NFTs: top tips for brands looking to explore the brave new world of non-fungible tokens

Exploitation of non-fungible tokens (NFTs) continues to rise in popularity, as brands and artists look for alternative ways to increase revenue and experiment with new methods to connect with customers and grow brand awareness. We have seen companies such as Warner Bros publish NFTs to promote film releases, Coca-Cola selling NFTs with the proceeds going towards its nominated charity and businesses such as Papa Johns releasing NFTs which enter purchasers into competition draws to win prizes.

We have published a more detailed article, NFTs: a legal perspective - ownership, which discusses the nature of NFTs, why they have become popular and ultimately how NFTs are bought and sold. However, at its simplest, NFTs are digital assets in which ownership of the asset is recorded using blockchain technology, which provides evidence to certify the authenticity of the asset, as the unique code associated with a NFT should ensure that the respective NFT can have only one owner at any given time.

Despite the growing popularity, there are legal risks and it is important that brands take advice before delving in to this brave new virtual world.  In particular, we think it is important that brands are aware of the following three points:

1. Brands minting NFTs will usually sell NFTs on a NFT platform. Given the popularity and the fact that there are a finite number of NFTs in each published collection, they are generally considered as 'limited edition' and consequently, we often see the value of the NFT increase once published by the brand. This model has created a secondary market between traders and customers, under which we have seen NFTs sell for substantially more than their initial release price. However, it is worth noting that whilst millions of pounds are being spent on individual NFTs, it is often only the actual token, which the purchaser buys ownership of and not the intellectual property rights in the work itself. This is because ownership of intellectual property is not transferred, unless the smart contract encoded into the NFT explicitly sets this out. By retaining the intellectual property rights in an NFT, a brand can retain the ability to update or revoke permissions for the use of that NFT and purchasers will be restricted from selling copies of the work in the NFT to others. It is therefore important that the smart contract sets out the intention of the brand. Often this smart contract will be automatically generated by the NFT platform provider, so it is important for brands to review all terms before listing the NFT on the blockchain. 
2. Owing to the traceability of transactions on the blockchain, a benefit of NFTs is that brands can seek to ensure that they earn a percentage of any sales on the secondary market – think DC Thompson earning a percentage of every Beano magazine resold at a car boot sale. However, this is based on the assumption all transactions will be completed on the blockchain, but there are instances where transactions have been completed off-chain and then manually inputted following completion, which may run the possibility that the brand is not paid its percentage of sales on this secondary transfer. It therefore should not be considered guaranteed income, and should serve as a reminder to get legal advice when presented with offers from purchasers looking to complete offline. This is particularly the case when considering the status of purchasers, and whether consumer laws and regulations will be implied under the contract. It is not yet clear as to the extent that UK consumer law will apply to the purchase of NFTs on blockchains, but it is more likely that any contracts negotiated and drafted off-chain will be caught by consumer law and consequently brands will need to comply with the mandatory requirements when selling the digital content to consumers. 
3. Whilst intellectual property rights will likely not be transferred to a purchaser of an NFT, it is still important that brands ensure it owns the copyright in the works before exploiting the NFT. This may require an intellectual property assignment of all title, rights and interest in the work if, for example, the brand has commissioned an artist to create the work or a photographer to photograph the works to be minted under an NFT. It will be the brand's responsibility to ensure the works are sufficiently original (and not a direct copy of other artwork) so that the works are capable of being protected by copyright and can be assigned under an intellectual property assignment. Failure to do so could leave the brand (and subsequent purchasers) liable to intellectual property infringement claims. Any brands who are also franchisors and wish to exploit NFTs may also want to make clear in franchise agreements that the underlying works in the NFTs are not licensed within the intellectual property rights granted under the franchise agreement, and title shall remain with the franchisor.

The opportunities under NFT are limited only by creativity and whilst they can serve as an additional revenue stream and a further communication line to customers, it is important for brands to understand the risks and implications from exploiting NFTs.

If you would like more information or have any specific queries on this topic, please contact Gordon Drakes or Kate Williams.