Author: Andrea Cappai

The NFT acronym has entered the common lexicon in the last few months thanks to a series of media stunts that have made the non-fungible token (NFT) an avant-garde symbol of wealth.

Companies are eyeing NFTs with fascination, and everyone is talking about them, but few know what they are. Even fewer understand their practical uses; we shall try to navigate this obscure and seemingly inhospitable domain.

NFTs are commonly perceived as an evolution of the digital art that emerged in the 1960s; the truth is less poetic. NFTs are “ownership” certificates for digital works. The buyer of an NFT only buys proof of a right to the work secured through a smart contract. 

This explanation does not help us to understand the phenomenon better. Smart contracts have existed since the 1990s and are, in essence, computer protocols that facilitate, verify or enforce contracts’ negotiation or execution. Additionally, digital works – the corpus mechanicum of digital work is a digital file – have existed since the 1960s. So, what is the new element that has made two long-known elements so interesting only now? The answer is the blockchain.

This is another term that has entered common parlance, although not all who use the term fully understand it. One should not dare undertake the arduous task of explaining the system conceived by Satoshi Nakamoto. We can easily rely on a relatively straightforward, albeit simplistic, explanation proposed by Mitchell Clark in his article “Blockchain, Explained” for The Verge: “Blockchains provide a place to put information that anyone can add to, that no one can change, and that isn’t controlled by any single person or entity. […] Instead of one company or person keeping track of everything, that responsibility is spread out to everyone on the network.” As Clark points out, the matter is much more complicated than that, but the simplification serves our purposes.

NFTs are certificates of “ownership” of a work guaranteed by a multiplicity of operators in a network that constantly keeps track of the information provided to it; sharing the same information among numerous operators makes it impossible to change undetectably.

It is worth mentioning that there is no single blockchain platform that ‘inerrantly’ certifies validity. Indeed, several blockchain platforms are available, but they all rely on the same underlying principle. The guarantee offered by the blockchain applies to transactions carried out on it but not to transactions involving the same work carried out on different platforms. 

No longer is there a trusted gallery owner or art historian to certify originality; there is only a widespread computer network certifying the ownership changes of the work from the author to the subsequent owners.

In a nutshell, NFTs are virtual certificates of ownership on virtual works of art, saved on a virtual computer network that guarantees the certificate’s existence and the work itself. 

Despite the ethereal nature of NFTs, which are almost impalpable and right-out elusive – unsurprisingly, the leading sales platform for NFTs is called Ethereum – the interest that these new IT/legal/artistic tools have spurred is very much tangible.

So far, most companies have used NFTs for promotional purposes or to monetise their creative assets. Brands such as Nike, Louis Vuitton and F1 Racing have shown an increased interest in these digital collectables, which open up new and unexplored avenues for marketing and promotion.

A prominent example is Coca-Cola. The company has a long track record of creating and selling collectables in the real world. On the company’s website, a limited-edition set of four Norman Rockwell Coca-Cola prints is priced at $400, while a vintage German “Trink” plastic cooler can be bought for $550.

Now, Coca-Cola is selling a series of four NFTs, including a pixelated version of Coke’s classic 1956 vending machine, a metallic red bubble jacket inspired by the company’s old delivery uniforms, a digital version of Coca-Cola’s 1940s trading cards and a “sound visualiser” that features classic Coke sounds such as a bottle opening, and a drink being poured over ice. Proceeds will benefit the Special Olympics International; the publicity will benefit the Coca-Cola Company.

Lamborghini has also recently auctioned digital replicas of the rarest, most unique and priceless supercars.

Elysium Bridge, Lamborghini’s partner in its first venture into the world of NFT, has announced it is collaborating with other luxury brands.

However, NFTs are not just collectors’ items like Coca-Cola gadgets or Lamborghini model cars.

NFTs can indeed become a tool for brand owners to harness the growing possibilities of the so-called metaverse. To understand what we are dealing with, we need to deviate and visit the virtual world of Fortnite

Fortnite is an online video game created by US video game and software developer and publisher Epic Games. Players must work together to stop growing waves of aliens who have conquered our planet in a post-apocalyptic future. The action is set on an island full of weapons essential for survival. 

The island features openly flat and mountainous environments, a river running from north to south, and a small central lake and points of interest such as towns, rural areas, laboratories, hangars, and forests. 

The aim of the game, connecting millions of players worldwide, is to shoot and kill as many enemies as possible, collaborate to create shelters, fortify one’s base, set traps and, in essence, team up against the common enemy.

This ‘collaborative’ component has helped create a virtual universe where players know each other, strategise, make friends, and spend time together as they build their virtual reality.

Fortnite Island has become so popular over the years that in August of this year, the famous pop singer Ariana Grande organised a visually stunning virtual concert for millions of Fortnite users only. 

The entrance into the world of Fortnite is free. However, the free entrance does not mean there are no chances to spend during one’s stay on Fortnite. Using the local currency, V-Bucks (which you buy with real bucks), players can purchase ‘costumes’, pickaxes, blankets, and many other virtual items to enhance one’s virtual life.

Although it is the most prominent location in the metaverse, Fortnite is undoubtedly not the only virtual world in which to engage, have fun and, of course, spend money. 

From this perspective, the chance to sell virtual versions of one’s products in these virtual environments can be highly tempting to companies of all kinds. Fortnite may be a good market for costumes, work tools, weapons, and medical kits, but the model could be declined in a thousand other nuances. 

Players might have to perform tasks such as organise a fashion show, where NFT ownership of fashionable clothes would be a crucial plus or participate in a car race using a unique car model purchased through an NFT.

Then there is the augmented reality world, where our reality is enriched by electronic devices with virtual elements that alter our vision. This technology, which aimed to provide users with more information about what they see (such as the direction of the road ahead or the immediate translation of road signs into another language), also allows one to observe oneself (or be observed) wearing a pair of Gucci trainers on one’s feet or CHANEL sunglasses – all strictly virtual.

Gucci, an innovator in this field, has already created its first pair of designer trainers that can be worn only online, thanks to the fashion-tech app by the Belarusian design studio Wanna. These virtual kicks are free and available to everyone, but they could become exclusive and require payment with the same technology.

All the virtual worlds and intersections between the real and virtual worlds create the so-called “metaverse”.

However, not all that glitters is gold.

NFTs, as we have seen, have enormous potential and open up new revenue streams for companies that so far have focused on physical products. 

However, the very system on which NFTs are based is inherently flawed, at least from a legal point of view, and can certainly not replace, at least to date, the standard intellectual property protection tools that IP owners rely on every day. 

First, the value (uniqueness) of an NFT does not hinge on blockchain technology but instead on the level of trust between the seller and the buyer. The blockchain platform guarantees that the exact digital work has not been sold to others on the same platform. 

However, it does not make the same guarantee for other blockchain platforms. Thus, the buyer must assume that the seller has not already sold or does not intend to sell the work through other channels. 

Additionally, though the blockchain prevents multiple sales of the same work, it permits an unlimited number of near-identical works to be offered on the same platform.

Therefore, the rightful acquisition of the virtual work is only guaranteed to the extent that the seller acts in good faith, and the blockchain platform verifies that its system is not being used for fraud. However, there are no guarantees, and it is best not to engage in wishful thinking about this. 

Anyone with a shred of legal acumen can see that the methodology on which NFTs are based is acceptable only in a strictly nonprofessional context. 

Then, there is the issue of obsolescence. Blockchain platforms are thriving on heavy promotion, and if we are to believe crypto-enthusiasts, we can assume that they will continue to function for a long time. However, if some platforms have a more or less secure future thanks to crypto-currency profits, it is not certain that all NFT blockchain platforms will be equally successful. 

Some blockchain platforms could cease their operations in the future, deleting all the recorded transactions in their systems. 

Therefore, when a company purchases an NFT (e.g., a graphic that it plans to use on its website), it must resort to the usual contractual tools to respond to the system’s intrinsic shortcomings. Therefore, a contractual relationship with the artist is crucial, transcending the digital tool’s technical limitations and protecting the company from fraudulent conduct.

Issues such as the sale of copies on other blockchain platforms or the sale of similar versions of the work must be adequately regulated; likewise, the transfer of the rights of economic exploitation of the work, which are not automatically transferred with the transfer of ownership of the work itself, must be appropriately regulated by contract.

A typical example is the NFT for a video of a slam dunk by the celebrity US basketball player LeBron James, released as part of a series of limited-edition digital collector’s cards of NBA highlight clips that can be bought and sold on the Top Shot marketplace. The card depicting the dunk may sell for a large amount of money, but the NBA still owns the copyright in the original video, and any reproduction of that video is still subject to licensing terms from the NBA.

It is also advisable to carefully check the contract one signs with the blockchain platform through which the work is purchased and select more structured and sounder blockchain operators.

On the other hand, if the IP owner issues NFTs (for various purposes), the most pressing issue will be protecting the IP of the work integrated into the NFT. As we know, the blockchain system on which NFTs are based guarantees the uniqueness of the work but does not guarantee that third parties cannot market the same work with irrelevant modifications on the digital code underlying the image, nor does it guarantee that others cannot sell the same creation on other blockchain platforms.

From this perspective, the design registration for the aesthetic characteristics of the work included in the NFT and the registration of the trademark in the most appropriate class are as necessary in the virtual world as they are in the real world.

Even when the IP rights owner transfers the NFT, the exclusive rights transferred to the purchaser must be contractually defined by precisely identifying which uses of the digital work are possible and which remain the exclusive right of the transferor instead. 

The contract will then be administered, saved and managed through the blockchain platform (a so-called smart contract), but the drafting will require the same attention and care as a contract written with pen and paper.

October 2021