PUBLICATION – The Global Fashion Lawyer

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Crypto veterans have built it. Creators are already monetizing it. Brands are trying to understand the value behind it. And now, we catch up on it.

Is this technology a fleeting trend or will it reshape the business of style and traditional rulesets to the core?

Innovative technologies and digitization of the physical world are disrupting longstanding centralized systems across market sectors. Recently, artificial intelligence and machine learning have been hyped to “restyle” the fashion industry. Today, we take one step further into the virtual world, arguably our inevitable reality of the future. As the pandemic has fueled the “online-everything shift” virtual experiences, environments and assets have become of exponentially growing interest. Investors, futurists, and executives view the so-called metaverse as the holy grail for interpersonal connection, entertainment, and profit. At the heart of the “mobile internet world” lies interactive personalization at scale.

New digital worlds are built on blockchain technology which can be thought of as massive transaction ledger. Each transaction, a block, must be mathematically validated by all participant nodes (i.e., computers hosting the blockchain) within the network, without human intervention. Once a transaction is verified a block is added to the ledger. This makes it a highly secure tool to authenticate transactions.

While the use of blockchain infrastructure in fashion is not as prevalent as in other industries, major luxury maisons are making significant headway in grasping the potential for the fashion business at large, as it will assist brands to protect their digital identities and goodwill.

  • Digitization & Agility of Supply Chain

Authenticity and transparency of blockchain records guarantee full disclosure of information throughout a fashion brand’s supply chain. Via “smart labels” – in form of QR codes attached to each textile asset – the entire supply network management, logistics, and operations become a traceable apparel ecosystem. Increasing sustainability pledges of fashion houses are also going to be verifiable.

LVMH, Prada and Richemont (Cartier) have developed the first blockchain platform in the luxury sector. The “Aura Blockchain Consortium”1 allows to identify the provenance and ownership of their products (including re-sales). Thus, the removal of intermediaries improves processing efficiency and reduces operating costs.

  • IP Protection & Enforcement

Most importantly, blockchain technology offers a new path for brands to establish remedial measures against counterfeit products where large scale legal applications (e.g. limited IP protection of fashion designs in the US, first sale doctrine, conflicting governing laws and jurisdictions, etc.) tend to fail. “Tagging” a product during manufacturing with a unique identifier cryptographically signed by the brand will particularly benefit the booming online secondhand luxury marketplace in the fight against counterfeits.

  • Digital-only Fashion & NFTs

In 2019, Digital Fashion Houses changed course from selling “digital-only” fashion – garments which can be fitted and/or worn only by an individual’s online presence in the metaverse – directly to consumers to market items on the blockchain as a digital tradeable. Such an NFT (non-fungible token) is a unique digital asset. Once the token is created, or minted, it can’t be altered and exists in perpetuity within the ledger.

Even though traditional IP laws apply, different scenarios regarding ownership interests in NFTs push the boundaries of existing legal systems and principles. Minting an NFT, means to create a derivative work, a unique hash on the blockchain and a hyperlink to the original asset. Therefore, misrepresenting the authorship to the underlying asset likely constitutes copyright infringement, subject to a fair use argument. Ownership considerations of digital assets can get tricky quickly. For instance, does a gamer who customizes a gaming character with digital garments remain the owner of the design or does the gaming company take ownership? And how are contractual issues solved when said gaming platform no longer exists? Similar legal issues are going to be raised relating to NFTs and the highly viable resale market. The secondary marketplace poses an invaluable opportunity for artists to reach maximum monetization as they receive royalties for each subsequent sale.

  • Smart Contracts & Computability of the Law

The lack of laws regulating cryptographic assets lead to an elevated focus on contractual provisions. This is where smart contracts (“SC”) come into play. It is the self-executory nature that creates an endogenous crypto-legal structure for transactions. Yet, an SC is NOT a legal contract. It is an agreement that exists in the form of software code in programming language implemented on the blockchain, such as Ethereum, which enables it to run autonomously. Some SCs prevent transactions from going through until certain preconditions are satisfied, such as payment of royalties on the resale of an NFT. More often, marketplaces are encoded to also enforce SC royalty obligations, whereby upon resale a percentage of the resale price is automatically transferred to the original seller.

The combination of NFTs and SCs establishes a “certificate of authenticity” for ownership of an asset. Small and medium-sized brands in the fashion industry will be able to use SCs as tool to track the transfer of IP ownership and protect their designs.

Technology will continue to change how we own, manage, archive, collect, promote, buy, and sell virtual wearables within flourishing metaverse worlds. Carefully curated online-closets are going to dictate our cyber-identities and “digital likenesses” will walk down the runways of the future. The paradigm shift in the marketplace will be determinative for the significance of IP laws and regulations over the decades to come.

How will you dress your avatar?
Happy cyber-shopping!

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