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Repost: INTA Features

NFTs, Brands and the Metaverse - Coauthored by Weston Anson

NFTs, or non-fungible tokens, were one of the biggest digital trends of 2021. They continue to shake up the entire intellectual property (IP) community as more brand owners attempt to understand how to use them and the metaverse to engage their customers.

An NFT is a unique digital asset that can be verified and traded on a blockchain platform (e.g., Ethereum). It is a unit of data stored on a digital ledger, or blockchain. It cannot be duplicated or manipulated and is not interchangeable. It draws its value from being scarce, one of a kind, and verifiable.

NFTs are the newest version of collectibles, but in a digital format: digital artwork, videos, fashion items, social media posts, GIFs, in-game items, photos, concert highlights, Top Shot moments in sports, and many others. They can embody pieces of art or even trademarks. CryptoKitties (collectible and breedable digital cats), CryptoPunks (collectible characters with proof of ownership stored on the Ethereum blockchain), and digital sneakers for the metaverse are part of this new digital fever and brand extension tool.

Riding the Wave

Platforms such as Auctionity, Mintable, OpenBay, OpenSea, and Rare Bets host auctions for NFTs in various digital formats. These platforms use computer algorithms to guarantee the NFT’s authenticity in a data structure using either a centralized or decentralized blockchain system and offer various options for its purchase and sale. Generally speaking, the purchaser of an NFT gets a non-exclusive and limited license to the digital asset. Many platforms allow for the original owner to receive a percentage of every resale of the NFT and to restrict the transfer of rights, including resale rights.

Although the legal status of NFTs as they relate to IP rights is still to be determined, multiple platforms have notice and takedown procedures for reporting trademark infringement involving NFT content. Similarly, some countries’ IP laws can already be enforced against the unauthorized exploitation of publicity, copyright, and moral rights involving NFT content. A potential hurdle for protecting IP rights, however, is that seizure of an NFT could be difficult if not impossible, where an asset exists on a decentralized blockchain. However, a court order could likely reach an NFT asset hosted in a centralized blockchain system or a hosted wallet, where a single provider holds the user’s private key.

Artists, influencers, and brand owners are creating and auctioning limited edition digital products to take advantage of the interest in owning NFTs. For example, Jack Dorsey, the former CEO of Twitter, sold his first tweet as an NFT for US $2.9 million; Charmin created digital art that it dubbed “the world’s first Non-Fungible Toilet Paper”; Pizza Hut Canada released a limited quantity of digital pizzas; and Mattel offered NFT Hot Wheels cars.

Brand owners can also leverage NFTs for offline engagement. For example, Nike patented blockchain-compatible sneakers, which it calls CryptoKicks, and sells them to customers who can “breed” the digital shoes with other digital shoes, which can then be made as a tangible pair of sneakers.

Brand owners see anticounterfeiting applications as one of the strongest cases for using blockchains, as NFTs can be used to authenticate physical products and provide a product’s transaction history. The AURA blockchain network, which is open to all luxury brands (founding brands include Cartier, Louis Vuitton, and Prada), allows brand owners to create a unique digital ID for each item during production to provide proof of authenticity, ownership, and the ability to track every transaction involving that product.

How Brands Can Monetize NFTs in the Metaverse

What is the metaverse? Simply put, it is a collection of virtual worlds. You enter a virtual world using a digital replica or avatar of yourself, and can interact with different environments, people, and experiences, as well as purchase various items. Some virtual worlds use traditional cryptocurrencies as the payment method, but this highlights the serious environmental problems that cryptocurrency creation causes. Newer virtual worlds use centralized NFT systems and cryptocurrencies that are far less damaging to the environment and enable tracking of ownership of each NFT.

Brands can benefit in several ways from the metaverse. Virtual world products may become available for sale in the real world to consumers around the globe. Fashion houses like Gucci and Louis Vuitton provide customized “skins” (graphic appearances) for various games being played in the metaverse environment. Sneaker startup company Aglet created a game app and released a collection of virtual sneakers. Players compete to find the virtual sneakers at geo-fenced real-world locations using the in-game map and shop (currency is earned through walking while the app is on), and then display their collection. Aglet’s platform also allows existing brands to launch their own virtual retail stores. In these examples, NFTs attached to the products guarantee authenticity and provide a simple way of tracking the products.

More and more brand owners and licensors will participate in the metaverse soon because it represents the world’s largest untapped licensing market. According to the Licensing International organization, it represents the last great licensing market open to industry and could represent as much as a 40 percent increase in volume in licensing in the near future. The combination of a virtually unlimited number of customers combined with the ability to use NFTs as identifiers or hang tags could see almost unlimited growth in sales for brand owners.

Issues and Risks for Brand Owners in the Metaverse

Brand protection is chief among the potential pitfalls facing brand owners in the metaverse, of course. NFTs may help to protect brand holders by verifying ownership and identifying product resales, but there are multiple virtual worlds, and brand owners must decide which ones to enter. Primary criteria to consider are the security of the central blockchain management and the cryptocurrency being used.

Added to this is the concern that in the future there could be too many virtual worlds, too many licensees, and too many products. Today, there are as many as 25 or more active virtual worlds: Cryptoboxets, Decentraland, Roblox, Sandbox, Sims, Somnium Space, SuperWorld, and Zepeto are just some of them. As the biggest players such as Facebook and Google enter and start to consolidate the market, this concern may naturally clear itself.

Another possible concern is loss of management control as the number of NFTs/hang tags grows and it becomes more difficult to track each one—particularly if an NFT goes through a number of transactions in the virtual world. Therefore, brand owners will need a new level of creativity to make new relationships with the creators and managers of multiple virtual worlds.

Branding Activity in the Metaverse

The pandemic changed our behaviors in relation to the digital world—and with much of the world in lockdown at different times since early 2020, more commerce moved online. Increasingly, people work and spend large portions of their time in virtual worlds, creating new sets of customers. Now brand owners can sell not only physical goods, but also digital goods. As a result, several virtual worlds have prospered in the metaverse, and brand owners have begun to establish themselves in it permanently.

A few years ago, the virtual world Decentraland went through “The Great Land Rush.” At that time, Republic Realm, an investor and developer in metaverse and NFT projects, paid US $1 million to acquire several hundred plots of virtual land in Decentraland’s virtual world. In turn, Republic Realm began to auction off the plots. Sotheby’s was an earlier acquirer and has built a highly successful virtual business auctioning virtual artwork in the form of NFTs. Many designer brands, such as Gucci, Louis Vuitton, Moschino, and Tissot also entered the field and began to offer virtual products within virtual worlds like Decentraland.

Brand owners have joined Roblox, another virtual world, with more than 200 million active users, in an aggressive way. For example, last year, Gucci began selling sneakers for US $12.99 a pair, which the buyer’s avatar could wear in this virtual world. Prices for those sneakers quickly rose and Gucci made headlines when it sold a digital purse in the Roblox virtual world for 350,000 Robux, equivalent to roughly US $4,200. The physical version of the same purse could be bought in a Gucci store for about US $3,500.

All types of consumer goods and services can be licensed in this new economy. In addition to fashion lines and collectibles, brand owners can also offer experiences, like theme park tours and virtual rides, and art and entertainment of all kinds—all to be viewed only in the virtual world. The range of products that will eventually be offered as brand extensions or under license in the metaverse may exceed those in the real world.

Brand owners can profit from original sales. With trackable NFTs attached to each product or service sold, brand owners can finally earn revenue from the resale of their licensed products, too. As anyone can resell a product anytime and anywhere around the world, brand owners will need to have efficient tracking systems and be aware of the international legal and tax implications that auditing information and payments may have.

Ultimately, NFTs and blockchain technology present a bright future for brands and brand owners. However, brand owners should be aware of potential pitfalls before diving deep into the metaverse.

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