The Future of NFTs in the Metaverse: Utility and Liability | Shook, Hardy & Bacon LLP

As NFT sales have taken a nosedive in recent months amid ranking speculation, scams and hacks, many rightly wonder if NFTs have any value or utility or if they are just a passing gimmick. The answer is somewhere in between: As an emerging and easily commercialized technology, the NFT market is understandably experiencing growing pains. But as NFT marketplaces and platforms become more secure, regulators step in, and new use cases emerge, this blockchain-based technology is likely to see a resurgence and become a key, if not integral, part of the unfolding Metaverse. In this article, I explore what the Metaverse and NFTs are and could become, and what companies can do to limit liability when selling valuable NFTs in the future.

What is Metaverse

Before I try to define the metaverse, I should first note that the metaverse isn’t quite here yet. Talking about the Metaverse now is like talking about the internet in the 1970s. We have some of the building blocks in place, but we don’t yet know what shape or path the Metaverse will take.

Many attribute the term “Metaverse” to Neal Stephenson’s 1992 dystopian sci-fi novel Snow Crash, in which people connected to the “Metaverse”—a massive virtual urban world—via terminals using VR (or virtual reality) headsets. In June 2021, venture capitalist Matthew Ball published a 9-part essay called The Metaverse Primer, in which he offered his “best spin” on a definition of the Metaverse: “The Metaverse is a massively scaled and interoperable network of real-time rendered 3D virtual worlds that can experienced synchronously and continuously by an effectively unlimited number of users with an individual sense of presence, and with continuity of data, such as identity, history, rights, objects, communication and payments” (emphasis original). 1 In other words, Metaverse is “a quasi-successor state of the mobile Internet” 2 — a new way of experiencing the Internet, one that is not only mobile and dynamic like today’s Internet, but interconnected, immersive and in 3D. Mark Zuckerberg, who renamed Facebook’s parent company “Meta ” in October 2021, has called it an “embodied internet.” 3

In the fully formed Metaverse envisioned by Ball, Zuckerberg and others, users will have avatars, or virtual identities, as well as virtual assets, and they will be able to take both the avatars and assets from one virtual world or platform to another.

What is a “Non-Functional Token” or NFT?

Simply put, an NFT is proof of “ownership” (more on ownership later) of a unique, non-fungible asset recorded on the blockchain. A blockchain, in turn, is a decentralized database consisting of a network of autonomous computers around the world that each validates and records a particular transaction (i.e. “recorded on the blockchain”), thus minimizing the risk of transaction disputes and counterfeiting without the need for centralized supervision. Two examples of blockchains are Bitcoin and Ethereum. The asset associated with the NFT is usually, but not necessarily, a digital asset such as a virtual artwork or video clip which, unlike the NFT itself, is usually not recorded on the blockchain. While the NFT market has taken a hit in recent months, many retailers have already invested in it, such as Ticketmaster, Formula 1, Gap, Under Armor and Adidas, and many others are waiting for the market’s new potential.

In addition to selling NFTs, companies can also use NFTs as a promotional tool and give them away as freebies or as a limited edition collectible. Also, NFTs can be linked with smart contracts – which are simply self-executing blockchain-based software programs – to become revenue-generating entities in perpetuity.

To illustrate, imagine Nike giving you a free Air Jordan NFT when you buy a real pair of Air Jordan sneakers. That NFT gifts are registered on the blockchain. Now imagine that Nike’s gift of Air Jordan NFTs to you was part of a smart contract, where Nike allowed you to transfer NFTs to someone else, and every time you or a subsequent recipient transferred NFTs, Nike automatically collected a royalty. That is the power of the smart contract. And if Nike created artificial scarcity by minting or making only a limited number of Air Jordan NFTs, these NFTs could be the gift that literally keeps on giving. 4

NFTs in the Metaverse

So what do NFTs have to do with the Metaverse? Potentially a lot. Going back to the Air Jordan example, imagine that the Air Jordan NFT wasn’t just attached to a virtual image of a pair of sneakers, but a digital wearable, i.e. virtual sneakers, that you could store in your crypto wallet and equip on your avatar your. In the imagined Metaverse where virtual worlds are interoperable and connected to users’ crypto wallets, your avatar can wear the virtual Air Jordans while world-hopping, with NFTs as proof of purchase and thus the right to wear. For some, buying an NFT-backed virtual good like a Gucci bag or a Ferrari is just an investment. For others, it is a tool for creative self-expression and identity construction, and can provide a sense of community and belonging.

What do you “own” when you buy an NFT?

If an NFT is tied to a purely digital asset, as most are, what are you buying when you buy an NFT? Relatively few have addressed this question to date, and the answer remains unclear. To bring the matter into sharper focus, I will use a recent class action lawsuit against Amazon as an analog. In 2020, Amazon was hit with a putative class-action lawsuit filed by an Amazon Prime subscriber who alleged that Amazon’s description of its movie streaming services as “purchases” constituted false advertising and consumer fraud because, as it turns out, the subscriber actually does not. own some movies that are “purchased”. 5 Rather, the subscriber purchases a license to view the films which may be withdrawn for various reasons, and the films are consequently removed from the subscriber’s library.

While the In re: Amazon Prime Video Litigation is still in the litigation stage, it asks the same question that can be asked of NFTs: What do you get when you “buy” an NFT? Normally, when you buy a painting in real life, you are really only “buying” the physical canvas – you are not buying the intellectual rights to the painting itself. But with an NFT, there’s usually nothing physical associated with it – it’s all IP. And it’s unlikely that companies are going to want to fork over their IP rights when they “sell” you an NFT. More likely they will offer you a license to use any digital assets related to NFT. If Amazon Prime Video is any harbinger of lawsuits to come, I suspect we’ll soon see class action lawsuits popping up in the NFT market over what consumers are actually “buying.”

So how can companies protect themselves from liability in the NFT space? In short, by seeing what they say. If your business is going to license and then sell or give away NFTs, make sure your ads, marketing materials, and especially your license agreements are clear about who owns what and specify that the buyer of the NFT only gets a license to use the digital content (the the portable device, the artwork, the song, the video, etc.) associated with the NFT and not the IP rights to that content.

And if you license third-party content (e.g., as Amazon does with Prime Video and Kindle, or as Nike might do if the NFT sneakers feature images of famous NBA players), make sure your licensing agreement with the third party allows you to pass on those licensing rights to the end consumer or that any applicable third party copyrights or other IP rights have expired. In 2009, Amazon came under fire for remotely deleting digital editions of George Orwell’s 1984 and Animal Farm from readers’ Kindle devices after learning it did not have the rights to them. 6 While Amazon issued refunds to those affected, customers still felt offended, and Amazon faced both bad press and lawsuits. 7

The NFT market has already faced similar controversies. Last November, film studio Miramax sued director Quentin Tarantino when it learned he planned to auction off seven “exclusive scenes” from the handwritten script for Pulp Fiction as NFTs. 8 According to Miramax, Tarantino’s planned auction was in violation of the parties’ contract in which Tarantino assigned Miramax “‘all rights (including all copyrights and trademarks) in and to the film.” 9 The lawsuit, which was settled in September, benefits Miramax. as a warning to others looking to market NFTs potentially fraught with third-party rights.

Conclusion

As the Metaverse emerges and companies perhaps merge, NFTs will be used as far more than just a receipt for a particular virtual good. Because NFTs are recorded on the blockchain for all to see, the tokens themselves are nearly impossible to counterfeit. As such, NFTs can be linked to both virtual and real benefits and at the same time serve as proof of your right to use those benefits. For example, Nike could partner with a virtual gaming platform so that any user who wore Air Jordans in the game world would gain a special power or gain access to an otherwise restricted area of ​​the world. Likewise, an NFT—whether linked to a virtual good or not—can serve as a ticket to a virtual or real concert, allow you to enter a presale of virtual land, or even grant you membership in an exclusive Metaverse- community that promises extra benefits.

The possible benefits that can be attached to an NFT are practically endless (pun intended). We have only just begun to uncover their potential – and the potential liability they pose.

1 See Matthew Ball, The Metaverse Primer: Framework for the Metaverse (June 29, 2021), available at (last visited July 8, 2022). In his long-awaited book that “updates, expands and remakes everything [Ball has] previously written on the Metaverse”, Ball confirms this definition of the Metaverse. See Matthew Ball, The Metaverse and How It Will Revolutionize Everything (Liveright Publishing Corporation 2022), at xv, 29.

2 Id.

3 See Kyle Chayka, The New Yorker, “Facebook Wants Us to Live in the Metaverse” (5 August 2021), available at (last visited 8 July 2022).

4 In fact, Nike has already entered the NFT sneaker business. In April 2022, Nike released its first collection of virtual sneakers, called Cryptokicks, consisting of 20,000 NFTs, one of which sold for $134,000. See Alex Williams, The New York Times, “Nike Sold an NFT Sneaker for $134,000” (May 26, 2022), available at (last accessed July 8, 2022).

5 See In re: Amazon Prime Video Litigation, No. 2:22-cv-00401 (WD Wa.)

6 See Brad Stone, “Amazon Erases Orwell Books from Kindle,” The New York Times (July 17, 2009), available at (last accessed September 12, 2022).

7 See Alexandria Sage, “Amazon Settles Kindle Lawsuit Over ‘1984’ Copy,” Reuters (October 2, 2009), available at idUSTRE59151X20091002 (last visited September 12, 2022). In particular, customers claimed that their digital purchases were deleted without notice or consent and in violation of their purchase agreements, and that any digital notes they had taken on their Kindle editions were irretrievably lost when the books were deleted. Id.; Stone, “Amazon Deletes Orwell Books from Kindle,” supra.

8 See compl. [ECF No. 1] at ¶ 1, Miramax, LLC v. Quentin Tarantino, et al., Case No. 2:21-cv-08979 (CD Cal. Nov. 16, 2021).

9 Id. at 8 p.m.