Exploring the NFT phenomenon: A token approachBy Industry Contributor 23 June 2022 | Categories: feature articles
By Kim Rampersadh, partner at Adams & Adams
Since 2021, we have seen the rise and rise of NFTs (non-fungible tokens). The NFT boom has been powered by the sale of NFT artwork, the first-ever tweet on Twitter and even popular memes, which have all fetched a pretty penny.
The hype following the minting and sale of some NFTs has also brought into question the rights of NFT owners versus the rights of brand owners and copyright holders, whose underlying intellectual property, it seems, may have been filched in the creative or frugal pursuits of others. Courts have been tasked with considering whether NFTs relating to a rap album, uncut movie scenes, images of branded bags and virtual and physical sneakers constitute an infringement of intellectual property rights, amongst other legal violations. In the legal fraternity it has even been said that these cases will determine the future of NFTs.
Interestingly, these cases may well still be decided on the fundamental principles of trade mark and copyright infringement. Even so, in a bid to safeguard their interests and err on the side of caution, brand owners have sought to register their trade marks in relation to goods and services that ensure that they have coverage for or rights in relation to NFTs or, at least, virtual goods.
With the immense commercial interest in NFTs and the largely publicised litigation concerning these specific NFTs, in South Africa, at least, we have not yet turned our attention to NFT or blockchain domains, also called Web3 domains, which, for the moment, seem pale by comparison to the NFTs dominating headlines. This article is intended to highlight the significance of NFT domains for brand owners.
The internet that most persons know and use today, Web2, uses the Domain Name System (DNS). The DNS includes domain names (e.g. google.com) that ease our browsing of the internet. These domain names are governed by a central authority which regulates their registration, sale, use and transfer. Many brand owners have registered domain names in different domain name extensions (e.g. .com; .org; .love ; .shop) which contain their trade marks. Domain names take the place of IP addresses, consisting of a string of arbitrary, hard-to-remember numbers and are therefore valued for being user-friendly.
Typically, they are available on a first-come-first served basis and they are one of a kind (e.g. coca-cola.co.za or adams.africa). Domain names are linked to websites and therefore secure brand identity and custom online. In light of their utility and value, prominent brands often fall victim to cybersquatting, which includes trafficking in domain names, closely resembling a brand, to benefit unfairly from that brand’s reputation and magnetism. However, with the regulation of the internet or Web2, mechanisms have been put in place to limit the degree of cybersquatting and assist brand owners in addressing bad faith domain names.
Web3 is an alternative or new version of the internet and is decentralised because it is based on blockchain technology, the same technology that underpins the much-publicised NFTs and cryptocurrency. With the innovation and rise of cryptocurrency, the domains market has and continues to evolve. It has become a space for crypto investment and not simply a means to create a virtual presence.
The appeal of cryptocurrency is the ability to transact without the need for a bank. However, those transactions were complicated by the fact that the transaction had to be made to a crypto wallet, which like IP addresses, consist of a long line of arbitrary numbers or characters. Web3 domains take the place of those complex crypto wallets and are intended to break the barriers to transacting in cryptocurrency. In addition, these NFT domains or blockchain domains can resolve to a website and, since they will not be centralised or regulated by one controlling body, the owner of the domain will have complete autonomy over the content of that website.
These domains are also susceptible to squatting or token-squatting. The private companies currently providing blockchain or NFT domain names use different technologies which affect, for instance, the cost of acquiring these domains and their accessibility on certain internet browsers. Examples of blockchain domain extensions currently offered include .crypto and .nft.
A Web3 domain name, unlike a Web2 domain name, may be fully owned and controlled by one user. The transfer of the Web3 domain name is subject only to the consent of that user and is without the involvement of any controlling body or domain name registrar, which can make addressing an infringing Web3 domain name challenging.
The inherent risks associated with these domain names is that, in addition to linking to a website that mimics the official website of a brand owner, it will be linked to a crypto wallet and possibly even decentralised blockchain applications, including social media applications. Web3 domains are therefore being heralded as universal virtual and physical identities.
Despite their innovation and convenience, it seems clear that these domains may well be used to take advantage of consumers and that risk is more apparent in a world where virtual goods are being prioritised, in some cases, over physical goods, and even paid for in cryptocurrency. With this in mind, brand owners should likewise consider the development and effect of Web3 and NFT domains on their businesses and virtual presence.
Insofar as enforcement goes, we continue to follow developments and landmark cases with a view to creating a playbook for dealing with Web3 infringements. Time will tell if we have an innings or whether Web3 is a passing phase with no real intercept with the world wide web or physical realm.
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