The Balancing Act to Securely Sharing Content with NFTs

Blockchain and crypto are taking the arts by storm! Notable bands and artists such as Kings of Leon, Grimes, Steve Aoki, Shawn Mendes, Portugal. The Man, Beeple and Banksy are actively advocating for the use of non-fungible tokens (NFTs) to ensure safer transactions between consumers and products and manage the way in which digital content is curated and shared. Instead of holding physical money to purchase your favorite artist’s new album or art piece, the NFTs will serve as a type of cryptoasset representing items like tickets and music, all while operating on a blockchain that is publicly accessible and secure for all users.

Crypto, NFTs, and the Golden Ticket of Authenticity and Novelty

For context, the blockchain and cryptocurrency industries started off in late 2008 with the release of the Bitcoin whitepaper, and early 2009 with the first (genesis) Bitcoin block. Bitcoin was designed to be a global peer-to-peer digital currency that uses cryptography to allow anyone to participate. Satoshi Nakamoto designed the Bitcoin network, the first blockchain that wasn’t put at risk of tampering or destruction by a central point of failure and couldn’t be transferred by anyone who wasn’t the owner. The cypherpunk community and several digital-native enthusiasts concluded that as more information was represented on-chain (that is, on a permissionless distributed ledger), one will see an increase in the verifiability and utility of data secured blockchains.

As a result, people explored ways to represent unique items like domains, artworks, rights, and digital certificates of real-world claims on-chain, and this led to the development of the Non-Fungible Token (NFT) – meaning that from a custody perspective, no two works of art are the same. The value proposition of an NFT comes from transparency of the token’s ownership, its ease of transferability, and its composability (that is, the ability for people to build additional features or content on top of the NFT). Right now, we’re seeing examples of collectibles, art pieces, and even domain names taking advantage of the speed, tamper-resistance, and composability of NFTs range from Namecoin domains; collectibles in the form of Cryptopunks, Cryptokitties, and NBA Top Shot; and audio and visual works from artists including Grimes, Steve Aoki, and 3LAU.

One of the most exciting design spaces for artists involves granting access to exclusive content to NFT-holding fans. VIP and concert tickets, albums, virtual try-ons, and fan club access are some of the use cases actively being experimented on through artists and collectives like 3LAU, Friends With Benefits (FWB), Beeple, and others. NFTs can also serve as a form of digital authenticity for releases. Over the last few decades, an extensive amount of resources in the media industry have been spent on combating security, privacy, and the theft of unreleased music and movies. Additionally, there are unresolved issues as it relates to proper attribution for digital content like music and content, as it can be difficult to verify who is owed attribution for the first instance of an idea.

“To counter this ongoing debate about ownership and custody, NFTs will eventually serve as a “golden ticket,” serving the owner with a public proof of access and authentic ownership, regardless of how many digital copies are readily available,” said Okiki Famutimi, Senior Associate. “In the future, these NFTs can also represent a direct, more robust connection between the artist and their fans.”

What’s in the headlines?

Some of the big headlines in the past month involve Kings of Leon, Weezer and electronic music artist Grimes. In a Rolling Stones article, Kings of Leon is reported to become one of the first bands to offer special perks with NFTs, including limited-edition vinyl and front row seats to future concerts. Other artists are using NFTs as a form of primary exchange; as Grimes auctioned off $5.8 million worth of digital art pieces within 20 minutes using tokens, with visual artists Banksy and Beeple following suit with their digital artwork, as well. Weezer also sold their new album, OK Human, with NFTs – but it doesn’t stop there. Eli Manning and other stars are also hopping on the NFT train, demonstrating the value of digital collectibles with startups such as SportsIcon, which aims to deliver even more value via sports focused NFTs that direct interaction with athletes.

Vogue Business also confirmed that Gucci will be releasing an NFT as it is "only a matter of time.” All the while, other luxury brands are closely following suit to cater to “multiple industry sources” at a time.

Amid the rising digital commerce landscape, gaming and virtual reality are already activations that several brands have been working on with existing user interfaces and apps. For example, a brand called Enjin partnered with augmented reality platform MetaverseMe to deploy fashion NFTs for digital avatars. Users on their platform will be able to purchase and interact with these NFTs through the platform’s online shopping and “dressing room” features. Genies is another platform looking to generate NFTs that represent exclusive content from Other retailers are creating “digital twins” of real-life clothing items for sale on NFT platforms, which helps give those looking to purchase the fashion NFTs access to the corresponding real-life apparel, all while ensuring legitimacy in the item and transaction.

Additionally, Hasbro is “actively developing [their] opportunities” in relation to NFTs for their digital brands, which include Transformers, MTG (Magic: The Gathering), and D&D. Currently, Wizards of the Coast (creators of MTG) and digital gaming accounts for over $400 million in operating profit for Hasbro, and could potentially unlock new and more engaging business models if extended to collectibles like trading card NFTs.

Considerations for a Safe Sale

Because NFTs are digital art that is sold and resides on the same ledger as cryptocurrencies, there are several legal considerations. Artists, brands, platforms, and marketplaces will develop best practices to address these concerns and others over time. For instance, AML and KYC risks like that of the traditional art world also apply to the purchase and sale of NFTs. While the pseudonymity of blockchain addresses present the potential for bad actors, this risk is mitigated by the fact that many of the highest-volume crypto exchanges are regulated, or indirectly apply with regulations. More importantly, the immutability (unchangeable nature) of blockchain addresses means that over time, on-chain transactions will likely be used for on-chain reputation. Buyers will likely be more wary of NFT projects without an established brand, as people will steer clear of bad actors and scammers.

If an NFT is copied, then that may present a brand or reputation risk for the original creator; brands may consider options like hosting a website that links to the official NFT, as well as disclosures to present legal cover against counterfeit NFTs. Depending on the jurisdiction, it is likely that some of the tax considerations for creators and collectors of art would apply to that of NFTs, while adding capital gains taxes for buying into and selling out of crypto. While that may change, it’s likely that tax regulators will look at the substance of the NFT over the form and assess facts and circumstances of a given NFT to determine which taxes are applicable.

Avoiding the Environmental Repercussions

There is an environmental impact associated with minting NFTs, like most other activities online. Due to the nature of distributed consensus on several current blockchains, energy is expended in order to “mint” an NFT on a blockchain. Coming on the heels of the NYT article about minting NFTs and a notable piece from Harvard Business Review, there are a few important factors for consideration in the issuance process and beyond. For instance, depending on the blockchain one uses, there are NFTs that have ‘less of a footprint than a drawer full of cotton shirts.’ From this, the need arises to understand one’s own carbon footprint. Corporations are presented with the opportunity to understand the ESG profile of their business processes and their carbon footprint, as well as the impact of technology to ensure accurate measurement and reporting. With accurate reporting, tracking and measurement, NFTs are set to revolutionize the way digital content is being consumed and shared. And everyone’s navigating this balancing act together.

The future of NFTs

The future of NFTs can be looked at from two perspectives: the technical perspective, and the social perspective.

Technical

From the technical side, the first concern is scaling. Cryptokitties slowed down the blockchain in 2017, and from that concern, Dapper Labs built the Flow blockchain, and NBA Top Shots as a flagship service on Flow. Transaction fees are lower, and transaction throughput is a lot higher than other chains, making room for different types of NFTs to be built on that chain.

Ethereum, Solana, Near, and other blockchains are addressing issues with transaction fees and throughput natively or with sidechains (like opening and closing a bar tab, but on the blockchain) in order to make their blockchains more appealing for NFTs. The design choices also lower the environmental footprint. We’ll likely see more interoperability in the form of applications, content, and communities built on NFTs.

Developers are actively working on NFTs that build on top of on NFTs, like a hat or a VIP concert pass for your digital collectible, integrations into media, games). Over time, developers and platforms will develop best practices for screening prospective buyers, staying compliant, and ways to securely store the NFT metadata. The resiliency could result in interactive NFTs, NFTs that change over time based on set parameters.

We currently see a few generative art projects like Cryptopunks, ArtBlocks, and others, and once standards for interactive NFTs have been set, communities will build and refine interactive NFTs, similar to maintaining a common area through a community project. Most importantly, crypto wallets holding these NFTs will enhance the ease of use and the utility of these NFTs, as more people become NFT holders.

Social

On the social side, we’ll likely see more interesting NFTs being created, along with more established business models, patterns, and funnels for fans. As brands and artists determine the business models that work best for their craft and their audience, we’ll likely see collectibles, merchandise, and audio/visual sold to fans in more engaging ways. We may even see funnels that convert fans into NFT purchasers, and NFT purchasers into fans who attend concerts in a post-pandemic world. Over time, we night also see crossover NFTs, where artists and brands collaborate on an NFT and split the revenue, similar to crossover television, comics, movies, and albums. Lastly, the maturity and interoperability of the technology will mean that we’ll probably see more instances of NFT ownership representing a new, more flexible tier of engagement for fans.

All in all, NFTs represent the opening of a design space for creating new forms of audio, visual, and interactive art. Artists and creators have already dived into the crypto art space and generated a lot of buzz with these experiments. While there are a number of unanswered legal and environmental questions, there seems to be enough enthusiasm and active development towards solutions. Over time, we believe that the resolution of technical and social considerations will lead to NFTs becoming a household name.

To learn more about Digital Banking and KPMG’s Cryptocurrency practice, please contact Arun Ghosh at arunghosh@kpmg.com.

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