Apr 12, 2022

Fashionable forgeries: NFTs in the metaverse

The Metaverse is the gateway to a new consumer society. Blockchain's main milestones include the creation of property rights over digital goods or assets in an entirely virtual environment, enabling users to interact and operate with them through animated avatars that aspire to become exact holographic replicas of each one of us.

Most blockchain networks allow the creation, registration and trading of digital assets that do not have a physical underlying and which, by their nature, are visible to the public at large, like a showcase.

Fashionable NFTs

Companies in the fashion and luxury sector, where exclusivity is the main value driver, are aware of the potential of these digital assets, known as "NFTs" (Non-Fungible Tokens).

Haute Couture brands such as Burberry, Balenciaga, Gucci, and Louis Vuitton are carving out a whole new niche market. Their commercial activity now transcends the barriers of the physical world by offering digital fashion items and garments in the form of NFTs with the aim of building loyalty, if not expanding their target consumer base.

The first NFTs minted by fashion and luxury companies were purely collector's items and therefore items with limited use. Today, they are looking into designing exclusive lines of digital fashion accessories focused on the online gaming industry, which is by far the largest source of income for metaverse companies.

Through the acquisition of these digital garments, gamers can show their own identity and stand out from the crowd inside the Metaverse, achieving an immersive capacity that in a short period of time is expected to equal real life.

While the idea of enjoying a right of ownership over an asset that is intangible might at first seem less attractive and trustworthy to consumers, the public blockchain networks on which all transactions and trading of virtual assets - primarily Ethereum - take place provide unprecedented security, meaning that the ownership of a virtual asset or NFT is digitally traceable and verifiable, and non-susceptible to appropriation by hackers, as the consensus algorithms on which the blockchain is based prevent an NFT from being snatched by a third party to whom it does not belong. And it is thanks to the security of this new concept of ownership that a more dynamic, borderless, and tariff-free economy is flourishing in parallel to the traditional financial system.

Is it possible to forge an original NFT on a public blockchain network?

First, prior to putting any digital accessory into circulation, it is advisable for these fashion and luxury companies to go to the Intellectual Property Registry in order to request original status for these assets.

Once this is done, when one of these companies mints an NFT under its brand in the corresponding blockchain network, it is automatically registered through an original hash code or genesis that is unique and unmodifiable, together with a time stamp, guaranteeing its authorship and originality. Therefore, by definition, no two NFTs can be the same.

However, the fact that each NFT is unique and irreplaceable does not prevent anyone from minting a new NFT and reproducing on it the same image or a slightly modified copy that can be mistaken for the original, on the same or a different blockchain network on which the original was registered, whether or not they have rights to it.

These replica NFTs will have a hash code different from the original and a subsequent timestamp, so to avoid this type of fraud, potential purchasers will need to check these two technical aspects before each purchase, with the burden and responsibility of such checks falling on them alone. This information will probably go unnoticed by most, as consumers often have a negligible understanding of what they are actually purchasing.

Although there is currently no specific regulation on NFTs, nothing prevents these plagiarising behaviours from being considered as a crime against intellectual property, provided for and punishable under Article 270.1 of the Criminal Code. This provision punishes with up to four years' imprisonment anyone who, for profit, "reproduces, plagiarises, distributes or in any other way economically exploits" a work or artistic performance fixed "in any type of medium or communicated by any means", without the authorisation of the holders of the corresponding intellectual property rights.

It seems clear, therefore, that the conduct of anyone who distributes or offers for sale an NFT that is an identical or substantial reproduction of another's previously copyrighted work without the consent of the copyright holder not only isn’t in legal limbo but may be punishable by law.

In short, the evolution of the virtual world has fully entered the fashion and luxury sector. And in the rush to position themselves at the forefront of the innovation and opportunities presented by the NFT market, brand owners and consumers are exposed to an unfathomable ocean of criminal risks. The current lack of regulation provides an incentive for unauthorised third parties to frequently mint and offer non-original NFTs for sale at high prices in an attempt to profit financially from these not easily understood disruptive phenomena.

Given these circumstances, it is necessary, on the one hand, to implement an ironclad policy of verification of ownership (or know your client) to make the NFT market more transparent and, on the other hand, express regulation with, at least, a minimum degree of centralisation to enable globalised and monitored treatment of the NFT market.

For all questions regarding the topics raised in this blog, please contact Javier or a member of our team of digital asset legal experts.

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