On 27 April 2021, The Collective by Lewis Silkin welcomed Cliff Fluet, Joint Head of the Media & Entertainment group at Lewis Silkin LLP, MD of Eleven Advisory and Chair of the Ivors Academy, to discuss the fundamentals of non-fungible tokens (NFTs), how they’ve been used in Art, Sports, Music and their application for the brand, fashion and retail industries going forward.

NFTs have sparked a lot of interest during the pandemic and businesses in the brand, fashion and retail industries, which have been hit hardest by the pandemic, will need to keep abreast of their use in the coming months as the world looks to open up again.

NFTs: What are they?

Before discussing what an NFT actually is, let’s consider the underlying technology, Blockchain. Until about 18 months ago, you could not go to an industry conference without there being yet another session on Blockchain and how its distributed ledger would revolutionise the world of commerce.

Cliff confirmed he was always of the view that were the three key use cases for Blockchain for creative and brand-based business. These were, in a world of digital ubiquity: (1) providing proof of digital ownership, (2) to capture ongoing value i.e. providing a secure secondary market for merchandise or tickets and (3) to bring scarcity to digital media after two decades of ubiquitous access. NFTs appear to be a great use case for all of this

So, what are NFTs? As Cliff noted, you can’t talk about NFTs without understanding the essence of fungibility. A fungible item is something that can be replicated and exchanged for identical items or similar services. Looking at an example, Cliff explained that if he were to give someone a £10 note, in return that person would have the option of paying him back with a £10 note or two £5 notes or ten £1 coins. All these options have the same unit of value in total and are therefore interchangeable, making them fungible in nature. Therefore, currencies (including cryptocurrencies) are also fungible as they are interchangeable.

In contrast, a non-fungible item is something that has unique or irreplaceable value based upon the buyer’s sentiment and/or market dynamics. It cannot be swapped for an identical item. For example, the original Mona Lisa. There are millions of copies of the Mona Lisa which have little to no value, whereas the original retains immense value.

The use of NFTs on blockchain came to prominence in 2017 with the game CryptoKitties. This was a platform that allowed users to create digital cat avatars with specific and unique attributes, which made them non-fungible. Users were able to trade attributes or cross-pollinate avatars to create something equally as unique. On the first day of trading, CryptoKitties reached $23 million.

Terms and Conditions: IP or not IP?

Cliff noted that as a lawyer, it is always important to look at the small print. Taking CryptoKitties and their terms and conditions as an example, it is possible to start grappling with the technical details of legal ownership. In relation to a ‘Kitty’, the user would only own the NFT. All other rights would be owned by the platform and all users would only be given permission via the platform. You wouldn’t be allowed to modify or sell the underlying digital art. The owner of the NFT doesn’t own the underlying IP of the digital work, they own the token - that token is the certificate of that Kitty’s digital authenticity.

Taking a step back, Cliff referred to the value of a ‘blue tick’ on Twitter. A ‘blue tick’ is highly coveted as it confirms the provenance of the Tweeter. Likewise if you were trying to buy a very special pair of “Back to the Future” trainers, you would own the physical shoe, but there wouldn’t be any question on the buyer’s part that the rights of Universal Studios or Nike were conveyed in the product itself. What is important to understand with NFTs is that what you are buying is the token, and not the IP.

Who is using NFTs?

Sports

One example of where NFT usage has exploded is in relation to trading cards. The National Basketball Association (NBA) has launched ‘Top Shot’ which is a platform for basketball superfans to buy and trade clips of their favourite players and moments such as ‘dunks’ from games. People are buying and trading these to build their own special collection. On the platform you can find and follow your favourite basketball teams and look to buy new NFT packs which are released as ‘drops’. As at the time of this webinar, ‘Top Shot’ is estimated to have seen $500 million’s worth of buying and trading. What is important to the NBA is that they are capturing the onward value of trades. People can display their NFTs in their virtual world and on their social profiles which allows them to hold bragging rights, but the NBA retains the underlying rights and all the NFT onward value.

Art

Art is probably one of the most disrupted digital worlds, where, as Cliff noted, a right click could almost create an exact copy. A good example of a digital artist is Mike Winkelmann aka Beeple, who famously creates one piece of digital art per day. A recent collage that he created was sold by Christie’s as an NFT for $69 million. This was purely for the rights to own the NFT on a unique one-off basis - there were no rights to the underlying work.

Cliff raised whether people may question whether the art world had gone mad. In his view, it appeared to be perfectly captured by Banksy’s piece ‘Morons’ which has text embedded in the work saying, “I can’t believe you morons actually buy this shit”, as the price of the art goes up exponentially. Even prints of this work have costed nearly $100,000. Some buyers bought a print, authenticated it, digitised it and then burnt it! These buyers then managed to sell the digitised version as an NFT for $383,000. This NFT is now being sold, resold and upwardly sold.

The NFT world is not without its concerns. As Cliff observed, many of the hallmarks of a speculator boom are present. There are many rightsholders such as football teams, comic book publishers and movie studios that are firing warning shots against their talent informing them that NFTs relating to their intellectual property is a domain that they must control. As with anything in the information age, there is a concern about “rubbish in means rubbish out” and that there may not be adequate verification at the point that an NFT is “minted” (i.e. created). There are also concerns that buried in the terms and conditions of many NFT platforms, it is stated that whilst the ownership of the token resides in the purchaser, the continuing ownership and control of the underlying asset remains with the platforms and, technically, could be revoked at any time. There are also some fundamental environmental concerns that the actual raw materials required to mint the token can have both significant actual and ecological costs with the amount of energy that is required in order to generate the token but that doesn’t take into account the long-time value proposition and rate of adoption. It should be mentioned that there are equally many people arguing that with the continuing rise of computing power or moves towards proof of stake over proof of work, these concerns will amend over time.

Music

Across the last few months, there has roughly been $75 million worth of NFT value in the music world. The music world has been hit over the last year due to restrictions on live music, so the opportunity to monetise NFTs has become increasingly prevalent. The music artist Grimes released an NFT which was sold for $6 million. Kings of Leon had their own NFT campaign a few weeks ago, one of which contained a ‘golden ticket’ which would give the holder a front row seat to any headlined gigs as long as the band is together. Whilst there is a risk (i.e. how long will the band stay together), thousands of pounds have been spent trying to hold the NFT. NFTs have also allowed for an element of creative utility for the music industry. NFTs can form a more meaningful yet intangible value for fans to ‘tip’ their favourite artist without having to wait for the artist’s next tour. One could also see NFTs working as not only ‘NFTickets’ but also their use to create digital ‘NFT/VIP’ experiences where the NFT verifies the veracity of the ‘meet and greet’ with the artist and creates the kind of bragging rights that fans will pay top dollar for.

What do NFTs mean for brands, fashion and retail?

Drops

In the fashion world, the concept of NFTs can be compared to ‘drops’, whereby there is a moment where people can rush out and buy a ‘drop’ which will only be offered for a limited time. The concept of a drop isn’t new to the fashion world. What might be new is that this concept is now seeing more luxury brands take this forward, where in the past it has mainly been attributed to streetwear brands. There are recent examples with luxury brands such as Burberry, Jean Paul Gaultier and Moschino working with influencer collaborations. In relation to the digital world, we have seen Moschino collaborate with The Sims in producing pixelated apparel that avatars can wear. Very recently, we have also seen Sotheby’s sell a verified pair of Kanye West’s Yeezy trainers which he wore on stage for $1.8 million.

In the digital world a company called RTFKT is known for selling viral sneaker designs, memes and collectible exclusives. Gamers can shop during exclusive drops and wear the digital sneakers and jackets in games and virtual worlds. RTFKT have also been doing this by protecting designs by way of NFTs in order to make their work generally desirable and which plays a core part of the value of the digital sneakers. The success of RTKFT demonstrates that fans are willing to pay for their avatars in VR or metaverses to wear desirable digitised clothing.

The Nike case study

Retailers need to understand that retail is going into ‘eTail’ very quickly. See for example the partnership between Nike’s Jordan Brand and Epic Games where there was a release of skins available in its ultra-popular video game Fortnite. These skins could be purchased by any player for $13 to $18 a pop, and whilst they were not protected by NFTs it demonstrates that collectors are paying for ownership of a specific asset - something that allows them to flex on their followers across digital worlds. There is definitely cause to believe that big brands such as Nike will start to use NFTs for items such as sneakers. In today’s resale market many collectors don’t even want the sneakers they’ve purchased delivered to them, opting instead to flip them while they’re still safely stored on a shelf - see for example marketplaces like StockX. In the physical world to date, brands such as Nike have not participated in the upward value of goods which are traded on StockX. With cryptographic digital shoes, Nike could embed a set royalty in the code of the NFT and ensure the brand continues to make money as its digital assets are resold again and again. It could also help address some of the pitfalls of the physical market, including overproduction, waste, and counterfeiting and authentication.

By playing detective, Cliff revealed that Nike already seem to be on the path of adopting the use of NFTs in their business. A patent was awarded to Nike in December 2019 titled “[a] system and method for providing cryptographically secured digital assets” which described a system for minting, exchanging, and intermingling cryptographic digital assets in the form of digital shoes, which can each be linked to a real-world physical shoe. Nike’s system would blur the line between physical and virtual, finding monetization opportunities in both. Nike have also trade marked the name “The CryptoKick” so that at the core of the Nike system would be a computer-generated virtual collectible known as the CryptoKick, a tokenized shoe identifier that is stored on the blockchain and linked to a virtual shoe. These tokens may be traded on NFT marketplaces and stored in ‘lockers’, bred with other tokens or even become physical shoes. In essence, the system Nike is cultivating the idea of a ‘living’ shoe which can be adapted and morphed - a concept not too dissimilar to CryptoKitties.

Luxury and fashion

Whilst some people may argue that the world of NFTs may only pertain to streetwear brands like Nike and not to luxury and fashion brands, Cliff argues on the contrary and points to Robert Triefus, an executive vice president at Gucci, who said in March 2021 that it is “inevitable that luxury brands would begin to design NFTs”. Likewise, Marjorie Hernandez, the founder of Lukso (a blockchain platform that works with fashion brands) stated that “the question is just who will pull the trigger first”.

Some people may still ask why should luxury brands take notice though? Well as Cliff pointed out, the notion of rarity builds the whole idea of scarcity which in turns drives the concept and price of luxury. In today’s globalised and digitised world, a physical scarcity driving the price is not enough. As the luxury world becomes a victim of expansive and increased visibility, it runs the risk of losing its scarcity element. A few prominent challenges that luxury faces are that of counterfeit goods where verifying authenticity in case of second-hand goods market can become hugely problematic. Resale is also a huge market for luxury that locks out the manufacturers and houses from capitalising on upwards value.

There are already examples of luxury fashion NFTs in use as well. The most straightforward example of a fashion NFT is where the NFT is the digital ‘twin’ of a real-life garment. Clothia, an online retailer in the accessible luxury space, is currently auctioning NFT dresses. The winning bidders will receive the corresponding real-life dresses, and both the NFTs and the physical garments are one-of-a-kind. Other examples include Dressx and NEUNO, both companies utilising technology to create 3D clothing.

Concluding thoughts

Consumers now want to be well-informed regarding the provenance of items and want assurance and easy accessibility to a product’s knowledge. With the advent of the concept of tokenization, these allow luxury goods to be taken to the blockchain as an NFT with an integrated certification library, offering not only proof of ownership and history but also to serve as a permanent link to the verified documentation. Using NFTs gives items the property of permanence, similar to how luxury is meant to be timeless and showing it has a long-term appreciating investment.

Cliff ended his talk with a telling equation:

If Permanence x Provenance x Rarity = Luxury, then NFTs might just be the answer…

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