Following the launch of its inquiry in November 2022, the Culture, Media and Sport Committee, a cross-party group of MPs, has now published a report discussing the risks to sport and culture posed by NFTs and the blockchain.
The report considers that the regulatory framework around non-fungible tokens (or NFTs – digital tokens which exist on the blockchain) may not be sufficient and recommends the need for increased protection for both consumers (who choose to invest in crypto-assets, often without appropriate awareness of the risks) and creators (whose works may be susceptible to copyright infringement if used as part of an NFT). In particular, the report discusses:
Art and culture
- NFTs pose a real risk of copyright infringement for creators (whereby existing art is replicated for the purposes of an NFT without permission);
- current safe harbour provisions (comprising exemptions which are granted to online intermediaries that host third party content) mean that NFT marketplaces are not liable for infringing content until they are notified that such content is hosted on the site. This is often reflected in the marketplace’s terms and conditions which exclude liability for copyright infringement, payment of royalties, fraud, etc;
- the vast numbers of NFTs and the ease with which they can be minted mean that conventional takedown requests for infringing content may not be practical;
- therefore, the Committee recommends that the Government engages with NFT marketplaces to address the scale of copyright infringement and enable copyright holders to enforce their rights;
- NFTs can offer new revenue streams for professional sports clubs;
- in addition to NFTs, clubs can offer “fan tokens” which provide additional benefits and rewards to holders and are intended to increase fan engagement;
- investment by fans in NFTs and fan tokens is not without financial risk which is often not sufficiently communicated to fans;
- therefore, the Committee recommends that clubs should not present fan tokens as an appropriate form of fan engagement;
- NFTs are unregulated and volatile meaning that advertisements encouraging consumers to invest in NFTs carry risk, particularly, where such advertisements may be false or misleading; and
- therefore, the Committee recommends that the Government respond to evidence on misleading and/or fraudulent advertising for NFTs and ensure that any regime compels the entirety of the advertising supply chain to take steps to mitigate the risks of harm to consumers from the marketing of NFTs.
Putting the MP’s report aside, the market for NFTs and fan tokens is evolving fast. There was a rapid rise and then an even speedier fall in the popularity of NFTs and fan tokens over the last couple of years. There have also been some regulatory developments. For example, the ASA has already issued rulings that make it very clear that the risks of fan tokens and similar crypto assets must be made clear in ads. The FCA has also clarified its position on crypto assets.
Despite this, there are still deals to be done (although we are seeing shifts in their nature). This demonstrates that, to an extent, the market is already reflecting the concerns that the report raises. For example, NFTs are being re-positioned as “digital collectables” and some rights holders are limiting how these can be dealt with, moving them away from ‘investments’ by only allowing trading in exchange for other digital collectable items in the same series. This, in effect, makes them the digital equivalent to physical Top Trump, Panini, or Pokémon cards.
In the last 12 months there has also been a hiatus in the excitement over the metaverse. However, with increasing sophistication in related tech (for example, lifelike graphics generated by powerful, upgraded engines), we anticipate a renewed enthusiasm for metaverse projects in the next year or two. Many of these are likely to integrate NFTs/digital collectibles, or fan token-type blockchain backed assets with real-life utility, to enhance the users’ metaverse experience. These, of course, also generate additional revenue for the platforms and rights holders working together to develop these new online worlds.
For now, at least among consumers, there remains widespread misunderstanding of how these crypto assets actually work, what rights they grant, their value, and related risks. However, it seems that the Committee is perhaps behind the curve on these more recent developments too.
In view of the special relationship between club and fan that engenders greater trust in officially endorsed products (which is identified by the report), the desire for additional regulation to protect consumers in the UK is understandable, and some of the proposals are laudable. However, existing laws and regulation in the UK are versatile and can be used to deal with IP infringement and the most egregious advertising. Market forces may well also hold the industry to account more quickly than regulation can, so is there a need for additional specific regulation?
Further, as with all quickly evolving technologies, the law will inevitably struggle to keep up. As such, the law-makers face an uphill task and it will be interesting to see if this is considered a big enough issue for the government to prioritise. If, in the meantime, the major players which the report seems to be targeting (i.e. the big trading and advertising platforms, and the sports rights holders) take steps independently to clean up the market and ensure their reputation is not tarnished, the impact of additional regulation may be relatively limited.