The BackPage Weekly | The Culture, Media and Sport Committee Report: NFTs and the Blockchain: the risks to sport and culture
By Ollie Raggett and Eitan Jankelewitz
The rise of Non-Fungible Tokens (NFTs) in the digital landscape has brought forward a wave of innovation and excitement in recent years, but increasingly has given rise to a complex range of risks and challenges. In previous editions of The Backpage (#2 & #18) , we have explored the opportunities within tech and the metaverse for rights holders both within sport and wider entertainment. NFTs are no different in this respect and have continued to capture the imagination of rights holders, brands, collectors, and investors alike. However, while there has been much uptake and interest in NFTs – particularly as they exponentially grew in popularity throughout 2022 - there has simultaneously been a growing scrutiny on the potential pitfalls and uncertainties that accompany this digital frontier. In its recent report (published on 11 October 2023), the Culture, Media and Sport Committee (CMS) has highlighted some of the key risks of NFTs – particularly relevant to the sport sector.
The CMS’s report followed an inquiry in November 2022 which reviewed evidence on a broad range of topics, from the impact of financial speculation to fraud, scams and intellectual property issues to technological innovations. As part of this review, the committee discussed the most pressing concerns in these sectors. Such concerns included topical issues relating to online advertising of crypto assets in culture and in sport (such as regulatory action against prominent sports clubs and professional athletes) as well as how crypto assets are regulated under the complex UK advertising regime. In this edition of The Backpage, we examine some key takeaways from the report and, in so doing, summarise some of the key risks and complexities surrounding NFTs.
1. Intellectual Property concerns
The most pressing issue to emerge from the report relates to the intellectual property risks posed by NFTs, which impact both creators and consumers. The report identified key areas of concern including:
consumer confusion – purchasers are often not clear as to the extent of their ownership rights in an NFT (which are often non-existent) and confusion regarding the blockchain itself can also hinder understanding as to liability (further discussed below);
safe-harbouring provisions prevent NFT marketplaces from being liable for unlawful content or activity they host (unless notified) which gives little protection to rights holders;
limited recourse for redress – rights holders can only use a notice-and-takedown procedures to ensure removal of infringing work which can be time consuming and not prevent repeat offences; and
inadequate protection – given a continued absence of regulation and codes of practice, there is no authority to set minimum standards in respect of IP protection which would help address concerns around transparency and enforcement of obligations.
The report noted that “Intellectual property laws and copyright protection are central to enabling artists to create, innovate and make a living from their work. Emerging technologies that undermine these protections have a profound impact on individual artists and the UK’s world-leading creative industries more generally”.
2. Legal enforceability of smart contracts
While highlighting the benefits that blockchain can provide to help track assets and demonstrate authenticity, the CMS highlighted its concerns around the use of smart contracts – particularly in respect of their legal enforceability. “Smart contracts, as computer programs rather than legal agreements, are not legally enforceable and, in a practical sense, are constrained by the limits of what can be coded into and executed by a machine.” Without this enforceability, errors (or malpractice) in the data introduced to a system can hinder any right to secure provenance of an NFT and the ability for rightsholders to collect resale royalties.
Eitan Jankelewitz, Head of Sheridans’ Crypto practice notes that:
“The position taken by the CMS on enforceability would appear to diverge from the findings of the Law Commission, which determined back in 2021 that smart contracts are, in principle at least, enforceable, despite being recorded as software. We share the Law Commission’s view and don’t see why a smart contract is necessarily unable to meet the requirements of a binding contract under English law. We do however agree that smart contracts, once deployed and self-executing, can be far more difficult to vary than other forms of contract. This means that any errors are difficult to fix and any gaps are difficult to fill.”
3. Fan speculation (and finances)
The report highlighted the perfect storm of the recent plateaus in professional sports leagues’ revenues and the zero-risk nature of crypto revenue for clubs as fuelling the increasing numbers of partnerships between sports rights holders and crypto companies.
The unique relationship between clubs and fans has resulted in fan speculation on sport-based crypto assets - presenting a real risk of financial harm to fans and reputational harm to clubs. Unbacked crypto assets and price volatility on assets without an intrinsic value present a real risk to fans, particularly given the lack of regulation on both a football and wider NFT market basis. The report stressed the importance of introducing such regulation – particularly in respect of fan tokens to ensure Cclubs deliver on promises of fan engagement.
Clubs may present fan tokens as an appropriate form of fan engagement in the future, in spite of their price volatility and reservations among fan groups, who have voiced preferences for simpler (and more traditional methods) of membership as a means to increase engagement. The report noted that the introduction of an Independent Regulator in English Football (as discussed in our previous edition of The Backpage) could be used to address some of these concerns.
4. Online Advertising
Regulation of NFT-related advertising is divided between the FCA and ASA. Enforcement depends on the nature of the product or service, the advertising medium used and the specific content. There have been several high-profile cases of action taken against NFT advertising in sport in particular, against both individuals and clubs. In December 2021, the ASA proactively investigated and ruled against two adverts for Arsenal’s “fan token” as it failed to illustrate the risk of investment and didn’t make clear the token was a crypto-asset. However, the report noted the wider concerns about the lack of ‘teeth’ and limited enforcement powers of ASA which still remain – albeit these may soon be addressed by way of the upcoming changes to consumer law (as discussed in our previous article)
The report has added to a growing chorus of voices of concern around the risks associated with NFTs. While NFTs offer innovative opportunities for rightsholders, collectors, and investors, they also introduce a complex web of concerns. As NFTs continue to attract attention and investment, the potential for malpractice and market volatility is a wider persistent commercial concern. Despite these risks, NFTs represent a transformative force in the digital world, and their growth will likely be accompanied by ongoing efforts to address and mitigate these challenges – including by the CMS – creating a more secure and sustainable ecosystem for all stakeholders.