Fashion and NFTs: Where is the legal framework?

The relationship between luxury brands and NFTs appears to be regular for the moment. NFTs are unique cryptographic tokens that exist on a blockchain and cannot be replicated, as defined by Investopedia. NFTs can represent real-world items like artwork and real estate. If sold at the right time, the return on investment can be substantial.

Major luxury brands have entered the NFT market, including Gucci, Louis Vuitton, and Dolce & Gabbana. As we enter the era of Web3, fashion is making sure it gets in on its slice of the pie. NFTs have huge marketing and earning potential for fashion brands.

In 2021, sales of NFTs sent the market soaring to 20 billion dollars. In 2021, sales of NFTs sent the market soaring to 20 billion dollars. Projections see this figure doubling by 2025

Despite the promise of profitability, the legal framework around NFTs can be a little murky. NFTs have no regulations right now, and the NFT market is still growing, along with a slate of legal and regulatory issues. The Financial Action Task Force and the Combatting the Financing of Terrorism and proliferation regard NFTs as "crypto-collectibles" distinct from cryptocurrencies and virtual assets. Issues around NFTs are considered on a case-by-case basis based on what they are.

One of the primary issues for NFT buyers is what rights they acquire when purchasing an NFT. Sellers can still retain copyright relating to the NFT, so in the case of buying an NFT from a brand, like Burberry, the brand can still retain the copyright. Reproduction of the NFT in any form is subject to Burberry’s licensing terms.

Contracts are a significant component of NFTs. Buyers should pay particular attention to the coding embedded, namely royalties and commission on the future resale of the token. Copyright holders hold the rights to an NFT and can freeze users' assets if there is a violation of these terms.

The existing legal and regulatory framework was not well designed to accommodate digital assets. NFTs are difficult to classify, as it is unclear whether they are commodities or securities. No official guidance has been provided as to what NFTs are, but they could fall under the Commodity Exchange Act, which includes several enumerated items and a broad umbrella term “all other goods and articles.” Cryptocurrencies fall under commodities, so it makes sense other blockchain-related articles would too.

There is also the question of whether NFTs are subject to federal anti-money laundering laws. The Financial Crimes Enforcement Network, or FinCEN, has not issued guidance for NFTs, but it has published guidance for virtual currencies which NFTs could fall under.

Cyber security concerns are already a risk already being run with NFTs. NFTs are already being targeted, with some online NFT marketplaces reporting compromised users' accounts in account takeovers where unauthorized third parties have gained access to passwords to access users' accounts. NFT marketplaces need to invest in cybersecurity and IT to reduce the risk of loss and legal exposure.

As an asset, NFTs will continue to evolve, and the legal framework around them will need to as well. Fashion has already shown they acknowledge the value of NFTs, but if the industry is going to keep investing in these assets, strong legal protections and cybersecurity must be put in place.