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Non-Fungible Tokens: Key Issues for Rights Holders

Monday 26th April 2021

The sale of non-fungible tokens (‘NFTs’) have rocketed over the past few months, presenting a significant revenue generating opportunity for rights holders within the sports and media space. In this short update, we set out some key legal and commercial issues for rights holders to consider when contemplating issuing NFTs.

NFTs are digital assets that are ‘minted’ using blockchain technology, allowing for a digital record of ownership and authenticity which enables the assets to be purchased and sold on marketplaces. By removing the need for third party verification and allowing for secure and instantaneous sales, NFTs have revolutionised the collectibles market within the sports and media industry. For example, the National Basketball Association’s (‘NBA’) Top Shot range of memorable video clips (essentially digital playing cards) has already generated in excess of $300 million in sales. In addition, individual athletes such as Patrick Mahomes and Rob Gronkowski (both NFL players) have issued NFTs, generating multimillions in sales. In the music industry, artists such as Lewis Capaldi and Kings of Leon have also issued NFTs, creating an additional source of revenue at a time when touring and concerts are restricted due to the COVID-19 pandemic. A key advantage of NFTs in contrast to the traditional collectibles market is that rights holders are able to generate revenue from both the initial sale of the NFT and subsequent sales on the secondary market.

NFTs clearly offer opportunities for rights holders in the sports and media industry and we have set out some key issues to consider below:

#1 Commercial Strategy

To maximise returns, rights holders need to identify assets that would be valuable within the NFT market (and not just the primary NFT market, but also the secondary NFT market given the revenue share on such sales a rights holder can obtain). In addition, NFTs could present interesting opportunities for collaboration to maximise value – for example, two boxers could release a range to commemorate a particular fight or an athlete, artist or influencer could release a range in tandem with a particular brand.

However, all rights holders will need to consider the intrinsic value of NFTs: their scarcity. As such, whilst rights holders may be tempted to enter the market as quickly as possible to take advantage of the recent NFT ‘bubble’, careful thought should be given to the assets chosen to ‘mint’ and the number of NFTs issued to avoid any diluting of the market.

#2 Intellectual Property and Other Rights

NFTs generally include an underlying asset, for example, an image or video clip (as in the NBA Top Shot range). As such, before an NFT is minted, issuers needs to ensure they actually hold the relevant rights or licences to the underlying asset, whether that means holding the relevant intellectual property rights or ensuring they act in accordance with any applicable licences, image rights arrangements or data protection requirements. Any issues related to the underlying asset could lead to costly legal action whilst also diminishing the value of the NFT itself.

#3 Contractual Matrix

It is likely that any rights holder will already have significant existing commercial arrangements in place, particularly in terms of merchandising and sponsorship. As such, rights holders will need to consider any such arrangements to ensure the issuing of NFTs does not conflict with them, as well as considering the impact on future arrangements they may wish to put in place.

#4 Choosing the right partnership

Rights holders will need to enter into partnerships with third parties that are able to ‘mint’ the NFTs using blockchain and create and manage the platform upon which sales of the resulting NFTs are made (similar to the role Dapper Labs has played in the creation and management of NBA Top Shot). There are now several such providers operating within the space that are likely to offer varying commercial terms to rights holders which should be factored into any decision to partner with a particular provider. In addition, rights holders will need to ensure that the relevant terms and conditions used in respect of the sales on any such platforms (whether on the primary or secondary market) accurately reflect the arrangements in place so that rights holders are not inadvertently granting more rights than intended to NFT holders whilst also ensuring they comply with any consumer law obligations.

If you would like more information on any of the points raised above or any advice in connection with the same, please contact David Bentham (Partner) or Tom Simpson (Associate)