Expert Speak Digital Frontiers
Published on Aug 29, 2022
Proper regulations need to be put in place to control the NFTs’ impact not only from a climate perspective but also in the ethics and legislation around intellectual property.
The ethical cost of NFTs in Art: A focus on the fashion Industry As cryptocurrency began gaining popularity, the advent of digital assets aside from digital currency, based on the same distributed ledger technology (DLT), was foreseeable. Non-fungible Token (NFT) refers to licensing or proof of ownership of a digital asset on the DLT or blockchain. NFTs can be any digital or digitised product from the “first” of anything (like the first tweet ever) to new art forms. NFTs have created a new, more approachable market for new age and contemporary artists. In 2021, an auction house successfully sold an NFT of a piece of modern art for a whopping amount of US$ 69 million compared to other more famous works, like that of Van Gogh, which sold for nearly half this amount despite its historical relevance and global recognition. NFTs have also been advantageous for museums, who have sold NFTs of art pieces that have worldwide recognition to gain funds in a famously underfunded field.

The reproduction of art as an NFT only refers to a unique code of an image, and thus, does not come under existing IP laws.

The novelty of NFTs lies in their inability to be duplicated, i.e., the blockchain assigned to each is unique, so counterfeiting of NFTs does not hold the same risk as with counterfeiting of digitised/ digital art. NFTs are, thus, the perfect merger between art and technology.

Regulations for NFTs

Despite these advantages of increased markets, raised funds and reduced digital reproduction, the unregulated NFT space does not provide desired safety for artists, collectors, and sellers. One gap in the current NFT regulations is the legal implications of buying, selling, and even digitally reproducing art under intellectual property (IP) rights. Currently, the reproduction of art as an NFT only refers to a unique code of an image, and thus, does not come under existing IP laws. This regulatory gap has presented unethically for artists and collectors. In one case, a hosting museum denied a sculpture loan to its artists. The artists then created an NFT of their statue and sold it to reappropriate their IP. This sparked a legal battle regarding the constitution of ownership in cases of recent art production. Aside from legal issues around ownership and intellectual property, specific ethical issues are also part of the discussion around NFTs. One such ethical issue pertains to the climate implications of NFTs. In the present day, NFTs are mostly purchased and traded using Ethereum. Though Ethereum looks to engage in green technologies and is currently the least harmful cryptocurrency platform, the impact is not negligible in terms of carbon emissions. For example, the previously mentioned art piece resulted in a single transaction equivalent to the carbon emissions of a US household across approximately six days. The fashion industry, in its recent attempts to reclaim itself after the criticisms of fast fashion, has tried to wipe itself of controversy around labour practices, steep pricing, and greenwashing. However, these ethical issues persist even in, if not predominantly, the more prominent brands of “high fashion.”

Though Ethereum looks to engage in green technologies and is currently the least harmful cryptocurrency platform, the impact is not negligible in terms of carbon emissions.

Since the introduction of NFTs, the fashion industry has also begun to incorporate novice innovations into its offerings. This began with its advent into digital fashion and now Augmented Reality (AR). The fashion industry has marketed these new-age concepts as more ethical due to the reduced dependence on labour. The fashion industry has also increased investment in NFTs to increase customer loyalty. Unfortunately, using AR fashion and buying digital fashion in the form of NFTs are a significant burden on the climate. Just through Ethereum (a greener option than its counterparts), a single transaction is equivalent to 140,893 transactions with a Visa credit card. Beyond the issue of climate change is the conversation around intellectual property in fashion. In the physical world, the existing IP laws view fashion as “useful articles” compared to “art forms”. Thus, the current IP rights do not govern the fashion and clothing industry. With the introduction of NFTs, the views around the reproduction of fashion have changed. In 2022, Mason Rothschild created NFTs for Hermes signature bags called MetaBirkins. Hermes sent a letter of cease-and-desist, and since there has been an ongoing lawsuit. The case is tackling questions such as whether NFTs can qualify as artistic expression; what permissions NFT production and reproductions require; is an NFT a subproduct of the physical item or separate from it. This case and its outcomes will establish critical legal precedents around these and other digital assets. As an expected outcome, the rest of the fashion industry has started launching their own NFTs or creating virtual assets to protect their IP in Web 2.0 and Web 3.0. Another ethical issue is the volatility of NFTs in association with cryptocurrencies and its exploitation of vulnerable buyers and collectors. The unsustainable momentum behind NFTs has been acknowledged, mainly since a rapid drop of 85 percent in aggregated value occurred in under a month, indicating a silent bubble crash. Despite this, investors are still bullish on the underlying technology. In the fashion industry, Gucci and Tiffany & Co have continued to venture into the world of DLTs. Gucci has begun accepting crypto-based payments, and Tiffany is launching NFT-related products.hn Demand in the NFT market has slumped in recent months, with resale value decreasing in performance that washed out around  US$ 10 billion from the crypto sector’s total value. Still, large consumer companies continue to see NFTs and Web 3.0 technologies as promising ways to engage with customers in the Metaverse. This volatility often acts as a way to exploit investors who invest money into unregulated spaces and enables money laundering.

The unsustainable momentum behind NFTs has been acknowledged, mainly since a rapid drop of 85 percent in aggregated value occurred in under a month, indicating a silent bubble crash.

NFTs are vulnerable to many ethical and legal issues of misconduct. Wash trading, referring to selling an NFT between set buyers to inflate prices before selling to actual buyers, is one issue consistently brought up in art circles, resulting in fraud and money laundering. Another issue amongst NFT aficionados is the Rug Pull (creating marketing hype around a product or event and not delivering after having collected the money from buyers.) In the NFT market, if the purchase goes through, permissions for resale are sometimes blocked to prevent further transactions. Other forms of social engineering and scamming are also prevalent, where bad actors imitate NFT representatives and gain crypto-wallet data to steal cryptocurrencies from the susceptible. These issues, along with the existing ethical issues (greenwashing, underpaid and unpaid labour, and appropriation) of the fashion industry, present a space that requires regulatory support beyond IP rights. The fashion industry, acting as a tangible and accessible form of art, therefore, presents a case for the dilemma of the ethical use, production, and reproduction of NFTs. These issues only act as precursors to what will exist once we can access complete immersion in the Metaverse and AR and digital fashion become more prominent for the user’s avatars. It will take an industry-wide shift to reverse the NFTs’ impact not only from a climate perspective but even in the ethics and legislation around intellectual property and loopholes that have allowed the exploitation of the vulnerable thus far.
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Author

Shravishtha Ajaykumar

Shravishtha Ajaykumar

Shravishtha Ajaykumar is Associate Fellow at the Centre for Security, Strategy and Technology. Her fields of research include geospatial technology, data privacy, cybersecurity, and strategic ...

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