Non-Fungible Tokens, Record-Breaking Applications & the Counterfeit Implications of the Metaverse: Part 1

The Anti-Counterfeiting Committee is excited to bring UnscrIPted a series of articles related to the evolving digital landscape, highlighting non-fungible tokens (NFTs), new mobile and web-based applications, branding in the metaverse and artificial intelligence.

NFTs: the Basics

An NFT can be described as a piece of digital content that is linked to the Ethereum blockchain. An NFT can be any digital asset, a unique way to represent art, collectibles, drawings, and anything else that requires provable ownership. NFTs can only have one owner at a time and are not interchangeable for other items as each NFT has unique properties. Simply put, no two NFTs are the same. According to ethereum.org, NFTs give the ability to assign or claim ownership of any unique piece of digital data, trackable by using Ethereum's blockchain as a public ledger.  NFTs ownership is digital, and anyone can create an NFT and subsequently view and sell an NFT online. This new wave of crypto assets has impacted and in some ways, disrupted, a number of industries.

Counterfeit NFTs

The NFT market quickly became a billion-dollar industry, but large-scale issues of fraud, theft and counterfeiting followed suit. Artists and creatives have had issues with protecting their art from the initial rise in popularity of NFT marketplaces. Now, as brands across all industries continue to navigate this new space, all rights holders must proactively incorporate new and innovative ways to ensure their trademarks and copyrights are not used without permission or in association with a “catalogue” of digital content that they have not authorized. For many brands, monitoring IP rights in the physical world continues to present its challenges. The gatekeeping of unauthorized uses of trademarks and copyrights in a new, virtual space, is sure to present similar challenges to those of physical goods, with an added layer of uncertainty, particularly with respect to effective enforcement measures taken against the makers of the counterfeit virtual goods. Further, though virtual counterfeits can undoubtedly impact the Metaverse - consider, for instance, replicas of virtual assets created and sold only through digital marketplaces - virtual counterfeits can also impact brands in the physical world. 

Over the last several months, various brands from the high-end luxury to athletic apparel segments have brought claims for trademark infringement and trademark dilution against NFT creators that have released collections of NFT’s, which, from the “real world” brand owner’s perspective, closely resemble their brand assets, such as their trademarks or trade dress. While these lawsuits provide some novel guidance on how these digital assets can be dealt with in relation to intellectual property infringement in the physical world, many of the same considerations of a traditional infringement claim are debated, particularly with respect to a likelihood of confusion analysis. Are consumers likely to incorrectly assume the tangible goods are affiliated with the NFT collections being created and published by others? Even if consumers do their due diligence and determine the brand owner is not the creator of the NFTs or related digital content, NFTs, it is still possible that some may assume a licensing or partnership between both parties? If yes, there is a real discussion to be had regarding the possibility of virtual assets leading to brand dilution for a brand originating in the physical world.

New Marketplaces & Hurdles to Effective Enforcement

By now, most brands and rights holders have an effective online enforcement plan in place based on the shift and increase in online activity over the last 24 months. Though the increase in sales of NFTs and crypto assets may have been anticipated, the rampant sale of counterfeit digital sales and plagiarism took over some of the largest platforms at an alarming rate. In January, OpenSea, one of the largest NFT marketplaces, shared via Twitter that more than 80% of NFTs created with its free marketplace NFT tool were plagiarized works, fake collections and spam.

In response to this discovery, the platform worked towards making immediate changes to its user policy and the implementation of solutions that will prevent bad actors from abusing its free tools consequently infringing others’ rights. However, since OpenSea is mainly a self-serve, peer-to-peer marketplace, it is easy for users to create a variety of works that infringe others’ intellectual properties instantly. Despite the IP Violation reporting system that is in place and encouraged to be used, individuals and creators will likely continue to capitalize on their digitally created content that incorporates famous names and logos.  

In the counterfeit space, the phrase “whack-a-mole” has been used for years to describe the constant quest to keep websites and marketplaces free from counterfeit and infringing goods. Though it may feel like the same game of “whack-a-mole” is being played with respect to the Metaverse and NFTs, there are notable differences between “real world” counterfeiting, and counterfeit in the metaverse. When one is successful in enforcing their IP rights against a seller of counterfeit goods (as in physical products), the infringer must work on obtaining more product from their supplier, and often reinvent themselves, in order to post and sell again. Conversely, when a takedown request is submitted for a digital asset, it is not nearly as burdensome for a tech-savvy creator to find a new platform, or even use the same platform, to create the same and/or infringing content. Moreover, detecting a counterfeit NFT may be more difficult for consumers since this is a new space for many. Some NFT marketplaces verify collections and their creators, which acts as a check of authenticity for consumers as they navigate their first NFT purchase. However, the volume of collections that have been surfacing in recent months makes this verification process an increasingly difficult task for many online NFT marketplaces. This, in turn, creating a heavier burden on purchasers to confirm the legitimacy of their purchase.

Many brands have been vocal about their launch into the Metaverse - or for some, their reluctancy to join. As brands, rights holders, and creators continue to navigate both the opportunities and challenges connected to creating, selling, and participating in the Metaverse, it is imperative for all stakeholders to publicly disclose information and campaigns that can assist individuals from unknowingly purchasing counterfeit or plagiarized NFTs and related digital assets.

To Be Continued…