The Committee on Culture, Media and Sport has just published its report NFT and Blockchain: the risks for sport and culture. The report examines the complexities and challenges of using blockchain technology and crypto assets as means to commercialize the arts and professional sports. He emphasizes that while NFTs have sparked exciting new digital innovations, it is a complex and volatile area that will continue to attract interest from regulators. In particular, if the Committee’s recommendations are followed, we could consider increased regulation of online NFT markets, limits on the use of fan tokens in football and additional requirements on advertisers to mitigate the risk of misleading advertising for crypto-assets.
The report opens by following the rollercoaster ride that digital assets and online NFT markets have been on over the past few years. Interest and investment peaked in mid-2022 (OpenSea, one of the largest NFT marketplaces, reached a Valuation of $13.3 billion in January 2022), but has since declined as investors have turned to other recent developments like generative AI (check out some of our recent thoughts on this topic here).
Nonetheless, NFTs continue to be popular, and their use in new and novel ways over the past few years highlights how emerging technologies can present real challenges to traditional regulatory regimes (take a look at some recent examples of How English courts are grappling with claims regarding digital assets here).
Main areas of intervention and recommendations of the Committee
- In the art Around the world, NFTs have revolutionized the way creators like artists, musicians and writers can create and market their work. On the one hand, this can encourage artists to develop new digital skills and spark the creation of new markets for these works.
But at the same time, the nature of NFTs and the way the digital marketplace currently operates (in particular, the safe harbor provisions which mean online intermediaries are not liable for illegal content they host unless to be informed) mean that it can be much easier for a creator of the work to be made available to the public without their permission. It is also difficult and time-consuming for creators to get infringing works removed, especially compared to the ease of creating an NFT. Together, this creates the conditions for increased risk of intellectual property infringement on a new scale, with limited avenues for recourse and relief.
The report also mentions smart contracts – self-executing computer programs linked to crypto-assets that automatically carry out the terms of an agreement. Although this technology could help creators manage the rights to their works (and, above all, secure revenue from sales), the Committee considered that “Smart contracts, as computer programs rather than legal agreements, are not legally enforceable and, from a practical perspective, are limited by the limits of what can be coded and executed by a machine…“. This is an important topic in its own right, with broad practical and legal implications. If you want to learn more about smart contracts, check out some of our thoughts. here.
- Regarding sportsthe report cites examples like NBA Top Shot’s Collectible Moments, limited-edition NFTs of music videos depicting NBA highlights, as well as similar products such as utility tokens that give fans access to certain membership privileges and benefits beyond owning an NFT. The Committee expressed concern that these types of digital products are being used to extract additional revenue from supporters and that the speculative nature of crypto-assets could result in a risk of financial harm to supporters and harm to the reputation of the clubs. He recommended that the next football regulations explicitly exclude the use of fan tokens.
- On advertisement of NFTs, the report indicates that their “tectechnical, volatile and largely unregulated nature» means that their advertising carries a significant risk of harm to consumers, even for legitimate products.
Where to go from here?
The report broadly concludes by recommending increased engagement between regulators and stakeholders to address the risks of intellectual property infringement and the potential for financial harm to sports fans and, more broadly, misleading advertising and/or fraudulent use of digital assets. We will monitor how policymakers continue to address these challenges and seek to strike the right balance between innovation and protecting individual ingenuity in the future. Content creators, advertisers and investors will need to keep a close eye on the direction of travel, as things can change quickly in this space, and divergence between jurisdictions. In the meantime, you can take a look and some other recent thoughts on NFTs here here.