NFTs and the $22 billion question
The NFT Market grew from $100 million in 2020 to around $22 billion in 2021, what could this mean for IP Rights?
Whether you believe that NFTs are here to stay or just a passing phase, there is no denying that their expansion is currently unstoppable. In what is often referred to as the ‘Gold-Rush’ stage, their continued growth is simply down to rights and tokens being snapped up all over the world, whether as a potential investment or to secure and protect existing registered rights. Passing phase or not, the market grew from $100 million in 2020 to around $22 billion in 2021, with NFTs now accounting for around one third of online art sales, or just over 2% of the art market, all in the space of a few years.
As with any gold rush, NFTs exist in the ‘Wild West’ right now, most of the markets are unregulated and infringement and counterfeiting is everywhere. While most experts believe that demand will decrease as the markets begin to develop a consensus on just how valuable such tokens are, this may not be for a while and it will probably take even longer before the markets could be considered functionally stable.
So what does this mean for securing your IP rights online, whether that means protecting your brand from infringement and abuse in online gaming, the ‘Metaverse’ and other online worlds? We should point out that, at present, the Metaverse does not yet exist, at least in the way it has been predicted, and most people have yet to agree on quite how it will work, but many organisations are preparing for it nonetheless. As with many current and planned online worlds, people are able to personalise their online visual representation, or ‘avatar’, and this represents huge potential for IP rights holders through the sale of digital branded goods alongside the development of other potential new revenue streams. While the Metaverse may not yet fully exist, at least in its intended form, many of these revenue streams are already being explored and developed.
Explaining the Metaverse (and other digital worlds), would perhaps be the best starting point. It is also worth mentioning here that different versions are currently in development through different parties, the most famous being those announced by Microsoft, Nvidia, Roblox and Facebook (who have since changed their name to Meta to align with their plans), but there are also many others. In principle, the Metaverse is predicted to be the future platform for computing in a similar way to how you might use the internet now. It will be linked directly to the real world, both economically and visually, offering participants the opportunity to develop and trade products and services. It will combine augmented reality, where you see simulated images placed over field of vision, and virtual reality, where that field of vision is completely simulated, the intention being to create 3D environments that individuals will interact with in real time. If we think of all of the communication, purchasing and browsing information that we currently complete online, it is that, but overlaid onto the real world so that you see and hear, and eventually touch and smell, everything you interact with. (The ability to smell is, understandably, a bit further behind technologically, but it is certainly already at the R&D stage.)
Modern technologies are making such instant interaction increasingly possible, with 5G already able to handle the connection speeds required and 6G, while still technically in development, further improving access and overall user experience. Given the level of investment from some of the biggest names in tech, it is looking increasingly likely that 3D environments such as the Metaverse will become the places you go shopping, hold meetings, meet friends and partake in a host of other social activities. All digital, all simulated and all permanently connected. Younger generations are already growing up with such worlds and stories now exist of virtual birthday parties, attended by friends from all over the world, and requests for virtual gifts rather than physical ones. Given that such generations are comfortable living in these virtual worlds, and they will be the customers of the future, it is likely these will become the standard ‘go-to’ platforms for anything they need, including the purchase of digital items. Some brands are already presenting designs for virtual shopping centres, 3D navigable stores designed to mimic real world locations, where one can peruse, try and buy digital items in the same way they would in reality
Which brings us back to NFTs, and why it is important to offer a brief introduction, explore how NFTs work and identify what they might be used for. This is not an exhaustive explanation and we always suggest that you seek guidance and do your own research before considering how you might develop your IP portfolio and branding strategy. If you would like to learn more about how Zacco can help, you are welcome to reach out to Thomas Mølsgaard, Magnus Ljungdahl or another of our Trademark experts, who will be able to advise on what options are available to you, both with regards to NFTs themselves, as well as your wider Trademark or Brand IP strategy.
So what is an NFT? Well, the simple answer is that it is a unique ‘token’ that is created and linked to a specific asset. The asset itself often exists within the real world and could, for example, be a film clip, piece of art or music, or a digital representation of an existing product. The ‘minting’ of a Non-Fungible Token (NFT) effectively creates a corresponding digital asset that remains linked to this original asset. NFTs have their own value and can be owned, bought and sold (often using cryptocurrency) in marketplaces across the globe in much the same way as any other asset might be. Thomas Mølsgaard, Zacco’s Trademark Director for Denmark & Germany acknowledged “The primary difference is that owning the NFT does not necessarily mean that you own the physical asset it is associated with. It will be up to the seller to define whether they are selling a physical branded item, for example, or just a digital representation of it. It is also worth remembering that these markets are still largely unregulated, at least for now.”
So how do I make one? Well, it first makes sense to explore which assets are most suited to NFT development and protection and Zacco can help with this, if you do not know where to start. The actual process of creating an NFT is as follows: The IP owner (the creator of the design, or owner of a brand for example), starts a process called ‘Minting’. This requires the existence of a crypto currency ‘wallet’ because the NFT, once established, will be directly linked to that wallet as the first owner of the new token. This will be its starting position within the blockchain. To explain the blockchain could easily take up another article, but for now we can describe it as a publicly available record, which grows in ‘blocks’ as transaction data is added and can demonstrate proof of ‘providence’ of a particular asset. Although many companies may invoice for this in standard recognisable currencies, on a technical level, crypto currency is required to pay the fee for ‘Minting’ an NFT. This cost, often referred to as a ‘Gas’ fee is required to establish the transaction on the blockchain and reimburses the ‘crypto-miners’ (don’t ask) who have provided the necessary computing power (or ‘gas’).
The end result is the creation of an asset, with a publicly accessible and verifiable register of ownership (the blockchain) and, as such, the provenance and ownership of said asset can be easily checked, proven and will automatically update as the asset moves into the hands of a new owner. In this way, the asset may be reproduced and fake versions might exist, but it would be physically impossible to link these back to the established asset blockchain of the original, as only the owner themselves is able to modify the record of ownership. If we consider an NFT to be along the lines of a digital certificate of authenticity then we are getting close.
Many companies have been registering trademarks and branding rights for their digital items since NFTs were first developed, seeking to protect digital versions of products they already own or sell. Virtual goods are easily available for purchase online, such as costumes and accessories for ‘avatars’ (or players) in online gaming and this is only expected to increase as Avatars are developed for use in other online words such as the ‘Metaverse’. Hampus Adlerton, Regional Director for Zacco Sweden South, commented that “We have been working with helping brands to understand which rights they need to explore for some time now. Traditionally, these have been secured for licensing opportunities but, interestingly, many applications are now being made despite the fact that companies are not yet sure how they will be used, only that they will be. This approach at least prevents others from securing the rights first, with more detailed applications being drawn up when commercial applications are decided upon, and they have identified an opportunity to enter the market.”
An interesting aspect of NFTs is the simplicity with which a company can create ‘digital scarcity’. Obviously a number of licensing opportunities exist for use of branded goods ‘in-world’ and this is nothing new. The primary difference with NFT ownership is that there can only ever be one true owner of the original asset, even though it could theoretically be shared, used and copied by anyone (with payment attached or otherwise). Many of you may have read about the recent sale by Jack Dorsey of the NFT for the very first tweet where he raised $2.9 million for charity. This represents the fascinating thing about NFTs, that even though they are often publicly accessible and available, they are still considered a private asset. If we refer to the art market again, a comparative analogy might be prints (or copies) of work by Picasso or Mondrian hung up on walls all over the world, but the original still belongs to a single individual or organisation. As such, the original NFT becomes a scarce resource, often with a price tag appropriate to its demand. Therein also lies a difficulty for investors because the NFT itself has no inherent value beyond what the market will pay for it.
In principle, the creator of an NFT should have the permission of the copyright owner for anything that uses their works, samples, or designs, for example, but the speed with which NFTs have entered the mainstream over the last year has taken many by surprise. NFTs have become big business. As we have said, this is a Gold Rush right now and there will always be disruptive elements within any gold rush who seek to capitalise on the unprepared or uncertain. We have seen a significant increase in demand for more information and help in navigating this ‘strange new resource’. Many international brands have already established their NFT security and rights protections, with some already exploring potential new revenue streams or licensing agreements. For those who are still thinking about how to protect their brand, we are increasingly finding that NFTs have already been created using their, as yet unprotected, designs and trademarks.
While a violation of such rights would probably be considered infringement of copyright, anyone who works in IP knows that unregulated marketplaces are often filled with such infringements and Zacco would handle these in much the same way as we would with traditional infringement. Niclas Jonsson, Zacco’s Regional Manager for Digital Brand in Denmark, Germany and Norway, suggests “Given the anonymity and lack of regulation around crypto wallets it may take some time to identify the offending parties. In such cases, it is often easier to start the process by preventing the sale of infringing content on known marketplaces, such as through the use of more traditional Digital Millennium Copyright Act (DMCA) takedown notices.”
There is also the possibility to ‘burn’ an NFT. This method was originally developed to reduce available supply of cryptocurrencies, or to create digital scarcity, and while it does not technically delete the asset, it does make it effectively unreachable. Basically, once a transaction has occurred on the blockchain, such as the minting of an NFT, it cannot be deleted. This is simply due to the nature of the blockchain and also forms one of its most useful security aspects because it becomes almost impossible to fake a transaction’s provenance, or history. The decision to burn an NFT, or other digital asset, involves sending it to an inaccessible digital wallet address wherein it still ‘exists’ but becomes impossible to retrieve (as the wallet cannot be accessed by anyone) and therefore impossible to sell because it can no longer be accessible via a marketplace. The act of burning an NFT does require some ‘gas fee’ but it is also easy to verify, simply by trying to access the NFT and finding it unavailable. As a result, it is increasingly being used to remove infringing content from online marketplaces.
While relevant case law is still in the very early stages of development, with very little established as precedent, it is certainly worth watching some of the cases currently under consideration. There is last year’s Hermes case, related to the NFTs of the ‘MetaBirkins’, digital copies of Hermes’ famous Birkin bags. More recently, however, is Nike’s filing of a complaint in New York Federal Court in February against a company called StockX. They accuse them of minting, marketing and selling NFTs which contain Nike’s registered IP and then describing them as ‘investible digital assets’ to customers who may not immediately recognise that they have nothing to do with Nike as a company or brand. Interestingly, one of the most significant underlying factors is Nike’s claim that now these designs have been minted, Nike can no longer mint them themselves, effectively preventing them from selling their own versions. StockX has stated that such NFTs are merely related to physical goods that they themselves hold in their ‘vault’, basically an NFT of shoes they own, rather than of the Nike brand itself. It will be very interesting to see if and how this case develops further as it may offer insight into which way the courts will go in the future.
When it comes to NFTs there are, of course, horror stories but there are also potentially huge opportunities to embrace this new asset. We know of companies trying to hide clauses in licensing agreements, giving them rights to create and sell NFTs, or of private individuals copying a famous piece of fashion and selling digital versions online, with the original owner completely oblivious because they were unaware that such a possibility could exist. We also work with some major brands who are currently buying up digital design companies, knowing that this may be the future of digital sales. It is also certainly a positive development to see artists and organisations finally having a means by which to earn revenue from digital art or music that, theoretically, could be downloaded or shared by anyone.
Whether you believe that it will be a passing interest, or if NFTs are here to stay, it still makes sense to explore what actions you can take to secure or monetise your existing and future IP rights. We can talk you through how to incorporate effective licensing language for any products and rights you own, we can advise on IP rights that you might include within your NFT sale and we can even help you to determine which of your current products, trademarks, designs or copyrights might be suitable for conversion to NFT and offered for sale. We have been helping clients to plan for the Metaverse, and various other online platforms or worlds, for many years now. There are multiple options available for companies seeking to protect themselves as well as significant opportunities available for those willing to explore potential new revenue streams or brand development opportunities.
Where to start:
First, it makes sense to explore which of your existing products or trademarks would be suitable for digital conversion, identifying those that you would like to protect or offer for sale yourself.
The next step would be to update all potentially relevant trademark protections to ensure they include digital or virtual versions of any relevant products or branding.
You might then like to consider registering your digital trademarks or NFTs within the Ethereum Naming Services (.ENS), as these will give your block chain registration a name, rather than an associated hashed string of numbers. These work in much the same way as a Domain name, which is basically text that instead links to an existing IP address.
If you would like more information about anything within this article, or to discuss what might be a good starting point to protect your existing IP, then please get in touch as we would be happy to help. Our Digital Brands team is also available to monitor online marketplaces and Metaverse style games for potentially infringing content.
Please reach out to one of our colleagues below:
Sweden – Magnus Ljungdahl or Hampus Adlerton
Denmark – Thomas Mølsgaard or Knud Wallberg
Norway – Lars Henrik Stoud Platou
United Kingdom – Iram Zaidi
India and Middle East – Himanshu Sharma (From our preferred partner in India)
Digital Brands – Nete Bernt Hansson or Fredrik Nylin
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