The business of non-fungible tokens (NFTs)

Non-fungible tokens (NFTs) could be the next big commercial space business will need to have a stake in to avoid missing out on what could be very lucrative opportunities. Dave Howell explains what NFTs are and how companies could leverage NFTs to open new profitable channels, and asks whether virtual products are the future of businesses as they continue their post-pandemic digital transformation.

NFTs are the latest manifestation of the blockchain being closely linked to cryptocurrencies but differ in one crucial aspect: NFTs are linked to unique digital assets (and sometimes physical items), unlike cryptocurrencies which are interchangeable and traded.

The practical application of NFTs is a basis for businesses to create digital and physical assets and secure their ownership. In the digital space where copyright and IP have been notoriously difficult to assert, NFTs could be the asset ownership platform businesses have waited for. For example, the founder of Twitter, Jack Dorsey, used NFTs to auction off his first tweet. The asset eventually making $2.9 million.

Creating value from digital assets has a long history. In this discussion, the most compelling parallel with NFTs is how gaming has evolved its digital asset marketplaces. The purchase of in-game items (play-to-earn) to help the gamer build their world are a clear parallel with NFTs in a broader business investment context.

Some industries and sectors are ideal candidates to explore NFTs. “Big fashion brands like Balenciaga and RTFKT have been ahead of the curve in exploring NFTs with virtual clothing drops and a move to accepting crypto as a currency,” explains Alex Econs, founder of London t-shirt printing company ICON Printing.

“As the demand for NFTs grows, we should expect to see more adoption of NFTs within the luxury fashion and designer clothing sector. The paradigm shift is occurring quickly and 2022 will be the year when it begins to snowball. Expect to see digital-only clothing going at prices similar to limited edition sneakers and hats in the near future.”

For smaller enterprises, NFTs could offer a range of opportunities to secure digital assets and create new products for this burgeoning marketplace. However, as we have seen with cryptocurrencies, care must be taken when any investment is made.

Safe and secure?

News that Cent – one of the leading NFT marketplaces suspended the trade of NFTs because of high levels of fraud, and with OpenSea admitting that 80% of the NFTs minted on its marketplace were fake or spam, this is a clear warning to businesses looking to embrace NFTs that these new marketplaces can be challenging to successfully and profitably navigate.

Also, there are currently no regulations governing NFTs in the UK. Therefore, the risk of having a high value NFT item stolen from a digital wallet remains high. Also, it is essential to understand what IP the NFT actually refers to, as in many cases, the NFT is only a version of some underlying IP.

As with the purchase of established digital assets such as images, video, and audio, the originator's rights to the purchaser should be carefully assessed. For example, staying in the gaming space, if your company re-sold an NFT, royalties to the original owner may be payable. Again, look closely at the purchasing agreement for these kinds of limitations.

Croner-i spoke with Nick Eziefula, Partner in the Commercial group and intellectual property specialist at Simkins LLP, and began by asking NFTs seem to be inherently secure, but is the success of NFTs really about the users’ trust?

Nick responded: “The "security" of NFTs could be a double-edged sword. On the one hand, NFTs are exceptionally secure – unlike traditional currencies, they cannot be forged or duplicated, and there is an immutable record on the blockchain. But, on the other hand, this also means that (unless extreme measures are taken, like creating a new branch of the blockchain), it is very difficult to correct issues if crypto assets are stolen or an element of the underlying ecosystem is compromised as we saw in January with Crypto.com.

“Users do need an element of trust in the underlying technology they are using to buy or sell NFTs. Therefore, many transactions occur on established blockchains like ETH. However, the true success of NFTs, much like other assets, depends on users’ willingness to speculate on their investments. The NFT ecosystem is increasingly more established, and trust is being built, but the underlying risk is still present.”

Protecting intellectual property has been a challenge for several years – particularly digital assets – will NFTs finally offer a reliable way to secure these assets?

“A common misconception is that an NFT and the IP it relates to are the same thing,” Nick continued. “This is not true. A purchaser of an NFT typically owns the NFT itself (i.e., the short lines of code on the blockchain) but any rights to IP linked to the NFT will depend on whatever terms the minter of the NFT is willing to give.”

“Protecting intellectual property is increasingly complex in the internet-era, as items are copied and disseminated online faster than the owner of the IP can monitor use. NFT's are unlikely to be a silver-bullet here. If someone were to illegally copy an image that has been sold as an NFT, the fact that the image can be identifiably associated with an NFT will not stop the copying of the image itself.”

And Nick concluded: “Although NFTs may not be a silver bullet for addressing issues with IP, they do provide excellent avenues for creatives and businesses to monetise their IP in new ways and get new (often younger) audiences interested in their work. An artist seeking to sell digital artwork now has an effective way of doing so via an NFT.

“A recent example is Quentin Tarantino’s Pulp Fiction NFT launch. Tarantino is not giving away the original Pulp Fiction manuscripts, just selling a licence to hold and use them to the owner of the NFT. Through this mechanism, Tarantino has monetised a valuable collectable whilst retaining the original memorabilia and IP for his own use. A key challenge for the growing NFT industry will be educating users as to what exactly they are buying when they purchase an NFT.”

NFTs and your business

How smaller businesses could use NFTs is coming into focus. The current ease with which promotional codes can be copied and shared could be wiped out by linking promotional codes to an NFT.

“I am not sure I see an obvious role in customer support – other than maybe securing your warranty information and transaction history with the company – but that seems like overkill,” Rohit Talwar, CEO of Fast Future, explained to Croner-i.

“Where I can see NFTs being used is as a customer reward mechanism in place of loyalty points or coffee shop stamps. For example, buy 25 copies and earn a limited edition NFT that can then be resold. Others might use NFTs to create unique purchase rewards. For example, buy a seat at our theatre and your NFT will be you entrance ticket and offer you a range of other limited edition content such as interviews with actors and scenes from rehearsals. The more you buy, the wider the range of unique or limited availability benefits you can access.”

Anti-counterfeiting, in general, could become a massive market for NFTs alone. Linking loyalty cards and other customer-facing mechanisms to NFTs would make these channels more secure. And, of course, businesses would be able to secure any gamification-based promotional activities they operate.

The recent move by Facebook to define the future of the digital space it wants to evolve into the Metaverse is also a space that will be fertile for NFTs to expand, as the Metaverse is the natural habitat of digital NFTs. As the Metaverse takes shape, the already established trading of digital assets in the gaming space will move into the mainstream as businesses stake their claim to their plots in the Metaverse. Using NFTs in these new virtual marketplaces will quickly develop.