Over the past two years, headline news about the astronomical sales prices achieved for newly minted “Non-Fungible Tokens” or “NFTs” from popular artists and content creators catapulted this new form of digital asset into the public consciousness worldwide. In March 2021, digital artist Mike Winkelmann (known as ‘Beeple’) sold an NFT of his piece “Everydays: The First 5000 Days” for an astonishing $69 million! The sale, according to auction house Christies, positioned Beeple as “among the three most valuable living artists” on the planet.
Public interest in NFTs has grown considerably since Christie’s auction of Beeple’s work, but so has the debate over their purpose and usefulness. This third article addresses the uses and purposes of NFTs, the role they may play in the metaverse, and the legal risks and issues such use may raise.
Weekdays: The first 5,000 days
NFTs – an overview of ownership
As explained in the first article in this series, at its core, an NFT is simply a record of ownership of a specific unique digital asset, such as a jpeg or gif image or an audio or video file, stored and authenticated on a blockchain, usually Ethereum. In the case of Beeple’s work, the buyer can irrefutably prove to be the sole owner of the NFT of the work, as the distributed ledger technology used by the blockchain makes it almost impossible for the buyer’s ownership to be contested or processed because many nodes in the blockchain can verify this ownership .
The rights associated with the ownership of each NFT can vary significantly from a simple non-exclusive non-commercial license to publicly display the digital asset, to additional real-world rights to physical goods and services and exclusive unlockable content. An important benefit for artists and content creators who create NFTs is that in smart contracts linked to NFTs, they can attach an automatic resale royalty payment (usually a proportion of the cryptocurrency sale price of the NFT), which is triggered every time the NFT is resold .
While NFT skeptics see little point or value in being able to claim ownership of a specific digital image or video that can effectively be copied or reproduced online in most cases with a simple press of the “Ctrl-C” buttons, NFT advocates point blockchain record as a digital certificate of authenticity, similar to buying a Picasso painting authenticated by art experts at MoMA in New York, as opposed to buying a cheap Picasso reproduction on Amazon. A Beeple NFT stamped by the artist himself and authenticated on the blockchain is a status symbol for the owner, and gives the same bragging rights that a physical art collector in the real world would have if he/she exhibited the original. The Weeping Woman painting by Picasso on a wall in their home.
NFTs in the metaverse
One of the main problems for NFT owners is how to take advantage of these bragging rights. Currently, NFT owners are quite limited in the way they can display their NFTs, which are stored in their digital wallets. An NFT in a digital wallet is often primarily accessible on a mobile phone app or the owner’s personal computer, but with the advent of the metaverse, showing off your digital artwork and collectibles to a wide audience of envious peers can become much easier!
However you see the future development of the metaverse, whether it’s as an immersive 3D world accessed via your Meta Quest VR headset, a more interactive avatar-centric development of social networks and online meeting places, or quite simply as an enhanced form of gaming like the next generation of Roblox or Fortnite, it is very likely that NFTs will be at the core.
One of the main attractions for entrants to the new world of the metaverse is likely to be the high degree of customization and personalization that users can implement when creating their digital identity. This may include purchasing distinctive items of clothing that they will “wear” on their metaverse avatars, hanging unique artwork in their digital homes or personal meeting spaces, or equipping themselves with accessories to wear when interacting with other users, which may range from a designer case for a bejeweled sword. As in the real world, it would be surprising if metaverse users did not choose to associate their new identities with fashionable and recognizable real-life premium brands; a fact not lost on international brands such as Gucci and Burberry, each of whom have already offered NFTs of their products for sale. In December 2021, sportswear giant Nike also took the bold step of buying the virtual shoe company “RTFKT” that makes NFTs and sneakers for the metaverse.
NFTs therefore provide an opportunity for individuals to purchase authentic, premium, iconic and fashionable brands to associate with their life in the metaverse; But before you go buy the million dollar piece of NFT artwork to adorn the wall of your virtual home, or a Gucci bag NFT that will never leave your avatar’s hand, you’d want to consider some of the legal risks involved in the NFT square.
The legal risks
A known problem that metaverse users will face, especially when it comes to artwork, is the difficulty in distinguishing between NFT sellers who are offering real, authentic and original art as opposed to pieces that have simply been copied by a fraudster looking to make a quick buck. The highly respected glitch artist, Rosa Menkman, publicly complained about such a problem, after she found five of her works being advertised and sold as NFTs on the OpenSea platform without her authorization. While NFT market platforms can delist NFTs of plagiarized works, this will be of little comfort to buyers who spend cryptocurrency believing they have purchased a genuine piece of digital art as an NFT, only to find that it is the equivalent of a forgery. The lesson here for buyers is to do thorough due diligence on NFT sellers and not rely on the platform to do this investigative work for them. OpenSea’s terms and conditions make this clear, stating that: “…you are responsible for verifying the legitimacy, authenticity and legality of NFTs that you purchase from third-party sellers” (Part 5 – OpenSea Terms of Use, 31 December 2021).
Although recent case law in English courts has gone some way towards recognizing NFTs as property under English law (Osbourne v. Persons Unknown and Ozon [2022] EWHC 1021 (Comm) (10 March 2022)), metaverse users who suffer a loss when trading NFTs are likely to find themselves facing another problem, identifying the person to be sued! Unlike an art auction at Sotheby’s or Christie’s, where the buyer or seller (an individual or organization) can be identified relatively easily, the anonymity offered by digital wallets in blockchain transactions can make it extremely difficult for aggrieved parties to a transaction to initiate a claim .
Although blockchain technology in theory creates a clear record of every digital wallet that has held a particular NFT, tracing digital wallets (a series of numbers and letters) to their owners can be a difficult feat. Not only does anonymity put buyers at risk of obtaining legal remedies against fraudulent sellers of NFTs, but it also creates an obstacle for artists or brands seeking to enforce NFT license terms against subsequent downstream purchasers of their NFTs. If a buyer violates a typical term of the NFT license by, for example, using the NFT commercially or reproducing and reselling the NFT of the artwork or digital object, there is little the licensor can do to enforce those terms if they do not have a real person to take action against, and do not know in which jurisdiction they should start proceedings.
The ability to connect a real person with a virtual self and a digital wallet will become increasingly important in the metaverse as commerce and trade in this space (including via NFTs) begins to flourish. As our digital and real lives become increasingly intertwined, metaverse stakeholders will need to help bridge the gap between real individuals and their virtual selves, to ensure that people remain responsible and accountable for what their avatars can do, sell or own in this new virtual reality
