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Retail Academy: NFTs and the future of retail

Posted on 31 March 2022

From virtual fashion collections to video game accessories, many retail brands are now experimenting with non-fungible tokens (NFTs) as a way to broaden their consumer base and drive engagement.

On 8 March, we hosted our first Retail Academy session, in which we looked at the burgeoning world of NFTs, what is driving their popularity, and the strategic, technological, legal and practical considerations for brands looking to explore the market.

To view our full Retail Academy programme, please click here.

Visit the Academy for more learning, events, videos, podcasts and reports.

How are NFTs being used within the retail sector?
Lewis Cohen, Commercial Partner & Co-Head of Retail, Mishcon de Reya

Retailers are using NFTs in all different ways at the moment.  They are experimenting, they’re trying to find different ways of engaging with a customer base so you are seeing everything from in-game skins and in-game clothes to digital art to collaborations with third parties, it really is a kind of open sea of, of different usages at the moment as, as they try and test new ways of using NFTs.

What are NFTs?

Tom Grogan, OBE, CEO of MDRxTech and Co-Lead of Blockchain, Mishcon de Reya

A non-fungible token or an NFT is a type of crypto asset, the emphasis though is on the non-fungible bit, so that basically means that it can’t be readily exchanged for another crypto asset of exactly the same value so the classic example is if I owe you five pounds, you don’t really care whether or not I pay you back with a five pound note or five, one pound coins or whatever because they are totally fungible, they’re, they’re readily exchangeable for each other.  If I owe you a piece of art work though, I probably can’t settle that debt by sending you another piece of art work that is totally different because there is unique characteristics of that first piece of art that you want and value more.  NFTs basically bring that non-fungibility to the crypto asset space so they are unique assets in the digital realm that people value for their own unique non-fungible characteristics.

What legal issues should you consider when exploring NFTs?

Sally Britton, Partner, Head of Brands and Co-Head of Retail, Mishcon de Reya

There’s really been an explosion of interest in NFTs in the retail world particularly in luxury and lots of our clients are talking to us about how to enter that market but what is clear is that many of them don’t have the appropriate brand protection in place.  So what we are doing with clients is we are looking at their portfolios, we are stress testing them and seeing if they are fit for purpose for this new world, this new metaverse.

Lewis Cohen, Commercial Partner & Co-Head of Retail, Mishcon de Reya

Because this is a nascent area the companies that are occupying the space and providing content are often quite new so there can be a challenge around knowing who you are contracting with, how deep are their pockets, are they reliable and when they say they are doing checks that you need to make sure are being done, are they actually going to do them, are they going to do them to the standard that protects your brand and your reputation.  Another issue that retailers need to consider is actually ensuring that what they are doing is legal and they are not breaking the law because in the UK for example, there are strong anti-money laundering rules and regulations that in many instances can make this a criminal offence so it is not something to mess around with.

Charlotte Wilson, Partner, Regulatory, Mishcon de Reya

If you are issuing tokens in the UK which would include NFTs, if you are arranging for the exchange of either fiat or crypto for crypto or you are making arrangements for someone to exchange fiat or crypto for crypto or you are arranging for them to do so, then subject to some quite limited exemptions you are likely to fall within the scope of the UK Money Laundering Regulations and have to comply with those and the biggest commercial issue we are seeing for our clients with that is not only do you have to comply with the regulations but you also have to register for supervision with the FCA and that process is taking upwards of a year to get in place.

Lewis Cohen, Commercial Partner & Co-Head of Retail, Mishcon de Reya

The final issue to think about is ensuring that if you are launching an NFT that it complies with advertising laws and gambling laws and it is not a security as well.

Nick Nockton, Partner, Head of Betting and Gaming, Mishcon de Reya

When you get into the gamification of any kind of digital asset you are talking about potentially providing facilities for gambling.  If you are using for example, a game of chance if the mechanic involves chance or if potentially it involves any form of betting it’s quite a realistic possibility so you need to get specialist legal advice.

Sally Britton, Partner, Head of Brands and Co-Head of Retail, Mishcon de Reya

This is a new environment for brands and there are many challenges because people don’t really know what’s out there, how to use NFTs and what the regulatory landscape is and I think you need to get good advice and take the appropriate steps to protect your reputation in entering this phase.

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