NFTs in the entertainment industry

What is an NFT? 

NFT’s are commonly created (minted) on the Ethereum (ETH) blockchain – a distributed ledger technology (DLT).  How DLTs work is a separate topic, on which much has already been written.  In the case of Ethereum and NFTs, when an NFT is minted, the details of that NFT (including additional information such as metadata and/or a URL linked to digital content like an MP3 file) are logged onto the blockchain (or “ledger”) as a time-stamped and unalterable “block”.  This is then “distributed” to a decentralised, peer-to-peer network of devices, known as “nodes”, forming a “chain” for the data – hence the terms “blockchain” and “Distributed Ledger”.  Each node verifies changes to the ledger, as well as entry of new blocks onto the ledger, by comparing the data on the ledger against the ledger held by all of the other nodes, meaning that there is no single point of failure susceptible to alteration by a bad actor.  In short, NFTs are both unalterable and verifiable, without the need for a centralised authority implementing or verifying the transactions.  

This does not necessarily mean that the digital content associated with an NFT is unique – any number of NFTs could be minted, even in respect of the exact same digital content.  What this does mean, however, is that each NFT can be distinguished from any other, even if the associated digital content is identical.  This is the reason they are deemed “non-fungible” – one NFT cannot be exchanged for an equivalent other, unlike traditional currency or other cryptocurrencies, such as Bitcoin, which are fungible.  It is this quality that makes an NFT have the potential to be collectible . 

How are NFTs monetised?

The use-case for NFTs does not stop at the sale of artwork.  The entertainment industries have embraced the technology (potentially, in part at least, due to reduced revenues during the pandemic from physical sales and events) and have devised creative uses for a verifiable, traceable and non-fungible token.   For example, NFTs have been used: 

• as vehicles for demonstrating the originality or uniqueness of an artistic work (for extra dramatic, the original artwork could then be destroyed) ;
• to distribute tickets for events  - as each ticket would be logged and verifiable, ticket resales would be traceable or preventable and counterfeiting (theoretically at least) would be impossible;
• to sell both virtual and/or physical merchandise - the video game industry has begun to link NFT’s to in-game items, and some games now are even based on the technology (often mimicking the appeal of collectable trading-card games) ; and
• to host a beer-pong tournament with Post Malone .

There are now several platforms on which NFTs can be bought and sold depending on the use-case, such as OpenSea .  These platforms typically sell minted NFTs to the public, either at auction or for a fixed price.  Sales are usually in exchange for cryptocurrencies, often ETH itself, and agreements are executed via smart contract, commonly subject to the terms and conditions of the individual platform.  This means payment is often made immediately on the sale by linking the purchaser’s crypto-wallet to the smart contract.  

The value of an NFT often resides in its rarity or collectability.  As such, a key consideration for purchasers will be whether the creator of the NFT could create more NFTs for the same asset, in effect diluting the rarity and value in the NFTs already sold.  For this reason, some consider NFTs to be a high-risk investment.  Those commentators question whether the upsurge in NFT sales is a bubble ready to burst, as opposed to a stable investment vehicles for collectibles in future years. 

Additionally, some commentators have raised environmental concerns relating to NFTs.  As DLTs require multiple thousands of nodes to verify transactions, each transaction on the blockchain is inherently very energy-inefficient, with some estimates equating a single NFT’s carbon footprint to a month of carbon emissions for an average EU citizen .  Ethereum is already looking for a solution to this issue , and high-profile NFT sellers have, in the past, offered to offset the carbon impact of the sale . 

Despite the concerns raised by some, the current buzz around the potential applications of NFTs in the entertainment space is undeniable, as the industry has continued to see commercially successful NFT projects launched, and with an increasing frequency. According to one Reuters report, the NFT industry saw total sales expand from $13.7 million in the first half of 2020 to $2.5 billion in the first half of 2021, after seeing a significant rise in uptake in February 2021 .  In light of this, it is no wonder that many creators and entertainment companies are keen to capitalise on what they see as an opportunity for an important new revenue stream.  

NFTs and IP

Purchasing an NFT is just that – a purchase of the token itself.  It does not intrinsically include the underlying intellectual property (IP) rights in the work associated with the NFT.  The terms for the sale of Mike Shinoda’s single expressly note that the NFT purchasers “have no right to license, commercially exploit, reproduce, distribute, prepare derivative works, publicly perform, or publicly display the NFT or the music or the artwork therein”.  This is not a new concept for purchasers of creative works – a purchase of an original painting does not also grant rights to produce prints of that painting, which remain with the copyright owner (normally the work’s creator).  In fact, artists for physical works have additional rights, including resale rights in the EU, which (in theory) provides down-stream revenue for artists as their works are sold between collectors .  

NFTs could prove to be an effective way for digital artists to equitably benefit from re-sale of their works.  Although this would not currently fall within the EU legislative regime, there is no restriction on contracting for such rights on first sale, which could be executed via smart contract and would provide automated income for the artist without the need for active enforcement.  Perhaps the most famous example of this is Beeple’s sale of "Everydays: The First 5000 Days", which was resold at Christie’s for 1,000% more that it was originally sold to a collector for .  The artist made more from the resale than the original sale, due to an automatic 10% resale royalty executed via the NFT platform Nifty Gateway .  

It is important to ensure that purchasers of NFTs are aware of what rights are incorporated into the sale of the NFT, to prevent accidental IP infringement.  As discussed, in most cases purchasers of collectibles will not be purchasing associated rights to exploit the underlying IP.  However, it is feasible for rights in respect of a copyright work (or other underlying IP) to be included with an NFT, but this will always be subject to the terms of the individual deal (and potentially raises rights-clearance issues).  For example, some musicians have tied royalty rights to a single or catalogue to an NFT, which is then auctioned, allowing fans to “invest” in the artist in a meaningful way via smart contract whilst given the musician a mechanism to realise a large up-front payment . 

Closing thoughts

It can be tempting to draw analogies between emerging technologies like NFTs and traditional methods to prove an artistic works’ provenance.  Comparisons have been made between NFTs and certificates of authenticity - think collectibles and antiques or signatures on original pieces of art.  They may also be akin to proof of a “limited run”, denoting the specific number of a print for an artistic works print run.  In truth, NFTs are their own unique case.  Essentially, an NFT denotes originality and, frequently, rarity (of the NFT itself, but not necessarily of the underlying work).  

It is easy to see their value in, for example, digital art, Historically, each physical canvas painted by an artist would be unique and inherently “non-fungible” – a trait that up until the adoption of NFTs could not be replicated for digital art.

Critics attest that any connotation of rarity relating to NFTs is both arbitrary and contrived.  It is true that anyone could use a Nyan Cat gif, whilst only one can own the NFT issued by the artist for the same gif (which sold for roughly $600,000 worth of ETH) .  The one-off nature of the NFT is a construct of the artist’s making.  However, this is arguably no different from issuing a limited print run, or tightly controlling the copyright over an original piece.  Plenty of artists sell NFTs as collectibles, and do not claim that they are “one offs” (for example, Deadmau5 sold thousands of digital collectibles in December 2020 ).  Scarcity in the creative fields is, more often than not, attributable to intellectual property owners limiting the supply of those works.  

It is understandable that, for some, the lack of a tangible object to assign this scarcity to is a deal-breaker.  However, as the surge in NFT activity has proven, this is not a barrier-to-entry for all collectors, and the NFT industry continues to be legitimised as it is adopted by traditional auction houses, such as Christie’s.  

As this market grows, it is understandable that artists will want to exploit the potential additional revenue stream.  The key to doing so responsibly will lie in educating the relevant public as to the new (and as such unknown) risks in buying such collectibles, the rights associated with their purchase and how to account for the potential environmental impacts.  

As specialists in intellectual property and commercial law, with a deep understanding of both the entertainment and technology sectors, we at Simkins are well-placed to advise on the legal and commercial issues surrounding NFT exploitation. Please contact us if you would like further information on our capability in this area, or if you have any questions relating to the subject matter of this article.