David Barnett's Brand Protection Articles: The rise of the NFT

The concept of the non-fungible token (NFT) began to rise to prominence in Spring 2021, with a series of news stories reporting the sale of digital artworks in NFT form. A video clip produced by a digital artist named Beeple was sold on the cryptocurrency art marketplace Nifty Gateway for $6.6 million^[1], having originally been purchased just a few months earlier for $66,666 - just 1% of the later sale price^[2,3,4]. In late February 2021, a new piece of work by the same artist was listed by auction house Christie's^[5,6], eventually selling on March 11 for more than $69 million - a new record for a digital artwork, and the third highest auction price ever achieved for a living artist^[7,8].

An NFT is a cryptographic collectible comprising any of several types of asset or media. Key to understanding the NFT is the concept of blockchain (the technology underlying cryptocurrencies like Bitcoin) - a publicly accessible digital ledger in which transactions are recorded. Blockchain is cryptographically sealed and cannot be modified after its contents are recorded, making it relevant to several applications. Examples of its use include the maintenance of an audit trail of a brand owner's supply chain and shipping to guard against non-legitimate trade (as in the Aura Blockchain Consortium founded by Prada, LVMH, and Cartier in 2021^[9]), or even assigning NFTs to mortgages^[10,11]. For NFTs, ownership of the asset is also recorded on a blockchain (currently, most NFTs are associated with the blockchain used for the Ethereum cryptocurrency). They are designed so every example is unique and cannot be exchanged for alternative identical copies, and therefore are 'non-fungible'.

Theoretically, any digital file can be converted into an NFT - a process known as 'minting'. Although the file content can potentially be viewed by anyone, the association of the NFT with blockchain means there is a definitive original version of the file (or one of a series of authorised versions), whose ownership is recorded, making it a tradable collectible. The analogy is that "anyone can buy a Monet print, but only one person can own the original"^[12]. As a result, noteworthy digital items of a range of different types have been sold as NFTs, including various famous meme images (e.g. 'Doge' - an image of a dog, associated with the Dogecoin cryptocurrency - selling for $4 million)^[13], and the first tweet by Twitter CEO Jack Dorsey, which sold for nearly $3 million^[14]. Overall, NFT sales reached $25 billion in 2021, up from just less than $100 million the previous year^[15].

From a content producer's point of view, the concept of the NFT presents the potential to produce and sell a range of commodities. For example, on March 3, 2021, the band Kings of Leon announced their upcoming album would be released in NFT form (alongside standard formats), becoming the first band ever to do so. The NFT, priced at $50 and made available via the YellowHeart marketplace, included enhanced media (e.g. album artwork) together with the digital download of the music, and was available for a limited period. After this, no further versions were made, with the NFTs becoming tradable collectibles. Additional premium 'golden ticket' tokens were also released, including one version that included benefits like VIP concert tickets for life^[16]. The key idea is the use of blockchain technology to generate improved returns for the music industry in an era where digital sharing and streaming - and the COVID pandemic - is adversely affecting revenue streams^[17].

Applications

Virtual items

One application of NFTs is the production and sale of official virtual merchandise by brand owners. For example, luxury brand Gucci was one of the first players in this space, launching a series of sneakers in augmented reality, which can be purchased to be worn in virtual reality (VR) chat or the online game Roblox. Other brands experimenting with distributing branded products as NFTs include Dolce & Gabbana and Rebecca Minkoff^[18]. More recently, the Coach brand released a collection of NFTs as part of a holiday campaign^[19].

Although luxury collectables account for less than 1% of all NFT transactions in 2021, they are projected to evolve into a $25 billion business by 2030, or 10% of the total luxury market^[20].

With the emergence of the metaverse - the name given to the connected environment of 3D virtual worlds - this type of business model may become more mainstream^[21]. In February 2022, it was reported that McDonald's and Panera Bread had both filed trademarks for NFTs in the metaverse, setting the scene for virtual restaurants in online environments, tied to real-world deliveries for customers^[22]. Brand owners in a range of other industries have also filed trademark applications covering virtual or digital goods and services, across a variety of product areas, including Nike, The Brooklyn Nets, Walmart, Crocs, Skechers, Jay-Z, and The Coachella Valley Music and Arts Festival^[23].

Also in February 2022, the Playboy brand announced plans to offer digital subscriptions and a new virtual Playboy Mansion in the metaverse, following its prior release of a range of NFT imagery based on the bunny logo^[24].

Blockchain domains

A related idea is the concept of the blockchain domain. Like regular domain names, they consist of a second-level domain name and an extension, but there are a few key differences. Specifically, blockchain domains:

Are recorded, together with their ownership details, on a blockchain (i.e. not hosted on a server, or recorded in a regular registry zone file)
Do not resolve to websites in regular browsers, instead requiring dedicated browsers like Brave, or browser plug-ins
Are associated with specific domain name extensions (e.g. .eth, .crypto, .bit, etc.)
Are offered only by specific providers ('registrars')
Have a one-off purchase fee and are then owned permanently

They can be used for a variety of purposes, including personalised addresses for sending and receiving cryptocurrency, providing hosting for programs that can be run as apps, or building decentralised websites (e.g. on peer-to-peer hosting platforms)^[25]. However, it is becoming clear that they may also be associated with specific threats, including the inability to tie them to real-world ownership details, and their observed use in creating botnets or distributing malware^[26].

Additionally, blockchain domains are not governed by ICANN (the Internet Corporation for Assigned Names and Numbers), which could be a regulatory cause for concern. Some providers are also reserving branded domain names on behalf of brand owners, and charging them to un-reserve them and thereby take ownership (similar to a review fee).

From a monitoring point of view, blockchain domains can be extremely hard to identify, both because of the absence of zone files, and that the domains do not resolve to websites in regular browsers. One technique to circumvent this difficulty can be to search for references to the domain names being traded in NFT marketplaces (Figure 1).

Figure 1: NFT marketplace listing offering the sale of a blockchain domain name.

Enforcement options are currently limited, with one option being just to take down infringing listings from the marketplaces - although this does not deactivate the domain name itself or change its ownership. However, some blockchain domain providers are becoming more mindful of the risks posed by cybersquatters^[27], and offer brand owners the ability to block third-party registrations (similar to the Trademark Clearinghouse (TMCH) program for new top-level domains (TLDs)) or to claim ownership of trademarked names. Brand owners may also consider proactively registering key domain name keyword strings across relevant extensions.

Emerging threats

There appear to be several key areas where NFT-related infringements exist and could become areas of concern for brand owners. The most obvious include the trade in branded blockchain domain names, or other digital files featuring brand-related content, such as logos or other official imagery - with the logo of one fashion brand reported as being offered for sale for over $3 million at the start of 2022^[28]. Currently, this trade appears primarily focused on a range of dedicated NFT marketplaces, including OpenSea, Rarible, Nifty Gateway, Binance, and SuperRare, and with new marketplaces, like Folio^[29] and N.Fungible^[30], launching regularly. However, there remains scope for the development of additional distribution channels in the future, with social media likely to become one.

The growing popularity of NFTs also gives scope for other more familiar types of online scams and infringements, like registering domain names containing 'nft' to capitalise on the interest by Internet users. A 2022 study looking at over 34,000 NFT-related domains found that significant numbers may be associated with NFT scams, attack vectors for malware distribution, or cybersquatting^[31,32]. Scams take a variety of forms, including phishing, advance-fee frauds (e.g. the investor scam), and harvesting cryptocurrency. NFTs themselves can also have security implications, with a report in January 2022 of a type of NFT that could harvest viewers' IP addresses^[33].

The trade in NFTs can itself be subject to fraudulent activity. 'Wash trading', for example, is becoming increasingly widespread^[34]. This is where an individual NFT is repeatedly traded between multiple accounts owned by the same seller, as a means of artificially inflating its price. In February 2022, the first associated law enforcement action in the UK was taken in response to a VAT (value-added tax) repayment fraud involving 250 fake companies^[35].

It is worth noting that NFT ownership does not necessarily grant ownership of copyright for the content, and more generally, NFTs can also raise questions about the associated intellectual property (IP) rights. In November 2021, production company Miramax sued writer and director Quentin Tarantino over his sale of a collection of NFTs related to the movie Pulp Fiction. While Tarantino had retained limited contractual rights for the film, Miramax alleged that his sale of the NFTs violated the company's copyright and trademark rights^[36,37]. Cases become more complicated when content is moved from one blockchain to another, as it was in the recent Quantum NFT case^[38].

Growth in the sale of counterfeit versions of branded virtual items, like clothes and accessories for avatars, has also been noted as an emerging trend for various luxury brands. At the start of 2022, luxury brand Hermès took legal action for a trademark infringement against digital designer Mason Rothschild, following his release of a series of 100 designs of 'MetaBirkins' in NFT form. These "depict imaginary, fur-covered Birkin bags", in homage to the highly exclusive Hermès Birkin handbag. Following an initial sale price of 0.1 ETH (around $300), some MetaBirkin NFTs sold for up to $50,000 shortly afterwards - equal to or greater than the price of a real-world Birkin^[39,40]. The following month, Nike filed a lawsuit against shopping platform StockX for distributing NFTs featuring their logo and branding^[41]. StockX operates a system whereby 'Vault NFTs' can be redeemed for physical items, with Nike alleging that the association of the NFTs with their brand constitutes "trademark infringement, false designation of origin, and trademark dilution, among other violations"^[42].

Elsewhere in the digital content landscape, representatives of artists in the music industry expressed anger at a company named HitPiece, which appeared to be selling single and album artworks as NFTs^[43]. A few days later, reports emerged alleging that another platform, NFT Music Stream, was hosting unlicensed music content, apparently sourced from YouTube Music, on the blockchain^[44]. Instances have also arisen of artwork (such as that posted on online platforms such as DeviantArt) being stolen by third parties, converted to NFTs, and sold on marketplaces like OpenSea. In one instance, an artist's collection was offered for sale as a set of nearly 86,000 NFTs, through a practice known as 'lazy minting', where sellers list NFTs without writing them to the blockchain, in an effort to avoid paying fees until a sale is made^[45]. This follows a high-profile case where a scammer sold an NFT purporting to be by street artist Banksy for over $300,000^[46].

In fact, in response to the high volume of unauthorised sales, counterfeits and other scams, the Cent NFT marketplace suspended much of the trade on its platform in February 2022^[47]. OpenSea, the largest NFT marketplace, had also previously claimed that more than 80% of the NFTs minted on their own platform were "plagiarised works, fake collections, and spam"^[48].

Enforcement against infringing content can sometimes be carried out by submitting a DMCA (Digital Millennium Copyright Act) notice, generally resulting in high compliance. Additionally, some NFT marketplaces have specific processes for submitting takedown requests against IP-infringing content^[49]. However, the exact legal status of IP protection in the metaverse is unclear and the landscape appears to be evolving rapidly^[50].

References

[1] https://www.cnbc.com/amp/2021/03/03/what-are-nfts-all-you-need-to-know-about-crypto-collectibles.html

[2] https://observer.com/2021/02/beeple-record-breaking-christies-nifty-gateway/

[3] https://twitter.com/TheHustle/status/1366432385747804160

[4] https://www.coinspeaker.com/new-record-nft-beeple/

[5] https://www.cnbc.com/2021/02/18/christies-to-auction-beeple-nft-art-and-will-accept-ether-as-payment.html

[6] https://twitter.com/ChristiesInc/status/1365100549385957378

[7] https://www.nytimes.com/2021/03/11/arts/design/nft-auction-christies-beeple.html

[8] https://twitter.com/ChristiesInc/status/1370027970560106497

[9] https://www.pradagroup.com/en/news-media/news-section/aura-blockchain-consortium.html

[10] https://www.forbes.com/sites/kamranrosen/2021/11/18/this-company-wants-to-turn-your-mortgage-into-an-nft/?sh=67d405e037fe

[11] https://circleid.com/posts/20211209-protecting-your-brand-in-the-new-world-of-nfts