This article originally appeared in Law.com on May 20, 2022. It is republished here with permission.
Companies across all industries are jumping into non-fungible tokens (NFTs), looking to capture what they perceive to be huge business opportunities.
Lawyers working in the space see myriad reasons for optimism, despite a recent slump in NFT sales and a host of tricky legal and regulatory issues that companies entering the field must navigate.
NFTs are digital certificates recorded on a blockchain, a ledger distributed over decentralized computer networks. NFTs can be anything from digital art and collectibles to a plot of land in the virtual world known as the Metaverse. Digital certificates are a key cog in Web3, a new iteration of the internet built on blockchains.
Missing opportunities in this emerging field could be catastrophic, said Louis Lehot, partner at Foley & Lardner in California.
“Businesses that don’t scale will cease to be competitive,” he said.
Some companies are already launching bold actions. Earlier this month, video game publisher Square Enix sold many of its major video game properties, such as Tomb Raider, to fund its entry into the NFT space.
Those taking such action are undeterred by a nearly 92% decline in NFT sales in the first week of May, compared to last September’s all-time high, according to data from market tracker NonFungible.
Meanwhile, NFT startups raised $2.4 billion in Q1, representing 25% of all blockchain funding. Lehot said this shows the market is doing well and has barely slowed despite the decline in transactions.
“The flow of capital into new transactions is still at a blistering pace,” Lehot said. “We have agreements as if nothing had happened on the public markets.”
Rob Potter, partner at Kilpatrick Townsend & Stockton in New York, said established brands will have varying degrees of success selling NFTs to less technically savvy mainstream fans.
Potter is familiar with how businesses can interact with NFTs and Web3. He wrote an article for the Association of Corporate Counsel at the end of last year offering advice to CGs on the subject.
He said tying NFTs to more traditional marketing opportunities and promotional benefits, such as customer loyalty programs or exclusive products, is a safer bet.
For example, Clinique leveraged its loyalty program earlier this year by offering its members the chance to earn exclusive NFTs tied to products releasing each year for the next decade.
In March, rock band Kings of Leon eliminated music publishers by releasing their latest album as NFT. It removed all unsold NFTs after two weeks of sale, no longer being manufactured.
These examples are just the tip of the iceberg, Lehot said. For example, mobile developers can use Web3 to distribute apps directly to customers without going through app stores. He added that going through Big Tech costs developers 25-30% of gross revenue and can be unreliable at times.
These developers could even choose to remove payment systems, transacting with self-issued tokens or NFTs.
General counsel should determine which parts of their business are digital and require transactions through Big Tech entities, the attorneys say. If blockchains and Web3 can eliminate these intermediaries, this company could be well suited to experiment with NFTs.
Max Dilendorf, a New York-based cryptocurrency and Web3 attorney, said venturing into NFTs and other blockchain technologies offers big opportunities but also big risks.
He said the Solicitor General must ensure that their businesses comply with money laundering regulations, such as the Currency and Foreign Transactions Reporting Act 1970, commonly referred to as the Bank Secrecy Act. .
While this may seem surprising to the uninitiated, Dilendorf said NFTs carry a money laundering risk because the decentralized technology makes their transactions untraceable.
Once the legal teams cover that territory, Dilendorf said they should refresh the regulatory landscape, which is in flux.
Securities and Exchange Commission Chairman Gary Gensler last month announced plans to tighten regulation of blockchain technologies and nearly double the size of the agency’s Crypto Assets and Cyber Unit.
Potter said working with experienced partners, including outside attorneys, can help GCs navigate regulations.
“It’s who you want to start with to get that perspective, because it’s rapidly changing,” Potter said.
Firms should also feel comfortable selling an extremely risky asset, Dilendorf said, referring to the recent decline in NFT prices.
The average price of an NFT was around $1,400 in April, according to NonFungible, compared to $4,000 in February.
He said buyers should be informed and understand that their investment may drop to zero at any time.
“That way you protect yourself against future claims,” Dilendorf said, emphasizing. “[This way,] your buyer can’t come and say, “I lost $5,000 and I want my money back.”