As technology is rapidly evolving, we are witnessing transforming changes around us, with digitization making a mark in almost all facets of our lives. One interesting development is the synergizing of physical and virtual worlds in intriguing ways. This new avenue is being explored by businesses to reach out to their customers and to better connect with them. That is where non-fungible tokens (NFTs) come in.
NFT: The new trend setter
NFT is a cryptographic token stored on the blockchain representing a digital asset and once created you cannot alter it (What is an NFT? How does it work, 2022). Each NFT has its unique metadata distinguishing it from others, thereby ensuring its credibility and authenticity. It is to be asserted that NFT is not a digital asset, rather it is used to record the metadata of the asset in question on the blockchain. As it is a non-fungible asset i.e. one of kind asset that cannot be replaced with something else, no two NFTs can be the same.
Although originally NFTs evolved in the gaming sector, it has now found their way to many new industries. NIKE dived headfirst into the world of NFTs by introducing digital sneakers in collaboration with RTFKT and generated USD 185 million in revenue (Jones, 2022). Several other luxury brands such as Gucci, Dolce & Gabbana, and Tiffany have amassed millions through their NFT sales (Bourgi, 2022). Sports industry has also endorsed it by providing NFTs of unique artworks of iconic moments in sports history (What are NFT collectibles?, 2022).
So it is safe to say NFTs hold huge potential in a wide array of sectors. So can it be used to bridge the gap between the physical and the digital, to bring physical collectibles into the digital world?
Phygital NFTs: The bridge between physical and digital?
NFTs until recently were mostly associated with digital collectibles. But now it has rolled out the red carpet for physical NFTs or phygital NFTs (Howell, 2022). It is an asset that has got two distinct parts. One part is the actual physical asset and the other is the digital counterpart of it. This is one of those avenues through which NFTs are expanding their use cases in the real world.
Currently, the most common use case of this can be found in the art sector wherein physical artworks are minted and sold as NFTs. It is shifting the onus from the financial imperative to the creative side of art while ensuring its exclusivity and authenticity, thanks to the unique blockchain technology (Can physical works of art be linked to NFTs?, n.d.). It provides the buyer with ownership over the asset, but only to the limited extent that one can own something that can be endlessly reproduced. But if it were to be explained in terms of physical art, anyone can buy a print of the Mona Lisa portrait but only one person can own the original. Although the buyer might not be able to hang the digital art on his wall, he does get bragging rights (Kastrenakes, 2021). Additionally, it also provides the added benefit of royalty to the creator along with cutting out middlemen.
This brings us to the possibility of employing NFTs to modernize the lucrative world of physical collectibles. Similar to physical art, it can also be used to tokenize off-chain assets like coins, or stamps. In a world where counterfeits are widely in circulation, phygital NFTs help in ensuring authenticity and provenance which in turn leads to an improvement in the value of the tangible asset (Howell, 2022). So it becomes the unique proof of ownership for the asset in question. This is particularly relevant in the case of collectibles, the authenticity of which matters a great deal to the buyer (Lyons, 2022). One notable example would be Courtyard issuing NFTs for trading cards to reduce trading fees and friction (Teije, 2022).
With recent innovations such as NFC Chip, this bridging has become all the easier. Once the chip is attached an NFT including all the metadata regarding the asset is minted and linked with it. This helps in ensuring that whenever the NFT is sold over the market place all the details regarding the transaction are automatically updated and is available to anyone who scans the tag (CNBCTV18, 2022).
Phygital NFTs therefore can play a crucial role in clamping down on counterfeits while providing a clear and tamper-free data trail of ownership and encumbrances. However for this to work out efficiently, all the collectibles have to be on-chain and that reality would take a few years to come to fruition.
The Challenges
In the absence of a legal regime governing the NFT market place, there exists a lot of confusion regarding the rights of the NFT owner. What does it exactly mean to “own” something on a blockchain? Many buyers believe that they are acquiring the underlying work along with the accompanying rights. But in reality, all they are obtaining is the metadata associated with the work and not the work itself (Grimmelmann et al., 2022). Due to this misunderstanding, many NFT projects are faced with copyright issues.
NFT in itself most likely would not enjoy the protection of copyright law as it is a mere representation of work on the blockchain technology and is therefore neither the original work nor a derivative of it (Urquhart & Sullivan, 2021). But the work on which the NFT is based would be protected by copyright. It is the creator of the work who solely has the rights over it including the right to mint an NFT.
When an NFT is bought, the buyer obtains the license to display it in his e-wallet but only for his personal use and not for commercial purposes. This is due to the fact that most NFT sales do not involve a transfer of the copyrights, which usually vest with the original creator unless the latter takes affirmative steps to ensure that it does ideally through terms and conditions or a license (KM et al., 2022). But whether such actions hold would depend upon the legal requirements of each country: in the UK for example, the copyright assignment has to be “ in writing signed by or on behalf of the assignor” (Urquhart & Sullivan, 2021). It is unclear how NFT transactions can fulfill such requirements. However “CryptoKitties” are NFTs that allow the owner to commercialize the artwork on the precondition that such use does not result in earnings of more than USD 100,000 per year (Cryptokitties, 2018). On the other hand, NBA Top Shots only licenses the owner to “use, copy, and display” and not “reproduce, distribute, or otherwise commercialize” the NFT (NBATopShot, 2021).
So there is a lot of uncertainty regarding the rights regime around NFTs. However for the time being platforms themselves have become gatekeepers, taking down NFTs that involve unauthorized minting of original works (Guadamuz, 2021). Nonetheless, many copyright disputes are likely to pop up and it will be interesting to see the ownership claims pan out.
What next?
NFTs have definitely come a long way since their inception and considering the pace at which it is evolving, the days of tokenizing everything physical as proof of its authenticity is not far off. So it is high time the laws and regulations catch up with the technological evolutions so that uncertainties regarding it can be dispensed off while allowing us to cash in on this new trend.
References
Bourgi, Sam. (2022, August 23). Iconic brands including Nike, Gucci have made $260M off NFT sales.
Can physical works of art be linked to NFTs? (n.d.).
CNBCTV18. (2022, May 9). An “NFT Chip” that will turn real-world luxury items into NFTs; check details. https://www.cnbctv18.com/cryptocurrency/an-nft-chip-that-will-turn-real-world-luxury-items-into-nfts-check-details-13421022.htm
Cryptokitties. (2018). Terms of use. https://www.cryptokitties.co/terms-of-use
Grimmelmann, James., Ji, Yan., & Kell, Tyler. (2022, June 8). The tangled truth about NFTs and copyright. https://www.theverge.com/23139793/nft-crypto-copyright-ownership-primer-cornell-ic3
Guadamuz, Andres. (2021, December). Non-fungible tokens (NFTs) and copyright. https://www.wipo.int/wipo_magazine/en/2021/04/article_0007.html
Howell, James. (2022, September 1). Phygital NFTs: Bridging The Gap From Physical To Digital. https://101blockchains.com/phygital-nfts/
Jones, Chris. (2011, September 21). Selling physical items as NFTs, explained. https://cointelegraph.com/explained/selling-physical-items-as-nfts-explained
Kastrenakes, Jacob. (2021, March 2). Grimes sold $6 million worth of digital art as NFTs. https://www.theverge.com/2021/3/1/22308075/grimes-nft-6-million-sales-nifty-gateway-warnymph
KM, Gautam., Thomas, Sonia., Gurjer, Saurav., & Chakraborty, Ananya. (2022, July 12). India: NFTS and copyrights. https://www.mondaq.com/india/copyright/1211232/nfts-and-copyrights#:~:text=NFTs%20are%20unlikely%20to%20enjoy,created%20may%20enjoy%20copyright%20protection
Lyons, Geoffrey. (2022, May 9). 3 reasons why NFTS will go phygital. https://www.moonpay.com/nft/phygital-nfts
NBATopShot. (2022). Terms of use. https://nbatopshot.com/terms
StadioPlus. (2022, May 31). What are NFT collectibles? https://stadioplus.com/what-are-nft-collectibles/
Teije, Iris ten. (2022, March 22). NFTs And Blockchain Technology In The Collectibles Industry. https://www.forbes.com/sites/forbesfinancecouncil/2022/03/22/nfts-and-blockchain-technology-in-the-collectibles-industry/?sh=2a548c1f6db7
Urquhart, Quinn., & Sullivan. (2021, March 25). NFTs: Legal Risks from “Minting” Art and Collectibles on Blockchain.
What is an NFT? How does it work? (2022, June 3) https://economictimes.indiatimes.com/news/international/us/what-is-an-nft-how-does-it-work/articleshow/91623986.cms?from=mdr