF THE DIGITAL ASSET ASSOCIATED WITH THE NFT ITSELF?
The answer is NO. The owner of an NFT does not own the digital artwork itself, i.e., he does not own any physical/tangible asset and does not have any IP rights on the digital artwork. Ownership only relates to an intangible good, which is the NFT of the artwork.
WHAT DO YOU OWN IF YOU HAVE AN NFT?
- NFTs are ownership certificates, which may contain or not a copy of the involved digital asset. Therefore, owning an NFT grants the right to claim its ownership and to avoid others claiming the right of ownership over the same NFT.
- An NFT does not mean owning the digital asset associated with the NFT itself.
- With the purchase of NFTs, buyers do not obtain any IP rights, neither on the NFT nor on the digital artwork.
Buyers who want to enjoy the economic rights of exploitation connected to the NFT shall execute a separate agreement with the seller or the IP holder to regulate such aspects.
HOW ARE NFTs CREATED AND SOLD?
An NFT may be created (“minted”), sold, and bought on specific platforms, among which:
- Opensea;
- Rarible;
- Foundation;
- Mintable
Each time an NFT is sold, a “smart contract”[1] is issued. It includes the identifying information of each NFT and contributes to rendering NFTs unique. The main advantage of an NFT is that it provides incontrovertible ownership of the asset, thanks to blockchain technology which allows transparency, immutability, and irreversibility of transactions. Indeed, every sale and re-sale of NFTs, which occurs when the conditions included in the relevant smart contract are met, entails a digital certificate of ownership. Therefore, a double representation of the same NFT cannot be created.
WHAT IS THE TECHNOLOGY USED TO CREATE NFTs?
NFTs are created and stored through blockchain technology (Ethereum blockchain, Tezos, etc.). Blockchain falls within a decentralized technology known as Distributed Ledger Technology (“DLT”). It stores data in the form of blocks, linked together through cryptography and set in chronological order. Each new block validates the previous one. Through a peer-to-peer network and the reproduction of the blockchain across several computers, all users collectively have control over the blockchain, contributing to the security of transactions and, therefore, to their immutability and irreversibility. One of the main functions of blockchains is to record transactions (also including NFTs’ transactions) that cannot be transformed, canceled, or destroyed. This means that once created on the blockchain, the NFT cannot be modified and it is permanent, i.e., it will always exist on the blockchain.
WHAT IS THE DIFFERENCE BETWEEN NFTS AND CRYPTO-CURRENCIES (E.G., BITCOIN, ETHER)?
- Bitcoin or Ether are fungible tokens (identical, interchangeable, and fungible).
- NFTs are non-fungible tokens (unique, indivisible, and unreplaceable).
- Each NFT has a digital signature, which makes the NFT unique, and such a digital signature is used to record ownership.
HOW CAN NFTS BE SOLD AND PURCHASED?
- Once the NFT has been created, it is possible to sell it on one of the NFTs platforms.
- A wallet[2], owning crypto-currencies (g., Ether), is needed to create, sell and purchase NFTs.
- After owning a wallet, the conditions of sale may be chosen. Specifically:
- NFTs may be sold at a fixed price; or
- NFTs may be sold at
- In addition, sellers may choose the NFT’s price, the length of the sale and they may also limit the sale to a specific category of users or to one specific user as well.
- Royalties may also be applied to future sales of NFTs. In particular, Opensea permits sellers to set up royalties to 10%. For example, royalties have been applied to Emily Ratajkowski’s NFT.
- It is possible to sell the artwork and the NFT jointly (also on Opensea); in such a case, all liabilities regarding the delivery of the physical item are exclusively borne by the seller and not by the platform itself.
- Proceeds from NFTs’ sales may be devolved to charity. For example, four NFTs, inspired by Freddie Mercury, have been sold at auction and the proceeds have been donated to the Mercury Phoenix Trust, an organization that supports AIDS and HIV research.
DOES THE OWNER OF AN NFT ACQUIRE COPYRIGHT OVER THE MINTED ARTWORK?
- No, unless a specific agreement exists between the copyright holder and the NFT holder.
- Example: The CryptoKitties license: NFTs’ owners are allowed to make commercial use of their kitties with earnings up to 100,000 US dollars of gross revenues per year.
SHALL NFTs COMPLY WITH COPYRIGHT AND IP RIGHTS OF THIRD PARTIES?
- There are neither laws nor courts’ decisions yet. It seems safe to state that NFTs’ creators shall comply with third parties’ copyright and IP rights
WHAT IS THE METAVERSE?
- Metaverse comes from the two words: “meta” (e., beyond) and “verse” (i.e., universe). As it can be deduced, it indicates an entirely virtual universe, which has not been fully realized yet.
- In the metaverse, through the use of avatars, users will be allowed to enter a 3-dimensional version of the internet in which it will be possible to interact with digital objects in real-time. It is still unknown which tools will permit to experience the metaverse (g., headsets, smart goggles, etc.).
- At the moment, it is possible to enter virtual worlds, where users can buy lands and subsequently sell or rent them. Examples of such virtual worlds are the following:
- a) Sandbox;
- b) Cryptovoxel;
- c) Decentraland;
- d) Somnium.
- Some fashion brands have already used their products or items in the metaverse, for example:
- a) Nike has realized its own virtual world, called “Nikeland” which is inside the Roblox platform, where users can play and, at the same time, see and try in preview all Nike products.
- b) H&M has realized a virtual store for the metaverse.
IS THERE AN APPLICABLE TRADEMARK REGIME FOR THE METAVERSE?
- The guarantee of trademark rights in the metaverse is of fundamental importance and its regulation will need to be implemented in the near future, considering the constant growth of the metaverse.
- Some brands have already applied to register their trademark in order to use it in the metaverse. For example, Nike has officially applied to register its trademark “NIKE, JUST DO IT” in the US, Singapore, Mexico, Switzerland, and Canada.
- The goods/services, for which Nike has requested the trademark registration, are the following classes of the Nice Classification:
- a) downloadable virtual goods (class 9);
- b) retail store services featuring virtual goods (class 35); and
- c) entertainment services, namely, providing online, non-downloadable virtual footwear, clothing, headwear, eyewear, bags, sports bags, backpacks, sports equipment, art, toys, and accessories for use in virtual environments (class 41).
- The Nice Classification does not provide for the specific class of virtual footwear in which Nike is interested. Therefore, it is still unknown to which class such products (or similar) will be associated.
WHAT ARE THE CONCERNS RELATED TO INTELLECTUAL PROPERTY RIGHTS IN THE METAVERSE?
- Currently, the control regarding the use of characters and brands is managed and regulated by the relevant platforms. However, the future spread of the metaverse will inevitably lead to new legal challenges in relation to copyright.
- A problem regards the fact that rights may be granted to a specific digital asset, but they cannot be extended to its future uses. In this respect, it is important to contractually regulate such rights in view of future uses.
- An example of potential copyright infringement occurred in relation to the world of gaming. In particular, in the game “Animal Crossing”, avatars wore items of clothing reproducing monograms of real brands (g., Louis Vuitton), incurring in potential trademark infringement.
10 https://www.ilsole24ore.com/art/la-moda-investe-metaverso-otb-lancia-primo-centro-ricerca-dedicato-mondo-virtuale-AESKm7z, https://www.coindesk.com/business/2021/11/22/metaverse-gaming-nfts-could-account-for-10-of-luxury-market-by-2030-morgan-stanley/.
[1] Smart contracts are agreements written in computer code. Specifically, they are programs stored on a blockchain that automatically execute the terms and conditions of a contract. Therefore, the parties are immediately certain of the outcome without any intervention from third parties, such as intermediaries.
[2] Software wallets are available through web extensions, desktop applications, or mobile apps. Examples of the most popular crypto wallet providers are Metamask and Coinbase.
For more information on this please contact:
Lucilla Margherita
Of Counsel
E.: margherita@pglegal.it