Recently, Marc Beckman, senior fellow for the NYU SPS Metaverse Collaborative, chief executive officer, DMA United, and best-selling author of The Comprehensive Guide: NFTs Digital Artwork, Blockchain Technology, penned an article titled “The Business of Law: On the Verge of Disruption” for the New York State Bar Association website.
Here are a few excerpts from his article where he discusses the impact of web3 on the practice of law:
- Web 3 is disrupting all aspects of the law, from drafting contracts and filing documents to storing records and establishing trademarks. As corporate leaders, government entities, and philanthropic organizations embrace this technology, tech-savvy attorneys who understand the implications will be rewarded with enormous opportunities to expand their businesses.
Well-known companies are already plunging into the web3 world to generate new revenue, carry out high-profile marketing campaigns, launch philanthropic initiatives and reach a younger demographic. Popular brands adopting the new technology include Dolce & Gabbana, Tiffany, Gucci, Adidas, Time Magazine, Budweiser, Nickelodeon, and Pepsi are jumping on the web3 bandwagon and becoming part of the Metaverse -- a shared digital environment where participants can socialize and form communities in such areas as gaming, academics, and sports. McKinsey & Co. estimates that the metaverse, supported by VR, AR, and social media, will grow to a $5 trillion market by 2030.
Even cities have joined the metaverse with several government leaders across the country using blockchain technology to attract tourism, combat urban decay, create new revenue, and secure confidential records, to name a few uses. Reno’s mayor, Hillary Schieve – a visionary leading the charge in the web3 space – is leveraging blockchain technology to: launch a digital city key that provides owners with exclusive access to unique experiences across the city; create a public art fund (the Space Whale); and establish the first recordkeeping system to provide a register of historic places (the Biggest Little Blockchain). Reno, like other cities, has an opportunity with cryptocurrency to provide citizens with a new, accessible, practical, and affordable way to hold money and transit business in lieu of a traditional credit card. Deloitte predicts that 75% of retailers will accept some form of cryptocurrency as payment within the next two years.
- Intellectual Property is one of the first areas of law to see change with NFTs driving the need for more clarity around “rights” of ownership. Initial questions center on the type of rights conferred by the sale of NFTs – a piece of data permanently embedded on a blockchain and providing a decentralized ledger that records all transactions in a peer-to-peer network. NFTs are being used as a digital asset in artwork, music, and film, but also in more unexpected areas such as real estate and sports.
One of the more central legal issues in the purchase of NFTs is whether the purchaser can use the NFT however he or she sees fit, such as showing it, licensing it, or selling it to another third party. Another issue being raised is how to define a purchaser’s legal rights: Is it necessary to execute a traditional, long-form contract or does the code embedded in the NFT provide sufficient rights? Or, can a company use an NFT that incorporates the trademark of another entity for marketing purposes? This issue is being hotly debated in the suit Nike brought against StockX, an online secondary market retailer who is minting NFTs that feature the Nike swoosh mark on its digital artwork. At stake is whether StockX misappropriated Nike’s protected mark for marketing purposes.
Nike is just one example of a leading company wrestling with the issues being raised as businesses – small and large, new and established -- begin to transition into the metaverse. Ownership is driving the conversation but the potential prize from who wins the battle over rights is really what is at stake. Nike has generated almost $200 million in revenue from its sales of NFTs, but an even larger piece of the pie resides in the secondary market where close to 68,000 transactions have occurred worth almost $1.3 billion.
Even after purchasing digital artwork, some NFT collectors are unsure of what commercial rights they have. Is it possible for the holder of an NFT to further monetize the digital artwork and, if so, how? Where are these rights expressly stated? Is the information only found within coded material?
And, the IP issues raised by web3 don’t stop with the purchase of, for example, digital artwork. Other questions include the lack of clarity on what commercial rights owners actually have: Is it possible for the holder of an NFT to further monetize the digital artwork and, if so, how? Where are rights expressly stated? Is the information only found within coded material?
Even though these issues remain unanswered, are confusing, and could be potentially costly to those brave enough into venture into the metaverse, significant investment continues to flow into the NFT digital artwork space. Owners of NBA Top Shot digital collectibles, which are expensive, are often surprised to hear of the limitations on their rights, i.e., owners’ rights limited to personal display of the digital artwork. In spite of these limitations, the NBA Top Shot platform has exceeded $1 billion in transactions involving the sale of collectible “moments,” or modern-day digital playing cards with in-game highlights.
Other more creative entrepreneurs, such as the Bored Ape Yacht Club -- a property with a $1 billion market cap and a current floor price for each NFT trading at nearly $120,000 – see the granting of full usage rights as a way to raise the property value of the entire community. The notion of full usage rights seems to have taken off with Club owners monetizing their digital assets by creating, selling and marketing a variety of physical items, such as coffee, water, candles, hoodies, and CBD creams. One Bored Ape owner even signed a recording deal with Universal Music Group to launch a new digital Ape band called “Kingfish.”
And finally, the issue of ownership is a reminder of Andy Warhol’s use of iconic corporate trademarks in his artwork, such as Coca-Cola bottles and Campbell soup cans, which paved the way for modern artists to use valuable and protected trademarks in their art. Ownership of digital artwork, especially in the area of protected trademarks, is at the heart of the legal debate underway: Does the use of a trademark apply to digital artwork sold as an NFT? Is this new medium for artwork comparable to a printed edition or an exploitation of a valuable trademark sold as a new type of object? How should a company prepare to protect its intellectual property in web3? The stakes continue to be raised as more examples of trademark infringement collide with the metaverse.
- Other areas, such as Real Estate, Contract law and Securities are also experiencing web3’s impact, with some in these sectors just now seeing the tip of the iceberg.
In the real estate sector, lawyers are already showing enthusiasm for Web3 when it comes to buying and selling real estate with the use of NFTS as a deed, which can provide the public with a true history of ownership and price value and validate the existence of a buyer’s funds in almost real time. And tokenization, smart contracts, NFTs and blockchain protocols will significantly change and improve how fractional ownership takes form, with leading hotel owners, such as Aspen St. Regis Resort already issuing Aspen Coin, an asset-backed digital token that gives owners part ownership in the resort. The two leading metaverse real estate platforms, Decentraland and Sandbox are valued at nearly $1 billion each and have attracted major digital property owners, such as Sotheby’s, Samsung, and PricewaterhouseCooper.
Physical real estate legal knowledge will also be required in the digital space, with significant room for potential investment in prime real estate locations as we saw a century ago in Fifth Avenue and Rodeo Drive. Investors anticipate valuable, community-based metaverse opportunities will emerge in areas beyond real estate, including in retail, banking, live events, gaming, academics, and more.
As web3 takes hold, real estate issues will grow in importance with lawyers needed to consider innovative investment vehicles that can provide first-time opportunities to individual investors, such as partial ownership of real estate. And, down the road, real estate developers will need to seek legal counsel to avoid having their new digital assets classified as securities or getting blindsided by other emerging entanglements.
It is important to note that the changes underway are occurring in both the physical and digital worlds, such as in contract law where smart contracts are defining the rights of parties and providing conditions that automatically execute and agreement when realized. In web3, the terms of an agreement are built into the coding of a smart contract and then permanently embedded into a blockchain. Now attorneys and their clients can employ blockchain technology to hold and secure records to land deeds, personal identifies, such as driver’s licenses, voting records, payments for royalties and charitable donations, wills and trusts, and talent agreements.
Other changes are equally significant. The Securities and Exchange Commission Chairman Gary Gensler and the agency’s enforcement lawyers are determining whether digital assets should be defined as securities. Paperless filing is a game changer and can increase the legal profession’s client base by offering more affordable legal services. This streamlined and paperless process can also eliminate costly errors often found with manual filings.
- Sooner, rather than later, new regulations and laws will be needed to govern the changes underway as part of the adoption of and transition to web3.
The Biden Administration is already working to manage web3’s impact with its recent issuance of the multi-faceted Executive Order on Ensuring Responsible Development of Digital Assets. This sets the stage for lawyers to begin shaping federal governance under Web3, and, if made legally binding, will have ramifications for businesses and government agencies operating across the globe.
Several initiatives seem likely as more legal and governance issues are raised in the Metaverse. Congress will enact new consumer protection regulations, which may constrain the surge in entrepreneurship and rally free-market capitalists, but begin to establish a perception of safety and certainty. This sense of security surrounding innovation, will in turn, attract new investment and encourage more widespread adoption of web3 technology. Other government agencies, such as the Federal Reserve, are considering creating a Central Bank Digital Currency to ensure “a safe and efficient payments system, which is designed to provide a more stable digital currency for consumers but will move power from the individual back to the government, despite Web3’s decentralized nature.
Biden’s executive order addressed the global financial system with signs of its impact already underway. Russia recently established its own digital currency to settle payments with China and to avoid SWIFT-related sanctions (Society for Worldwide Interbank Financial Telecommunication). As public sector agencies step up their governance activities to address web3 legal and other issues, the private sector is also joining in by attempting to provide Congress with technology-based solutions, such as an automated, self-regulating approach to cryptocurrency to manage the safety and regulation of web3.