NFTs: An Opportunity for Small Business, A Challenge for Intellectual Property

by Ben King, Attorney/Shareholder

​Non-fungible tokens (NFTs) are a type of crypto technology that made a big splash into mainstream consciousness last year. Sales of NFTs jumped from $82 million in 2020 to $17 billion in 2021, according to NFT data company nonfungible.com. Not surprisingly, big brands are jumping on board.

Fast food giant Taco Bell tested the NFT waters and commissioned a series of GIFs based on dishes from their menu, then sold them online as NFTs. The tokens sold out within minutes of the launch. Taco Bell started their bidding at $1.87. The 5 tokens sold for more than $5,000. Mattel introduced a digital Hot Wheels NFT collection last November, which drove over $350,000 in revenue and sold out within an hour and quickly increased in value on the secondary market.

Although exciting for the future value of these brands, this approach poses the question: Can NFTs translate into profitability for all brands and businesses — small businesses, in particular?

NFTs and Small Business

Historically, big brands can be bold when it comes to trying the latest thing in marketing and advertising. The most successful tactics then trickle down to smaller brands and small business. However, big budgets are no longer mandatory to make things happen in the digital world. Although NFTs are a “new world” for small business owners, the risk can be low and the investment into building NFTs can be even lower if you know what you are doing.

In fact, for small businesses, NFTs can be created and sold to boost marketing initiatives, fund a future expansion or research for a future product. NFTs can be linked to songs, videos or images and each NFT is unique and not interchangeable. One caveat is that an NFT should not be linked to anything of real or tangible value as doing so raises questions of the NFT being a security regulated by the SEC.

Potential NFT applications for small businesses could include:

  • Including reward points for loyalty or membership programs for existing customers with the purchase of NFTs
  • Artists and musicians can sell digital collectibles (NFTs) linked to their music or art
  • NFTs linked to images from local events and concerts can be sold
  • A new, local bakery could advertise the first 20 people who purchase an NFT get a voucher for a free cupcake each week for a year

 

It’s Not All Upside: NFTs and Intellectual Property Challenges

As the creation of NFTs heats up, legal challenges increase as well. One can imagine that NFTs create unique challenges and opportunities for intellectual property (IP). As with other blockchain transactions, the blockchain forming the basis of NFTs creates records of the buyer and the seller in transactions involving NFTs. Buyers must keep in mind, however, that the NFT alone may not transfer ownership of intellectual property of the underlying digital asset. It is the buyer’s responsibility to be sure of exactly what they are getting before they bid on an NFT.

Other concerns:

  • Who has the right to create and sell an NFT?

There will certainly be counterfeit NFTs on the market. An open question is how to prevent others from selling their NFTs that are linked to your digital assets. Of course, copying and selling the underlying digital assets of NFTs without authorization from the original creator could violate the intellectual property rights of the original creator.

  • What IP rights, if any, are being bought or sold?

Sellers and buyers should read the fine print on the platform they are using to transact business. Buying an NFT does not necessarily mean that you have the right to display the token or the underlying digital asset. Sellers may retain certain rights after the transaction. A complete understanding of what is being bought or sold before the transaction will minimize risk for you and your business.

The Bottom Line

As the digital world becomes a larger part of our daily lives, NFTs and the technology behind them have the potential to increase exposure and revenue for all types of businesses, while improving transparency into our digital assets. But before wading into the crypto pool, ensure your company does its due diligence first to ensure the risk is minimal and the reward is worthwhile.