NFT ECONOMIES AND COUNTERFEITING RISKS

Chandler Wirosteck
Student Legal Intern, Center for Anti-Counterfeiting and Product Protection, 2L College of Law, Michigan State University

Daniel Duquet
Student Legal Researcher, Center for Anti-Counterfeiting and Product Protection, 3L College of Law, Michigan State University

The propagation of non-fungible tokens (NFTs) has created a new medium in which intellectual property can be conveyed. The technology has primarily been applied to digital artwork (Kastrenakes, 2021) and virtual reality spaces (Fornarov, 2022), but the technology can be expected to expand (Emmons, 2021) into other realms of digital media. Like other original works of authorship, copyright is important for the medium and a complimentary article discussing this can be found here (NFTs: What You Need to Know to Protect Copyrights). In addition to copyright, trademarks play an important role in the NFT landscape. NFTs have reinvigorated old struggles over trademark use, like the use of another’s trademarks by artists in “appropriation art.” NFTs will also create new issues to resolve, like the counterfeiting of digital goods for in-game/world use. By exploring current and future uses of NFTs and how they incorporate trademarks, rights holders will be better equipped to enforce their rights in a shifting digital landscape. 

The largest market of NFTs are currently digital artwork and collectables, which totaled $17 billion dollars in 2021 (Quiroz-Gutierrez, 2022). The digital artwork market is divided into two groups: there is the traditional artwork market, like galleries and auction houses, where better known artists like Beeple sold an image for $69 million (Kastrenakes, 2021) at Sotheby’s; then there are the NFT specific exchanges like Opensea, where anyone can sell a NFT and the average price is $2,000 (Kharif, 2022). The traditional art market does not create any new risks for trademark holders, but the new marketplaces present challenges to trademark holders. The first lawsuits filed regarding NFTs were due to NFTs listed on Opensea. Nike and Hermes are the largest brands currently fighting over trademark use in NFTs and a detailed analysis of the lawsuits can be found here (see Professional Pointer: Brand Management in the Metaverse, A Roadmap for Retailers and A New Frontier: Brand Protection Elevation in the Metaverse).

Many cases of trademark infringement in artwork fall under appropriation art, which is artwork that uses another’s intellectual property. A famous example of this would be Andy Warhol’s “Campbell’s Soup Cans” in which Campbell’s trademark makes up the majority of the composition. Campbell’s initially wanted to sue Warhol for trademark infringement, but instead, decided to incorporate the artwork into their marketing campaigns (Coleman, 2016). The legal boundaries of appropriation art are not fully settled. They generally protect single paintings, but artworks produced in high quantities, like NFTs, may have trouble asserting this defense. The Hermes case may help define how and when NFTs can be considered appropriation art.

The large market for NFTs has attracted many artists to the medium, but has also attracted grifters, scammers, hackers, and organized crime. Money laundering is a serious concern in the NFT space. Art has historically been used by some as a way to launder money (Behr, 2021) and cryptocurrency has enabled this practice to greatly expand due to the lack of financial controls on cryptocurrencies. There is even overt money laundering in the form of “washing” services. NFT laundering works by minting or buying an NFT, then trading it back and forth with involved parties, artificially inflating the value, until it can be sold for a high price of fresh cryptocurrency. Grifters—who are generally described as bad-faith actors who operate in the gray area of misrepresentation, just shy of the fraud required for being a scammer—will also artificially inflate prices of their NFTs through in-group exchanges. Hackers have been able to steal millions of dollars from NFT exchanges and users with the most high-profile being the $1.7 million Opensea hack (Ians, 2022). 

The recent crash of the cryptocurrency markets, causing an estimated loss of $300 billion, has cast doubt throughout NFT marketplaces and cryptocurrency more broadly (Yaffe-Bellany, et al 2022). Like a traditional stock market crash, this may be an opportunity for prices to be corrected, regulation to be implemented, and weaker companies to be forced out of the market. Stablecoins, which failed and caused a wider crash, were already the target of regulation that now seems more likely (Toomey, 2022). While most currencies have stabilized and recovered some of their value, NFTs lag behind the recovery because investors are behaving conservatively (Farren, 2022). 

An advantage NFTs have over traditional art for trademark holders is that the work can be removed from the blockchain at any time. Following the Opensea hack, art that was stolen was deactivated, making it worthless. A similar process is available to trademark holders who find infringing NFTs. Opensea has implemented a takedown procedure and it seems to have been effective, as a cursory search of popular brands came up with minimal infringing material. However, Opensea does not have a monopoly and smaller or newer exchanges may be slower or unwilling to implement takedown procedures. NFT deactivations theoretically allow any NFT listed on a marketplace, even those already purchased, to be removed from the blockchain. These processes will prove useful to rights holders once implemented throughout the NFT market and should be advocated for by rights holders as a solution to NFT trademark infringement. 

NFT images are the first and most well-known uses of NFTs, but companies are finding more uses for the technology in virtual reality and videogames. Decentraland is the most developed example of what these spaces offer, but Facebook’s shift to Meta and the development of the metaverse illustrates the resources large companies are investing into virtual reality. Virtual worlds have their own economies where consumable and wearable virtual items are traded with other players for cryptocurrency. NFTs allow tradeable items to be unique and fluctuate in value based on demand, while also preventing hackers from acquiring in-game items illegitimately. Developers of virtual worlds are inviting real-world companies to buy space (Takashashi, 2021) in virtual reality to set up virtual storefronts to sell virtual versions of real-world goods. 

Both iterations of NFTs offer an avenue for counterfeit goods to enter the marketplace. While NFT images mostly fall into the realm of copyright, there is still a risk of counterfeiting. When NFTs can be traded for real-world goods—like what is alleged the future plans of Stockx were (See Professional Pointer: Brand Management in the Metaverse, A Roadmap for Retailers and A New Frontier: Brand Protection Elevation in the Metaverse)—there is an increased risk for customer confusion when encountering NFTs containing a trademark. Nike recently accused Stockx of selling “Stockx certified” counterfeit shoes, which they discovered in a test buy (Wilson, 2022). Whether the shoes were a mistake or willful remains to be seen, but the incident further proves how, if Stockx enabled the trade of NFTs for tangible goods, the result could be counterfeit products falsely legitimized by NFTs. Another example is the case of mtgDAO, who wanted to create an NFT version of a popular trading card game (Chalk, 2022). MtgDAO sought to create a blockchain allowing owners of physical cards to “mint” tradable NFT cards. The owner of “Magic: The Gathering,” interested in pursuing their own NFTs (Carter, 2021), sent a letter to mtgDAO advising that mtgDAO is operating under a mistaken legal assumption. This letter was enough for mtgDAO to abandon the project.

Virtual reality NFTs, once fully developed, will pose a greater risk to trademark holders than NFT images. When virtual worlds start functioning like real-world economies (Gaudiosi, 2009), many of the same problems present themselves like the black market and counterfeiting. Browsing the Decentraland marketplace I was able to find counterfeit apparel—admittedly, in low resolution given the limitations of computer graphics. Even if owners of virtual worlds did everything they could to prevent counterfeit products, there is little they could do to prevent a user from creating a counterfeit product and selling it to another user in a virtual alleyway. Virtual reality could see a shift from ecommerce counterfeit goods, back to peer-to-peer transactions, necessitating the creation of virtual police forces or authorities to enforce trademarks. 

The development of full, virtual worlds may be a few years away, but in the meantime, takedown requests and cease-and-desist letters can help trademark holders exert control over NFT images. Many creators of NFTs may not know they are infringing on a trademark, like the owner of mtgDAO, and educating them on trademark law will help reduce trademark infringement and make it easier to pursue intentional infringers. Regulation over cryptocurrency and NFTs appears to be on the horizon, with the European Union and California working on legislation (PYMNTS, 2022). While most regulations are targeted at the financial and money-laundering aspects of the markets, some may indirectly help reduce trademark infringement until infringement is directly legislated.