The Beauty of NFTs

The rising popularity of NFTs has shone a spotlight on their environmental impact. A significant proportion of NFTs rely on the ‘proof-of-work’ model to verify each transaction on the blockchain, which involves participating users (miners) competing with one another to solve cryptographic puzzles in exchange for units of currency. This process can consume vast amounts of energy.

Beauty brands built on their clean credentials should be particularly mindful of this issue before implementing any NFT strategy, otherwise, it could risk a public backlash from its fan base. Using a blockchain-based on a ‘proof-of-stake’ model is currently considered a ‘greener’ route.

In addition, brands could explore offsetting the emissions from each NFT. For example, Gucci partnered with Offsetra to purchase 10T of Carbon Offsets to reduce the environmental impact associated with its NFT which it auctioned via Christie’s.

Despite the hype, there remains relatively little understanding in the general public about what NFTs are, and the implications of owning one. When someone buys a digital artwork that is authenticated by an NFT, they are not buying the artwork itself. Instead, they are purchasing a digitally authenticated note stating that they are the owner, like a receipt. This means that the purchaser will not obtain ownership of any intellectual property rights in the digital artwork itself without an express assignment. As we discussed in a previous article, there is unlikely to be any intellectual property in the NFT itself as an NFT is simply metadata.

Brands will therefore need to inform customers about what they are actually getting for their money. In accordance with the transparency requirements under the Consumer Rights Act 2015, any terms governing a customer’s purchase must be in plain and intelligible language. This means that brands should provide clear explanations of any crypto terms used such as ‘blockchain’ or ‘crypto wallets.’ Brands may wish to present this information in an FAQ-style document to increase accessibility.

A document should also be put in place setting out what rights the purchaser has with regards to the underlying digital asset in order to protect the brand’s intellectual property. For example, the terms may restrict the purchaser from commercially exploiting the digital artwork. Further, brands considering entering the NFT space for the first time should check whether their existing trademark registrations extend to digital tokens.

Finally, it is important to remember that digital assets are not registered on the blockchain themselves. Usually, the NFT will include a link to a stored file on an external web server. An issue can arise if the platform that issued the NFT stops hosting the digital media or providing access to it. This could leave a purchaser with an NFT that only directs them to an error page, potentially giving rise to a customer complaint or reputational damage. If a brand is selling its NFTs through a platform, it should seek clarification as to where the assets are stored.

Platforms that publish the digital artworks to the IPFS (which stands for an InterPlanetary File System) may offer more protection. The IPFS is a peer to peer network for storing and accessing files and data in a distributed file system. Brands would also have the option to pin the artwork themselves on the IPFS, rather than relying on the platform, which at least offers a brand some control over this particular risk.