NFTs have sprinted through the hype cycle, from frenzied enthusiasm to disillusionment in less than 24 months. Signals are hinting that they may have reached the ultimate stage of the cycle: productivity.

The crypto winter chilled a large cohort of investors previously emboldened by a steady upward march in digital asset valuations. Bored Apes, secured by FTX-stored tokens sailed from their virtual yacht club to oblivion, as the celebrity-backed craze ran aground while the speculative NFT market plunged by 97 percent between January and November 2022, prompting a call for dropping the term ‘NFT,’ in favor of ‘digital collectibles.’ Since then, Bitcoin, Ethereum, a basketful of established cryptocurrencies, and even the Bored Ape NFTs have stabilized, although at greatly reduced valuations as speculation calms in digital finance, and the worthless investment vehicles dissolve. From this chill, green shoots of productivity for retail could be emerging as venture capital-backed technologists are repurposing NFTs and related blockchain-based technologies.

Retail NFT Pioneers

CEO of the NFT platform Arienee, Pierre-Nicholas Hurstel, spoke with The Robin Report at a recent trade show. He detailed the company’s partnership with exclusive watchmakers IWC and Breitling, for which it has created digital product IDs verifying provenance, product attributes, ownership history, warranties, etc. He continued, describing the platform as the next iteration of CRM, with loyalty programs, product drops, and exclusive access to events for verified owners. Hurstel exclaimed, “Finally, we have found the killer use case for NFTs.” Interest in the Arienee platform has expanded beyond watches as luxury and contemporary apparel brands and retailers, Moncler, Galleries Lafayette, Printemps and others have signed on.

Skeptics would take Hurstel’s projections with a grain of salt, but luxury houses LVMH, Cartier, and Prada seem to agree in principle. The industry leaders have created a consortium, building an alternative digital passport system similarly grounded in the blockchain. The Aura system uses RFID tags and NFC microchips (small, embedded chips that activate receivers in cell phones and devices, supporting mobile payment systems and other functions) attached to products during manufacturing to develop transferable, but tamper-proof digital ownership certificates. The luxury consortium, The Aura Blockchain, was established as a not-for-profit partnering with technology firms Microsoft and ConsenSys to reduce counterfeiting and support sustainability claims. The Aura blockchain allows for traceability, following products from raw materials through resale. The founding companies have been joined by Jil Sander, Marni, Bulgari, Maison Margiela, and others.

Recapturing Value

Resale continues its ascent, grabbing an ever-increasing portion of annual apparel spend. McKinsey projects that the secondary market will experience a 10-15 percent annual growth rate over the next decade. Luxury brands have been slow to capitalize on the trend, but that appears to be changing. Balenciaga quietly opened a resale platform nearly two years ago and recently, fully integrated resale into its ecommerce strategy. Coach (ReLoved), Oscar de la Renta (Encore), Isabel Marant (Vintage), and Gucci (Vault) among others, have established branded resale platforms, hoping to capture residual value. In an recent episode of The Debrief, BoF technology consultant Marc Bain opined on the role NFTs may play in the secondhand market as brands hope to deploy the digital tokens to generate resale royalties. Bain explored the benefits, challenges, and value capture of this strategy. While NFTs may prove beneficial to luxury resale, logic with imply that they are perhaps more useful in general resale platforms, eBay, The RealReal, Vestaire, etc., where product origin is less secure.

ESG and End-of-Product-Life Efficiencies

For businesses operating in the increasingly challenging regulatory environment, particularly in the E.U., digital passports may prove useful in demonstrating a brand’s progress in sustainability efforts, while also satisfying consumer expectations by demonstrating alignment with stated ESG goals. The Eon platform generates what it calls a CircularID. Working with Yoox Net-A-Porter, Target, PVH, Chloé and other companies, it connects products to supply chain information stored in the cloud. This information goes beyond informing consumers and regulators, it stores an item’s material breakdown data, facilitating sorting, recycling, or disposal. in addition to Eon, other ESG-oriented digital traceability platforms have emerged including Fibretrace which specifically monitors denim, and Circular Fashion which encourages a closed-loop apparel recycling system from garment design through recycling or end-of-garment-life.

Buyer Beware

Virtuous sustainability efforts and traceable technology offer both risks and benefits. Brands and designers duped by untrustworthy suppliers may have tainted ESG data immutably cemented in the blockchain, exposing the brand to credibility, regulatory, and safety risks. When considering any public-by-default initiative such as NFTs, or alternative blockchain-based systems, the benefits of transparency are countered by the costs of exposure. Trade secrets or proprietary supplier information will be publicly available in any transparency-based NFT or the underlying blockchain. Stored information can never be edited, obscured, or deleted. For retailers with less than airtight supply chains, the adage of garbage in, garbage out, becomes garbage in, garbage forever associated with your brand in the blockchain.

Who is the Winner?

Have we discovered the killer use case for NFTs in retail? Have NFTs achieved the productivity stage? Let’s examine the questions and weigh the implications.

• Watches, leather, faux leather, and other durable accessories are practical vehicles for NFC chips that unlock a link to the consumer. Designers and brands can use this customer touchpoint to incentivize end users to engage with attractive benefits.
• Garment traceability is trickier, if a customer removes a QR coded tag, the brand’s phigital(digital/physical) connection to the product is cut. NFC chips embedded in apparel are difficult to remove and counter sustainability options as they complicate recycling efforts. Traceability is a regulatory benefit for luxury brands, but a challenge for large retailers with unwieldy supply chains.
• Authentication benefits the resale market and the consumer, but will it benefit the brand or designer responsible for its implementation and the related expense? The incentives inherent in luring high-value goods away from owners to facilitate brand value recapture will by necessity be high. Consumers may instead choose general resale platforms, allowing them to sell authenticated goods directly through established resale channels and private networks.
• If luxury brands are successful in establishing resale channels, will that kill already struggling online resale platforms, reducing consumer choice, and limiting the upside for sellers?
• Will consumers agree to wear or carry products that are trackable?

I could go on with implications but I will stop here. NFTs are useful under certain conditions, but is retail the “Killer use case for NFTs?” Not to equivocate, but the answer is, it all depends. For luxury brands, yes. Authentication, digital ownership certificates, and supply chain visibility add value to high-ticket items, and unlock new customer engagement channels. In general consumption, brands should carefully explore the implications for their company and consumers. While NFTs may be a solution for specific brands, they are a solution in search of a problem for others. Retail is heterogeneous. It is a fool’s assumption that an app, or any technology is a panacea that will solve for a weak strategy or execution. The killer solution is adaptive and agile leadership and culture that addresses the problems to be solved, rather than outsourcing a remedy to technology.

The Council of Fashion Designers of America (CFDA) recently announced it will be celebrating its upcoming 60^th anniversary by “looking to the future” with a metaverse, Web3, and NFT exhibition in December. While the subjects of the event may be unfamiliar to many, organizers hope to use it to show fashion players the opportunities that are becoming available in the digital world.

“Our vision at 5Crypto and with this partnership is to empower and educate Web2 brands on the limitless opportunities Web3 presents, and create special moments that bridge the gap between consumer and crypto,” said Akbar Hamid, founder and CEO of 5^th Column and 5Crypto, a communications agency for cryptocurrency, metaverse, NFTs, and consumer brands. More on Web2 versus Web3 in a bit.

Confusion currently reigns when it comes to NFTs and Web3, which gives brands the opportunity to be interpreters of this shopping arena. This makes even more sense when one considers that online shoppers turn to retailer and brand websites the most (35 percent) when they’re looking for ideas for online apparel purchases, according to the Cotton Incorporated Lifestyle Monitor research

The CFDA event will include a metaverse exhibition (metaverse can mean augmented or virtual reality, or avatar/gaming reality, among other things) of 60 looks from the CFDA’s six decades, as well as exclusive NFTs (non-fungible tokens) that will go up for auction.

The Shape of the Future

Valentino Vettori, founder, Arcadia Earth, a platform that aims to raise awareness about sustainability and circular design, says fashion companies can start creating values and relationships with their clients through Web3, NFTs and crypto currency. During a presentation at the recent Coterie New York show, Vettori described Web2 as a website where the brand sells to others. He then explained Web3 almost like crowdsourcing – where a brand would be owned by whoever buys a piece of the company through non-fungible tokens or crypto. It could be owned by a 100 people or a million people, depending on the value someone creates for their company. The ownership is then distributed through digital assets like NFTs, whose ownership can be tracked through blockchained smart contracts.

“NFTs can remain a simple loyalty program where if you own my NFT, you can participate in my fashion show, or if you own my crypto currency, you may own part of my brand,” Vettori explained. “Let’s say I released shoes and I put beautiful pictures on the digital contract that says if you own the shoes in the physical space, you also own them in the digital space. Once you own the shoes, you also get to resell them. If it was a limited collection, that has value and now you can make money from it. Also, if you’re someone with no money but you have a lot of friends and you want to start a fashion business, you can create a brand and break it into tiny little pieces. And then you create a crypto (Vettori says it’s not hard to do), and you’re technically fundraising really fast. Before you know it, you have raised funds with your investors who are also your consumer and your community — and all the transactions are tracked through their blockchain with this smart contract.”

The Future of Virtual Commerce

This might sound head-spinning. But it also sounds like it could be profitable for both retailers and brands, especially if executed by well-known names that already offer consumers a certain level of comfort. Currently, shoppers purchase most of their clothes at mass merchants like Walmart and Target (22 percent), according to Cotton Incorporated’s 2022 Lifestyle Monitor Survey. That’s followed by Amazon (13 percent), chain stores like Kohl’s (12 percent), department stores such as Macy’s and Dillard’s (11 percent), off-price stores like Ross and TJ Maxx (10 percent), specialty stores such as Gap and American Eagle (9 percent), and fast-fashion specialty stores like Zara and Uniqlo (6.6 percent).

Currently, most consumers prefer to purchase their clothes in a physical store (58 percent) versus online (42 percent), according to the Monitor research. It’s still quite traditional. But GWI, a U.K.-based market research firm, says more than one-fifth of Gen Z and millennial shoppers want retailers to offer AR (augmented reality) so they can digitally try on products. The company says there has been a 29 percent increase in the number of VR (virtual reality) headset owners since 2020.

GWI also says brands are in a position to help consumers understand and navigate the digital fashion world. The firm says “confusion currently reigns” when it comes to NFTs and Web3, which gives brands the opportunity to be interpreters of this shopping arena. This makes even more sense when one considers that online shoppers turn to retailer and brand websites the most (35 percent) when they’re looking for ideas for online apparel purchases, according to the Monitor research. That’s followed by social media sites (30 percent), ecommerce-only sites such as Amazon and Net-A-Porter (28 percent), ecommerce-only apps (27 percent), emails from retailers and brands (24 percent), retailer and brand apps (22 percent), fashion or fashion trend sites (20 percent), and emails from ecommerce-only sites.

GWI adds that brands should also get into the gaming world, as it predicts gamers will be among the metaverse’s first adopters. To wit, GWI relates, 22 percent of consumers interested in taking part in the metaverse already play Minecraft.

While some of fashion’s digital future might sound too futuristic, retailers and brands should note that most consumers (58 percent) say the past few years have changed the way they will shop for apparel in the years to come, according to the Monitor research. Nearly half of these shoppers (47 percent) say they will shop for more apparel online. And 41 percent say they will be more purposeful with the clothes they do buy.

For its part, the CFDA is using its 60^th anniversary to help the industry move forward. “The CFDA has always pioneered creative and innovative thinking,” said the CFDA’s Steven Kolb, CEO. “And with our first metaverse exhibition and NFTs, we are embracing this new era of digital transformation.”

Note: Cotton Incorporated is a Robin Report Collaborative Partner.

As the metaverse continues to evolve as a relevant ecosystem for consumers and creators, understanding the importance of protecting valuable intellectual property is critical. In the developing digital economy, users buy and sell intangible goods, property, and services in gaming engines and online. As this economic system develops, the divide between the virtual world and reality continues to blur. Virtual stores and experiences directly connect brands and services to consumers. Metaverse exchange primarily involves digital assets (games, avatars, etc.), and provides unique platforms for creating, building, and distributing content.

This emerging economy, while novel, compelling and tempting, will propel many retailers into uncharted territory. Licensing and policing copyright infringement will create unique logistical and technical challenges for retailers. The protection of intellectual property concerning the provision of goods and services in a “virtual” world will be especially tricky for brands and retailers.

Nike has filed seven trademark applications indicating its intent to make and sell virtual branded sneakers and apparel. These new trademarks will offer enhanced protection for the brand in this new and evolving virtual platform and indicate how other big-name companies may proceed in protecting their intellectual property in a burgeoning virtual world

To make matters even more complicated, the emergence of non-fungible tokens (NFTs) has spawned a growing number of trademark lawsuits that call into question the very nature of intellectual property rights in a virtual world.

Hermès v. Rothschild

Let’s take a closer look at the NFT trademark dilemma. In January 2022, luxury fashion house Hermès filed a complaint in the New York federal court against Mason Rothschild, a Los Angeles-based interdisciplinary artist and designer, for his use of the Birkin bag name and design. Rothschild creation of NFTs, coined “MetaBirkins,” consists of 100 NFT images mirrored in likeness and design to the iconic Hermès Birkin bag. The case is one of many recent disputes between a fashion brand and an NFT developer. Disputes of this nature will become more common as NFTs being sold and distributed in the virtual world infringe on brand’s trademarks in the “real” world.

The complaint filed by Hermès asserts that the use of the Birkin bag name and design by Rothschild is “causing confusion, and deception among consumers, who may believe that the MetaBirkins are authentic Hermès Birkin bags.” The complaint continues, “the sale of MetaBirkins is likely to cause dilution, false association and other injury to the famous Hermès mark.” The argument focuses on the MetaBirkins’ likeness to its physical counterparts and the suggestion that there may be a connection to the brand therefore exploiting the connection to the famed Birkin bag.

Rothschild’s response to these claims asserted that his NFTs are simply artworks providing commentary “on the animal cruelty inherent in Hermès’ manufacture of its ultra-expensive leather and animal skin handbags.” They are unique and fanciful interpretations and the fur covering the images of the bag is a statement in accordance with this commentary.

The motion to dismiss emphasizes that the NFTs “are not handbags” and “carry nothing but meaning.” They are not commercial or physical assets whereas the Birkin bag is. Rather, the virtual bags are Rothschild’s “speech, art, and expression, all of which are protectable under the First Amendment.” With free speech and artistic expression at the heart of his argument, Rothschild’s position calls into question whether or not the commercial nature of NFTs can be solely considered as art rather than commercial goods. Confused yet?

Michelle Mandelstein, a business attorney and adjunct professor of Fashion Business Law and Licensing at the Fashion Institute of Technology, had some insightful comments on the Rothschild defense, “The Hermès/Rothschild case is in the realm of using artistic expression as their defense…which is not a novel argument. We see this with tangible goods as well. Vans is currently suing MSCHF over their ‘Wavy-Baby’ sneaker. MSCHF’s defense is that they have a First Amendment right to artistic expression. But I don’t buy it. To me, it’s not artistic expression or protected speech in what the First Amendment contemplates.”

I guess we will have to wait and see what the courts think.

Nike v. StockX

The case Nike v. StockX is another ongoing dispute between a famed brand and an NFT developer over the use of a well-known mark. In February 2022, Nike Inc. filed a federal complaint against StockX, LLC, an online resale marketplace, in the Southern District of New York, alleging that StockX is minting and selling NFTs that infringe Nike’s intellectual property. StockX counters, arguing that its use of the images and descriptions of resale products in connection with its Vault NFTs are “no different than major e-commerce retailers and marketplaces who use images and descriptions of products to sell sneakers and other goods, which consumers see (and are not confused by) every single day.”

In layman’s terms, Nike is suing StockX for selling NFTs of images of Nike sneakers without the company’s permission, arguing that these images cause consumer confusion and infringe on the trademarks owned by Nike. The lawsuit also claimed that the StockX NFTs interfered with Nike’s  NFT plans.

Mandelstein helped clarify the difference between the Hermès/Rothschild and Nike/StockX cases, “Nike is in a very different realm than Hermès. More people are running after Jordans than they are Birkins, and the Nike mark is certainly more famous, recognizable, and open to customer confusion. StockX’s defense is also very different from the Rothschild defense. There’s an idea that when you purchase an item, the intellectual property rights and trademark rights of that owner are limited once the sale has taken place. So StockX is saying that each physical shoe is rightfully possessed by the owner, so they should be able to use the Nike mark to resell the shoe with no consumer confusion.”

Nike’s ambitions in the metaverse were revealed when the company filed seven trademark applications indicating its intent to make and sell virtual branded sneakers and apparel. According to the U.S Patent and Trademark Office, Nike filed applications for the brands slogan “Just Do It,” the swoosh logo, the “Jumpman” and “Air Jordan” logos, and its brand name “Nike.” These new trademarks offer enhanced protection for the brand in this new and evolving virtual platform and indicate how other big-name companies may proceed in protecting their intellectual property in a burgeoning virtual world. Nike, clearly a frontrunner in the NFT race, has been thinking ahead to protect its IP. That said, it looks like it could be a full-time job chasing down all the Nike NFT wannabes.

Uncharted Waters in the Metaverse

Cases dealing with NFTs and trademark infringements are unprecedented and, given the unique set of circumstances at hand, will guide the way on identifying key intellectual property issues surrounding NFTs, especially when the NFTs are tied to physical goods.

Both the Hermès and Nike lawsuits are among the first that question the intricacies of NFT rights, and may provide greater clarity in a currently hazy area between infringement and fair use of NFTs and physical products.

Such developments are notable considering that the uncertainties involved in protecting a brand in the swiftly-developing metaverse. The outcome in these cases may provide a blueprint to how courts should proceed when dealing with matters than involve both the real and virtual worlds.According to Mandelstein, however, there might not be much of a difference in terms of dealing with IP matters in the virtual world versus the physical world, “This is going to come up more and more because it’s uncharted territory. In spite of the very digital world we live in, when we hear ‘metaverse’ or ‘digital’ or ‘online’ we get very nervous. But I’m not sure that any protective step you would take is any different than a step you would have already taken in the physical realm. I don’t know if the mechanics of this digital sphere will really be that different, or if this is just a new layer to all of it. It’s like if you were only doing business in Europe and now suddenly wanted to expand into Asia, you would expand your team to make sure you were taking the necessary steps and precautions. I think the metaverse is just a new ‘geographic’ problem and that’s all. Retailers have stores in NYC, LA, Miami, and now… the metaverse.”