From copyright to contracts, an overview of the legal risks and regulations that accompany fashion adoption of NFTs
Non-fungible tokens – or NFTs – have indeed made their mark in the fashion industry. While these unique digital assets have been around since 2012 and have enjoyed popularity among the gaming community for several years, they have only relatively recently crossed paths with mainstream fashion through an array of efforts by many brands, ranging from Gucci and Louis Vuitton at Dolce & Gabbana and digital fashion brand RTFKT. Simply put, NFTs are digital tokens that store information and are linked to an asset (often digital) and managed on a blockchain, which acts like an immutable digital ledger recording transaction details. NFTs are like a certificate of ownership of the asset.
In the beginning, many NFTs created by fashion brands were tied to digital assets that were generally seen as works of art with otherwise limited usefulness. Take for example the short film “Aria” sold by Gucci in June in NFT. But there is both the appetite and the possibility for NFTs to take larger forms than that. All-digital fashion houses, such as The Manufacturer, for example, are emerging and Burberry is designing an exclusive line of digital accessories for Mythical Games Inc.’s new video game “Blankos Block Party”.
With the value that young consumers increasingly place on their digital personalities and the continuing interest of fashion brands in interacting with consumers in this way, our avatars may not be long in roaming the parallel digital universe – aka the metaverse – otherwise. haute couture largely inaccessible.
But in the rush to be at the forefront of innovation and seize the opportunities that NFTs present for fashion, global brands and fashion houses can expose themselves to ill-advised legal risks. At the outset, any brand entering the world of NFT should consider whether it even has the right to “sell” the digital asset in question through an NFT. In particular, the intellectual property rights of those who created the asset should be taken into account. Depending on the nature of the asset, there may be various contributors – from designers to coders to musicians – whose rights to their contribution must be assigned or licensed before the asset can be part of an NFT sale. legally outside the norm.
The next step is to determine the conditions under which an NFT sale will take place and precisely what rights should be granted to the buyer. In reality, most brands will want NFT to grant a bespoke license whereby the buyer can use the digital asset for personal use, but will prohibit commercial exploitation of the asset. Beyond that, brands may aim to reserve royalties in the event of a subsequent assignment of the NFT, while ensuring that no copyright in the asset is transferred.
Since NFTs are – at their core – “smart contracts” which are collections of code and data that effectively act as self-executing programs, a benefit for brands is that they can provide for automatic payment of. royalties to the original seller when the NFT is being resold (provided it is resold on the same platform). However, it is often advised that in addition to defining the contractual framework in the code itself, trademarks also include a complementary contract in natural language in order to ensure clarity on the rights and obligations of the persons concerned, as well as on the applicable law and jurisdiction.
Contract and intellectual property issues aren’t the only ones that brands can stumble upon in their efforts to capitalize on the appeal of NFTs; As TFL noted previously, there has been a debate about the compatibility of NFTs with data protection law, such as the General Data Protection Regulation. There is, for example, a potential tension between the immutability of the blockchain on the one hand, and a data subject’s right to rectification and erasure of data, on the other. When establishing NFT, brands should ensure that they obtain advice on how best to achieve maximum data protection compliance through contractual terms and technical solutions, the latter of which are constantly improving. .
Finally, it is also possible to get caught up in financial regulation. In the UK, an NFT could, depending on its characteristics, constitute an electronic money token or a security token, which means that authorization from the Financial Conduct Authority or other requirements may apply. It can also be viewed as “a cryptographically secure digital representation of value or contractual rights that uses some form of distributed ledger technology and can be transferred, stored or traded electronically,” which could result in financial obligations. ‘registration under UK Money Laundering Regulations. In order to assess the regulatory burden, the attributes of each individual TVN and related activities require careful analysis.
In addition to some of the legal issues involved, brands should remember to consider the tax implications of selling NFT for their businesses when planning their NFT strategy. (Although there is little guidance to date on how NFTs should be treated from a tax point of view, they may well be considered a taxable asset for capital gains purposes and succession.) And yet brands are encouraged to consider the potential for negative reputation. in light of the growing attention that minting and selling NFT on certain platforms can have a negative environmental impact.
While blockchain may have been developed on the basis of anti-regulatory ideology, as noted above, NFTs are not immune to risk and regulation. Fashion houses need to carefully navigate NFTs to ensure they don’t get caught up in issues that misrepresent their brand.
Lizzie williams is Senior Associate at Harbottle & Lewis. She is a member of the firm’s dispute resolution group, specializing in litigation, digital, technology, retail and fashion.