NFTs and the Metaverse: What’s Real and What’s Not
They’re often depicted as digital pictures, but NFTs (“non-fungible tokens”) are much more: a specified set of legal rights worth, in some cases, millions of dollars. Courts and regulators are only beginning to grapple, however, with how far those rights extend and how they interact with existing trademark and copyright protections.
The biggest question people unfamiliar with non-fungible tokens have when they see the typical illustration of one — a digital picture sometimes more reflective of the pixelated 1960s than the augmented reality of the 2020s — is why anyone would pay anything for them, much less millions of dollars.
The answer lies in what an NFT is, which is considerably more than how it may initially appear, according to Devika Kornbacher, a partner at Vinson & Elkins whose practice focuses on the cutting edge of technology transactions and intellectual property.
NFTs are assets typically held and stored on a cryptocurrency blockchain — an interactive digital ledger that provides a theoretically inviolable and perpetual record of transactions. There are several digital marketplaces, including OpenSea, where buyers can search for and purchase NFTs.
The NFT buyer does not typically receive any ownership interest in the copyrights embodied in the subject of the NFT, but “for some people, it’s plenty,” Kornbacher said during a February 15, 2022 panel discussion titled “NFTs: Welcome to the Metaverse,” organized by the Museum of American Finance. “For some people, it’s a big right to have: the right to be able to have an immutable spot on the blockchain, to be able to trace that value that you don’t have today.”
Other participants in the session, which was moderated by Michael Maloney, an adjunct professor at Fordham Law, included Ronny Yakov, chairman and CEO of OLB Group; Michael Amar, co-founder of the Paris Blockchain Week Summit and Paris NFT Day; Benjamin Cole, William J. Loschert, Endowed Chair in Entrepreneurship at the Gabelli School of Business; and James C. Row, founder and managing partner of Entoro Capital.
To grasp the value of owning something seemingly intangible, owning an NFT can be viewed as representing ownership in the metaverse, a network of digital platforms that work as counterparts to the physical world. Projects such as Decentraland and Sandbox create virtual worlds occupied by people via avatars, buildings and almost anything multi-dimensional encountered outside of a computer screen.
The NFT one purchases to use in the metaverse might also have unique attributes, such as a digital deed to a knife, a lance or a magical staff in a medieval war video game or the ownership of a limited numbered designer dress to place on an avatar. Buyers who are involved in playing a particular video game for hours may even earn a weapon or power, enabling them to advance to a higher level of competition, Kornbacher noted.
As Kornbacher explained, when that item is backed by an NFT, it’s given a unique digital identity that protects it from traditional theft: It can’t be duplicated easily by hackers or shared free of charge with friends of the video-game’s code writers. By limiting available copies, the marketplace and its creators form digital scarcity, which renders the items more valuable in the same way that limited supplies of oil and gold, for example, give both materials a higher market price than air or soil. Leveraging that scarcity, gamers might buy a piece of land in a hypothetical digital neighborhood that they believe will become more valuable because a pizzeria will open next to it, and consumption of pizza in that gaming universe confers unique powers, explained Kornbacher, an avid video game player herself.
In that example, owning the plot of land and building a house on it gives the player the ability to collect the first, freshest pizza and nab more points in the process — “Real estate is real in the metaverse,” she added.
And so are products from athletic shoes to screenplays, a development large corporations are acknowledging in court. Nike, the $226 billion athletic-apparel maker, filed a lawsuit in early February accusing sneaker resale platform StockX of infringing on trademarks in NFTs that it calls “investible digital assets,” according to records in U.S. District Court in Manhattan.
StockX’s action, Nike says in the lawsuit, is likely to confuse consumers and “jeopardize the capacity of Nike’s famous marks to identify its own digital goods in the metaverse and beyond.” In addition to monetary damages, Nike is asking the court to bar StockX from continuing to sell the unauthorized NFTs. The lawsuit and others like it — including filmmaker Miramax’s November 2021 case against screenwriter Quentin Tarantino over a plan to auction exclusive scenes from 1994’s “Pulp Fiction” as NFTs — illustrate the breadth of the financial stakes, as well as the potential conflicts over rights, including branding.
“What’s most salient as far as digitization of a work is how that relates to the trademark rights and the copyrights in that underlying work,” Kornbacher says.
When a digital image — or video or audio — is turned into an NFT and sold, it raises the question of “whether you have started to depreciate or negatively affect the value of the underlying work or unfairly trade[d] on the value of the underlying work in a way that you shouldn’t be able to do, because that bundle of rights wasn’t given to you by the owner,” Kornbacher says.
Such questions will press courts to set precedents based on U.S. laws whose authors didn’t even contemplate the existence of a digital world, much less conflicts arising from it.
U.S. copyright law contained in Title 17 of the United States Code, and based on the Copyright Act of 1976, still uses the term “phonorecords,” Kornbacher notes.
“It hasn’t even gotten close to being able to deal with the metaverse,” she says. “I’m hoping Congress and regulators, like the Securities and Exchange Commission, will step in and start giving answers where we really, really need them.” As Kornbacher pointed out, the metaverse is not the answer to everything; in fact, she reminded people that the prejudices and injustices that exist in the real world, if not addressed, could easily be mirrored in the virtual one.
For more information on the virtual panel discussion, visit the Museum of American Finance.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.