Blockchain and cryptoassets aren’t new. Bitcoin was created in 2009 (12 years ago, can you believe) hot on the heels of the economic downturn. And yet, distributed ledger technology (DLT) based digital assets had something of a rebirth in 2021. So much so that the price of Bitcoin more than doubled from the start to the end of the year. With many brands launching into the world of NFTs (non-fungible tokens) and Chief Metaverse Officers joining the c-suite, we’re starting to see reliance on DLT on a much larger scale, and the fashion industry is no exception. In 2021 we saw luxury brands grabbing a piece of the proverbial pie and in doing so, reaching and engaging with their customers in new ways.
Luxury watchmakers Franck Muller have started selling timepieces exclusively for purchase via Bitcoin and with in-built Bitcoin functionality. The Vanguard Encrypto, dubbed “the world’s first functional Bitcoin watch” includes a dial with a laser-etched QR code for a public wallet address that can be used to deposit Bitcoins and check the balance of the account.
We have also seen brands use cryptoassets to generate customer loyalty. Lolli, a rewards platform, allows customers to earn Bitcoin when shopping with a Lolli partner (including the likes of Nike and Sephora).
Of course, any discussion of cryptoassets and fashion would not be complete without mentioning gaming. Last year we saw Burberry collaborate with Mythical Games to launch an NFT collection in their game Blankos Block Party. The limited-edition Burberry Blanko is an NFT that can be purchased, upgraded, and sold within the marketplace alongside Burberry branded in-game NFT accessories. The reaction to the launch of the Burberry Blanko NFT speaks for itself – all 750 units that were available sold out within 30 seconds (those of us who have tried to get Glastonbury tickets before will know the feeling) and following an original price of $300 apiece, the NFT was sold for over $1,000 on the game’s marketplace among gamers. For a more detailed discussion on NFTs and the gaming sector, take a look at Nick Allan’s article here.
Clearly cryptoassets are more than a fad, but they do have downsides. It has been well publicised that the Ethereum blockchain (which is widely used) is run on an energy-intensive Proof of Work crypto model. This involves huge energy consumption and carbon impact, so from a sustainability perspective it falls far short of being a viable long term option. Brands are having to take this into account when choosing a partner for their digital collections. Given the focus on sustainability in 2021 and going forwards (more on this throughout this report), we are starting to see big names opting for models that require less energy consumption such as Proof of Authority or Proof of Stake.
If you are considering a foray into use of DLT, NFTs or other cryptoassets, you may wish to consider the following factors:
- Jurisdiction(s) of launch. The legal and regulatory regimes applicable to cryptoassets vary widely across different jurisdictions, and some are more favourable than others. To identify the most appropriate jurisdiction(s), you will need to consider the features and characterisation of the cryptoasset in question, and the activities to be carried out and by whom in relation to that cryptoasset. Depending on the jurisdiction(s) you may also need to consider corporate structuring (i.e. what entity will be involved in development / ownership / contracting).
- Regulatory status of the cryptoasset. In the UK there are currently three categories of cryptoasset, two of which are regulated (security tokens and e-money tokens). The third category is unregulated and this includes tokens that are not security tokens or e-money tokens (e.g. exchange tokens, cryptocurrency such as Bitcoin or utility tokens). If a cryptoasset is regulated, it is then necessary to consider whether the activities to be carried on in relation to that cryptoasset would require FCA authorisation.
- Registration requirements. Even if a cryptoasset is unregulated, activities carried on in relation to the cryptoasset may be subject to registration requirements. In the UK if a firm carries on business as a cryptoasset exchange provider or custodian wallet provider, it needs to be registered under the UK money laundering regulations (Money laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017). Careful analysis should be done of the activities in question, including issuance and distribution, to check whether they would be in scope of the regulations.
- IP and licensing rights. The rights attaching to any cryptoasset should be clearly set out, particularly in relation to NFTs where the treatment of intellectual property rights and licensing will be significant to both the creator / issuer and any owner. An NFT issuer should ensure that it has the correct IP rights to issue the NFT. To understand more on IP considerations when launching NFTs, have a look at Alan Hunt’s article here.
- Consumer protection. Cryptoassets are not exempt from consumer law, so, for example, relevant T&Cs will need to be compliant and advertising must not be misleading. The Advertising Standards Authority have recently issued a series of ‘upheld’ complaints relating to advertising of cryptocurrency trading. Lack of disclosure about the risk of investments and taking advantage of consumer’s inexperience being their two main concerns. Certain cryptoassets may in future be brought within scope of financial promotions regulations to help address this.
- Many regulators and tax authorities are still grappling with how to handle cryptoassets and so you will need to stay up to date on approach.
As we launch into another uncertain year, luxury brands will no doubt continue to look for new and innovative ways to engage with and retain their customers, and as more and more big names lean in to digital assets, it’s surely only a matter of time before we start to see the impact that this will have on the wider retail sector. For a more detailed look into what 2022 holds for cryptocurrencies and NFTs, take a look at James Gill’s 2022 Tech Predictions. Watch this space, and ensure you keep up to date.
By Wendy Saunders, Financial Services and Emily Stirling, Digital, Commerce & Creative - Lewis Silkin
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