NFTs Hit the Mainstream and Risk Follows | woodruff sawyer

These “overpriced pixels” quickly became a new status symbol for pop stars, professional athletes and wealthy entrepreneurs, and in turn propelled rapid growth in peer-to-peer marketplaces that support digital asset trading. Iconoclastic monkeys, punks, owls, and skeletons have become popular avatars and streetwear illustrations. Emerging artists with names like Beeple, XCopy and Mad Dog Jones have embraced this world of digital art, creating something of a crypto renaissance with digital pieces of meta heroes, political commentary, surreal still lifes and dystopian worlds. And the big brands have taken notice.

Luxury brands Gucci, Tiffany and Mercedes Benz are joining Main Street brands Coca-Cola, McDonald’s and Frito-Lay in their new Web 3.0 ventures. Same Time magazine joined the fray, releasing TIMEPieces with an inaugural mint that features an interview with Ethereum’s Vitalik Buterin.

Each company’s NFT strategy can vary greatly. Indeed, their strategy can change with each strike. But are there new risks associated with a technology as nascent as Web 3.0? The answers can be surprising.

Promotional campaigns

This summer, the History Channel made waves with its promotional offer of a limited number of NFTs during the popular Shark Week series. Viewers were prompted by a QR code between segments with instructions to download the free NFTs which featured stills of their favorite sharks in action. McDonald’s plans to distribute a limited number of NFTs with McRib starting in November. Fans of the limited-time sandwich will have a chance to win a free NFT during McDonald’s marketing campaign celebrating McRib’s 40th anniversary.

Superfans of both brands may appreciate the novelty of these NFT offerings, but the monetary value of their NFTs likely won’t increase over time. The brand risks associated with this type of promotional campaign are limited, but vendors assisting in minting run the risk of copyright and intellectual property violations without the proper clearances from these brands.

Collectibles

Coca-Cola, Kia and Tiffany have developed NFT collectibles with different strategies. Coca-Cola donated NFT artwork by fashion designer Rick Minsi in July to celebrate Pride Month, with proceeds benefiting LGBTQIA+ charities. Kia Automotive replaced its street-savvy hamster characters with DASK (Dark Army Skeleton Krew) skeletons in a TV commercial for its Soul SUV. Viewers were given a brief preview of a QR code with download instructions for a free promotional DASK NFT. The offerings were quickly exhausted. Perhaps the most frustrating hit comes from jeweler Tiffany & Co., with its NFTiff offering. Consumers are offered a limited number of unique Crypto Punk NFTs minted as NFTiff. The NFTs then grant the right to purchase a personalized Tiffany necklace and pendant featuring the Crypto Punk.

These strategies differ because the NFTs offered contain intrinsic value, even though some are part of a marketing promotion. NFTs are immediately tradable on peer-to-peer trading markets. Corporate governance challenges are surfacing as federal anti-money laundering laws are increasingly enforced with NFT creators.

Metaverse

For fans and collectors seeking sanctuary in the metaverse, UPS, Frito-Lay, and Mercedes Benz are here. UPS and Frito-Lay have filed new trademarks to offer products, services and multimedia in the metaverse. Full details of each offering have yet to be announced. Mercedes Benz, however, has released NFTs of its iconic G-Class SUV. Now status-conscious collectors can take their “G-Wagons” into the metaverse.

The creation and development of the metaverse is in its infancy. However, crimes including NFT theft and fraud are already making headlines.

Access control/Ticketing

Sports franchises, entertainment venues and concert festivals are exploring NFTs that provide special access and enhanced fan experiences.

As NFTs are offered as virtual tickets, the technology allowing entry to the site varies. If these NFTs don’t work properly or slow down the entry process, NFT issuers can find themselves exposed to reputational damage and class action lawsuits from fans not authorized to access.

Fractional ownership

Perhaps one of the biggest areas of potential growth also contains the biggest risk for NFT issuers. Recording artists and independent filmmakers have struggled with production contracts perceived as unsustainable for these artists. The criticism is that film and music studios retain disproportionate shares of revenue streams from unit sales, touring and other sales promotions. As a result, artists are exploring ways to monetize their work while marketing it directly to their fans with, perhaps, different levels of super fan-only customer experiences.

The idea is compelling. Artists would offer their work as NFT which gives fractional ownership to that work, while artists would retain most intellectual property rights. In turn, the artist shares this split portion of subsequent royalties with the owners of NFT. Artists can also reward NFT owners with periodic content or product drops. This new approach would also encourage owners to promote the work of artists in order to increase future royalty payments.

This idea, while attractive, could put the publisher against the Securities and Exchange Commission (SEC) with the authorized sale of unregistered securities, according to the Howey test. Currently, the SEC is pursuing several cryptocurrency issues and trading platforms under the same securitization theory as envisioned by these artists. For publishers, this represents another high risk that their directors and officers need to consider, along with governance requirements, technology risks and cyber exposures.

Where to turn

The insurance underwriting community has proceeded with caution when offering insurance solutions to incumbents launching Web 3.0 initiatives and digital asset organizations natively based on this technology. The impact on scope of coverage and pricing can vary significantly from company to company.

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