NFTs: Luxury or rubbish?

By Helder Galvão on

Non-fungible tokens (NFTs) have become real trends in the crypto market. It is true that cryptocurrencies like bitcoin paved the way for the emergence of new formats of digital assets that attracted thousands of investors and in high figures. NFTs was one of them. According to DappRadar, the sales volume of these tokens in 2021 moved more than 1 billion dollars. But, in fact, what makes NFTs so attractive?

At first, to be a scarce and exclusively owned asset. In other words, to have a non-fungible token, is to be the holder of a digital representation of an asset – such as a work of art, music, game items – registered in a blockchain, the much-hyped and grandiose public and immutable database. In practice, ownership of an NFT means having a digital certificate of ownership that any third party can confirm its authenticity, but which cannot be modified.

Moreover, an NFT, unlike a cryptocurrency, is unique and indivisible, creating a kind of select group of holders who can negotiate among themselves the token or keep it under speculation, aiming at a future sale. For better visualisation, and to understand the context of NFT, it is necessary to follow the evolution of the world wide web itself. In this sense, it is common to classify its trajectory in the three main phases of the web, with emphasis on web 3.0, also known as the semantic web.

It is, therefore, in the semantic web, where artificial intelligence, automation and the interconnection of data on the internet reach their apex. The quest to make the internet more intuitive and personalised, with the ability to understand user intent and offer a more relevant experience are its essential pillars. Examples of technologies associated in web 3.0 include blockchain, artificial intelligence and the internet of things. This phase is still under development and is considered a long-term vision for the evolution of the web. And this is where we situate NFTs.

Basically, a token, digital representation of an asset, is classified into fungible, that is, an asset that can be spent, enjoyed, perish and be replaced, in its quantity and quality, and another, the non-fungible. While fungible tokens can be divided into payment tokens, among them cryptocurrencies (or virtual currencies), stablecoins tokens, utility tokens and security tokens, non-fungible tokens represent unique and indivisible digital assets, such as digital works of art, music, videos, games, among others.

Unlike common cryptocurrencies such as bitcoin, which are interchangeable and have the same value, each NFT is unique and can have a unique value based on its rarity, authenticity, history or other specific characteristics. Take, as an example, the NFTs launched in the market that have provoked major debates in the media and the specialised market.

Starting with the world famous case (and which has already yielded tens of thousands of articles, reviews and exhaustive debates), the Bored Ape Yacht Club. The famous monkeys launched in 2021 have become a status symbol due to their popularity among celebrities like Neymar, Justin Bieber and Madonna, for example. Sales of the tokens have surpassed the 1 billion dollars mark. The club of those who own a Bored Ape ends up being desired and a very restricted exclusive circle. Moreover, the creators went further and created ApeCoin, a cryptocurrency inspired by the project, being able to make it even more accessible at some point, but without losing the hype caused by the feeling of exclusivity and scarcity generated by the Ape. All capitalization that revolves around BAYC’s NFTs are strategies of a well-structured marketing since the beginning of the product’s commercialization.

In addition to the legal challenges, the project, again stressing on a well-structured marketing project, consists of a collection of 10,000 NFTs, each representing a hand-drawn ape with a unique and exclusive appearance. Each NFT is assigned exclusive access to the Bored Ape Yacht Club community, which offers a variety of unique benefits to its members, such as access to exclusive events, discounts on products and services, and even the possibility to own a virtual piece of a private island. The project’s success is largely due to its engaged and exclusive community, which is powered by blockchain technology and the exclusive rewards offered to NFT owners.

The Bored Ape Yacht Club is an example of how blockchain technology is exploited to create new forms of digital art and exclusive communities of collectors, which on the other hand could be subject to criticism in view of a certain oversizing or hyperinflation of an extremely new market in formation. For this aspect, and for the other side of the issue, many critics viewed the project with a certain reservation and, also, a certain disproportion of the real value of an NFT. And, from a legal standpoint, the volatility of this NFT should be subject to a careful rule in the token purchase conditions, since it is a high-risk modality and the purchaser should manifest its unequivocal consent on this issue. One should also not lose sight of its global nature, in a clear aspect of transnational law and whose user cannot manifest his ignorance.

The MetaBirkins example involves a controversy concerning intellectual property, notably trademark and copyright. In fact, digital artist Mason Rothschild created 100 versions of non-fungible tokens inspired by the famous Hermès Birkin bag. The project is inspired by the Birkin bag of French brand Hermès, which is known for its distinctiveness and high value. MetaBirkin uses a similar approach when creating exclusive and limited NFTs that are sold in online auctions. Each MetaBirkin NFT is composed of multiple layers of digital artwork that are uniquely combined to create a unique, personalised visual experience for each NFT owner.

MetaBirkins generated millions of dollars and attracted the attention of the brand, which was not previously consulted about the launch of NFTs. The episode, however, resulted in the filing of a lawsuit with a favourable ruling for the company. It should be noted that the mintage of an NFT must be preceded by authorization from the respective owners, so the precedent of the MetaBirkins case sparked a series of debates on the intrinsic relationship between non-fungible tokens and intellectual property rights.

Finally, and still on the aspects of personality rights, the controversial Never Fear Truth stands out. The NFTs, created by American actor Johnny Depp, gained popularity after the actor’s victory in his legal dispute with his ex-wife. The collection features self-portraits of the actor and images of iconic actors, as well as his daughter and other emblematic characters. The curious detail, about the volatility of NFTs, is that their average sales were less than ten per day and after the court decision jumped to more than two hundred daily sales. As can be seen, there is a proportional relationship between media cases and the commercial exploitation of NFTs.

As demonstrated, there is a multiplicity of challenges, under the most varied legal aspects. As it is an extremely new technology, perhaps incipient, it will be increasingly common certain questionings, as in the example of the MetaBirkin episode.

Below, we highlight some of these key challenges, notably:

  • Copyright: NFTs can be used to represent digital assets protected by copyright, such as works of art, music and videos. Intellectual property rights are one of the main issues regarding non-fungible tokens, insofar as the minting of such tokens must be preceded by authorisation from the rights holder, with some exceptions, such as works that have entered the public domain.
  • Regulation and real estate market: It is important to note that although NFTs are a relatively new technology, they may be subject to existing regulations and laws in certain territories. This is the example of the real estate market, which endows its own solemnities, whose tradition of a property still requires the respective public registry.
  • Taxation: taxation of NFTs is still a topic under discussion which may vary depending on the country or jurisdiction. NFTs can be taxed as property, capital gains or in other ways, depending on the context and jurisdiction.
  • There is a growing debate involving the inheritance of NFTs, after all their character as intangible assets does not eliminate the aspects of succession and hereditary rights.
  • Consumer protection: it is important to ensure that consumers are aware of what they are buying when purchasing an NFT. Information about the digital asset that the NFT represents should be clear and accurate, so that consumers can make informed decisions about their purchase, especially about its volatility.
  • Money laundering: NFTs do not escape use for illegal activities, including money laundering, due to their pseudo-anonymous nature and the ease with which they can be transferred and sold. It is important that companies dealing with NFTs implement adequate security measures to prevent the illegal use of these assets.

It should also be said that the universe of non-fungible tokens carries the most distinct risks, whose legal evaluation should be done on a case-by-case basis. The tendency is to have more and more news about lawsuits involving a failure in the duty of information, bad faith associated with an invalid offer or the marketing of a counterfeit NFT. However, it is necessary to be vigilant about the following issues, among risks and associated advantages, according to the specialised website InfoMoney:

  • Liquidity – The liquidity of NFTs is low. If the holder of a non-fungible token, after a while, decides to sell it, it may not be immediately resellable. At this point, therefore, the NFTs segment is more akin to the art market than cryptocurrency. And thus, from a legal perspective, the disclaimer will be key.
  • Volatility – As is the case with cryptocurrencies, NFTs are also very volatile. According to experts, this is because the segment is new, and digital assets are still going through a period of price formation.
  • Fraud – Scammers may take works made by other individuals, transform them into NFT and sell them as if they were their own. Therefore, it is important to research whether the token actually belongs to a particular author, stressing once again the elements of intellectual property rights.
  • Shitcoins – For experts, as anyone can create an NFT, there are many shitcoins (term to refer to digital assets without foundation), as well as fake non-fungible tokens. As with the previous item of frauds, conducting due diligence beforehand is elementary.
  • Appreciation – Just as works of art appreciate over time, NFTs can also follow the same path. The example cited by the mentioned site is the NFT called CryptoPunk, which saw its price rise 50,000% in just over three years. It is important to emphasize that this episode was specific, distinct and not comparable to almost all cases of NFTs in the market.
  • Scarcity – NFTs, in essence, are scarce. Despite the abundance of copies in the market, only the owner actually owns them and, naturally, has the legitimacy to sell them in the future.
  • Ease – A non-fungible token can be transferred from one corner of the world to another in minutes, just like cryptocurrencies. In the case of a physical work of art, the process would be more complex, and would involve high transportation costs, logistics risks, customs expenses and insurance.

For the most web savvy, having a wallet has certainly become a standard. It will be inexorable, in a short space of time, the democratization of NFTs, regardless of profile and age group. Its advantages, as stated above, are multiple, both for users and companies. It is necessary, of course, to know how to explore the potential of the universe of non-fungible tokens.

Regarding legal aspects, and as with any innovation, radical or incremental, the challenges are natural and do not constitute an entry barrier for the advent of NFTs in their various segments, whether in the entertainment, fashion, games, real estate or luxury goods markets, as the examples illustrated above.

Quite the contrary: those who quickly master the regulatory, fiscal and intellectual property issues, among others, will certainly be one step ahead. After all, as Bob Iger, CEO of Disney, says, the riskiest thing we can do is maintain the status quo.