CryptoAssets
Feeling the force of an NFT storm
The Art Wars controversy laid bare the confusion and teething issues that persist around crypto assets, reports Richard Crump
From digital art to music, sports memorabilia, and even virtual real estate, the rise of non-fungible tokens (NFTs) has opened new revenue streams and investment opportunities across industries.
They also bring significant legal and financial risks; a timely reminder of which was provided in June this year by the BBC documentary The Stormtrooper Scandal about the Art Wars controversy that shook the NFT world in 2021.
The Art Wars project, initially focused on physical sculptures of iconic stormtrooper helmets from Star Wars created by notable artists, ran into trouble when digital images of the works were minted as NFTs without the explicit consent of the original creators.
NFTs are unique digital identifiers that represent ownership of a specific asset, such as a piece of art, digital content or media. They are recorded on a blockchain and are used to certify ownership and authenticity.
But the Art Wars NFT sale catastrophically unravelled as aggrieved artists, including Damien Hirst and the Chapman Brothers, demanded their work be removed, production company Lucasfilm waded in and the NFTs were rendered worthless.
The artists claimed they were unaware their works had been tokenised and sold on blockchain platforms, accusing the project's creators of violating copyright laws by digitally reproducing their physical artworks without permission.
“The key lesson from the Art Wars project is, when thinking about creating an NFT, do you control the underlying asset or have permission to create that NFT?” Rory O'Hare, an intellectual property (IP) lawyer at Primas Law, says.
Copyright strikes back
One of the central issues in the Art Wars scandal was the violation of IP rights. The ownership of physical art does not automatically grant the buyer the right to create or sell digital versions of the work.
Indeed, there is little to stop anyone minting an NFT, whether they own or have rights to use the underlying copyright, and there is often no easy way to detect use of copyright assets other than monitoring the relevant marketplaces and platforms.
The stormtrooper helmets case is a prime example, with the NFTs being created using works previously contributed without the artists’ knowledge or consent.
“What went wrong was the organisers of the sale did not really understand the IP risks. In creating NFTs, that was infringement of the artists’ rights if there was no consent,” Sukanya Wadhwa, an IP lawyer specialising in litigation at Brandsmiths, says.
NFTs representing branded content, logos or characters can also fall foul of trademark laws. Businesses that tokenise content related to well-known brands or trademarks without authorisation risk infringing on those trademarks.
“All of the classic IP rights are still there in the underlying asset,” Wadhwa says. “The NFT doesn’t change anything there. You may have brands, design rights, copyright, trademarks. The IP analysis you do is still the same for that physical asset which the NFT links to. What the NFT does is provide a new property, which has its own ownership and special nuance with chain of title.”
Contractual ambiguities
NFT transactions often involve multiple parties – creators, platforms, buyers and intermediaries – that have different rights and obligations. These need to be clearly defined through smart contracts, the self-executing contracts encoded on the blockchain that govern NFT sales.
The best way to successfully assign IP rights associated with the NFT and its underlying asset, according to Ellie Fayle, an associate at Kingsley Napley, “is to make this explicit at the point of the transfer”.
“There is no real mystery to it – the issues arise when organisations either fail to devote the required time to working out exactly what their intentions are, or where they are blinded by the novelty of the asset class and forget the importance of simplicity and clarity,” Fayle says.
Copyright is not automatically transferred when an NFT is transferred. Withholding copyright is the default in the absence of a specific term in the smart contract, terms and conditions linked to in the NFT listing, or a separate contractual assignment of copyright or licensing agreement.
But separate agreements “add complexity and are more likely to lead to confusion or disputes over what, if any, rights were intended to be transferred at the time of the transaction,” Fayle adds. “They are also more difficult to manage and monitor in any significant volume if, for example, they are part of a collection or a series of editions.”
Images: Getty
Legal implications
The main legal implication that businesses should bear in mind is the “tension between the fact that NFTs have the potential to sit both within and outside of the legal and regulatory landscape that otherwise governs how they operate”, according to Fayle.
If marketing or selling an NFT-backed product to consumers, existing consumer law will apply – for instance, introducing an implied term that the good should match the description, she adds.
“There is simultaneously uncertainty as to the extent to which a specific NFT will be considered a financial instrument,” Fayle says. This could bring with it a host of costly and complex obligations – for example, the necessity for authorisation or registration with the Financial Conduct Authority.
There are also attendant risks to being associated with the NFT market, such as potentially putting the business’ goodwill or brand at risk since an NFT does not prevent someone from utilising the underlying asset as they wish.
“This results in vulnerability to copyright infringement, trademark infringement, passing off and so on, where the unauthorised use of the underlying asset is free from or not restrained by the NFT itself,” Fayle says.
A kind of provenance
It has been two years since the initial hype collapsed (in terms of volume and value of sales) as the market’s appetite for spending millions on a relatively unknown, highly volatile asset class peaked. However, NFTs or, at least, the underlying technologies in some alternative form will “doubtless persist”, Wadhwa says.
One way companies may use them is to crack down on counterfeit goods, according to O’Hare. “If you have a limited-edition product and you want to protect against counterfeiting, you can link the item to an NFT so you have a digital certificate of origin, which can be verified on a public blockchain,” O’Hare says.
Many top brands from Nike to Warner Bros and McDonald’s are leveraging NFTs to build community engagement, create exclusive experiences, blend virtual and physical products, and enhance their digital marketing strategies (see Top brands using NFTs below).
For instance, for a company launching a product that wants the first 100 people to be part of an exclusive club, the NFT gives “a kind of provenance”, according to Wadhwa.
“Because of the chain of title, because it is linked to the blockchain, because you can validate that this person has bought it and this person has sold it on, those 100 people can be part of an exclusive club and get access to things that everyone else doesn’t get,” she says.
“If you are using NFTs as proof of a chain, that really has a lot of value outside of IP in general because what you get with NFTs is a verifiable chain. The whole exclusive club and provenance part of NFTs is unique and there is scope to use it.”
Top brands using NFTs
Nike Nike launched the Cryptokicks line, a collection of virtual sneakers tied to NFTs. They also acquired RTFKT, a digital fashion brand, to create NFTs linked to virtual sneakers that can be worn in virtual worlds or games. Nike’s NFTs often come with physical counterparts, blending digital and real-world fashion.
Coca-Cola Coca-Cola launched NFT collectibles tied to special moments and themes such as Friendship Day and International Pride Day. The NFTs offer unique digital artworks and interactive elements, with some proceeds going to charitable causes.
Gucci Gucci entered the NFT space by selling digital fashion items, such as virtual sneakers, and launching NFT-backed collectibles in collaboration with digital artists. Gucci also ventured into virtual worlds such as Roblox, allowing users to buy and wear virtual Gucci items.
McDonald’s McDonald’s launched limited-edition NFTs to celebrate anniversaries and product launches, such as the McRib NFT to commemorate the iconic sandwich. These NFTs are often tied to promotional events and marketing campaigns.
Warner Bros Warner Bros released NFTs tied to popular movies, such as The Matrix and Space Jam. These NFTs feature digital art and collectibles related to the films, with some offering interactive elements and the potential for future rewards.
Budweiser Budweiser launched a series of NFT collectibles, including a line of limited-edition beer cans in digital form. The NFTs offer holders special perks such as access to branded merchandise, events and exclusive content.
