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The emergence of non-fungible tokens in the world of art has led to the risk of widespread copyright infringement, while the promotion of crypto assets in professional sport is putting supporters at risk of financial harm and potentially damaging the reputations of clubs, MPs warn today.

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In its report NFTs and the Blockchain: the risks to sport and culture, the Culture, Media and Sport Committee notes that while sales of NFTs peaked last year and that they may not reach the same level of popularity again, concerns remain over how traditional regulatory regimes have been exposed by the emerging technology.

Highlighting evidence of misleading and fraudulent advertising of NFTs, the report calls for the Government to ensure that all those involved at each stage of the marketing of crypto assets take responsibility to protect consumers.

The Committee also urges the Government to work with NFT marketplaces to address the scale of copyright infringement in the art world. A creator’s rights are infringed in cases where their work is made available to the public without permission, with the process of having work taken down time consuming and difficult compared with the ease at which NFTs can be minted.

With regards to sport, the report recommends that the use of fan tokens in football do not count as an acceptable measure of engagement in the forthcoming regulation of the game. The Committee highlights the price volatility of such tokens and reservations from fan groups.

Chair Comment

Dame Caroline Dinenage MP, Chair of the CMS Committee, said: “Traditional regulatory regimes have failed to protect both creatives and consumers caught up in the volatile new crypto world. Artists are at risk of seeing the fruits of their hard work pinched and promoted without permission while fraudulent and misleading adverts add an extra layer of jeopardy for investors involved in what is already an inherently risky business. The Government must make sure that everyone in the crypto chain is working to properly protect consumers and the rights of creators.

In the world of sport, clubs are promoting volatile cryptoasset schemes to extract additional money from loyal supporters, often with promises of privileges and perks that fails to materialise.
Fan token schemes must not be used as a substitute for meaningful engagement with supporters.”

Main findings and recommendations

Art and culture

• Blockchains and NFTs have some unique potential applications in art and culture. NFTs, for example, can create new markets for artworks and encourage artists to develop new digital skills. The Committee found however that there are real risks and harms to creators and consumers in their use.
• The most pressing issue discovered by the Committee’s inquiry relates to risks to intellectual property. The report notes how the risks of copyright infringement are exacerbated given how easy it is to mint an infringing NFT relative to how time consuming it is for artists to enforce their rights. The sheer number of NFTs hosted across NFT marketplaces makes individual enforcement through repeated notice-and-takedown requests impractical.
• The Committee recommends that the Government engages with NFT marketplaces to address the scale of infringement and enable copyright holders to enforce their rights. The Government should also address the impact of safe harbour provisions by introducing a code of conduct for online marketplaces operating in the UK, including NFT marketplaces, that protects creators, consumers and sellers from infringing and fraudulent material sold on these platforms.

Professional sport

• NFTs are becoming increasingly popular within professional sport because they offer a new revenue stream for professional athletes, clubs, international teams and leagues at little cost to them. The report states that despite having little to no financial risk for clubs, NFTs have proven to be inherently risky for fans who invest in them.
• Distinct from generic NFTs, are utility tokens, which in a sporting context are called fan tokens. They theoretically give holders access to certain privileges and membership perks such as voting on club decisions, rewards, merchandise designs and unique experiences, and thus have more tangible and inherent value. The Committee however heard criticisms that they are not delivering on promises of fan engagement and are being marketed as equivalent to other legitimate club memberships.
• The report concludes that the unique relationship between clubs and fans means that fan speculation on sport-based cryptoassets carries a real risk of financial harm to fans and reputational harm to clubs.
• The Committee is also concerned that clubs may present fan tokens as an appropriate form of fan engagement in the future, despite their price volatility and reservations among fan groups. We recommend that any measurement of fan engagement in sports, including in the forthcoming regulation of football, should explicitly exclude the use of fan tokens.

Advertising

• The technical, volatile and largely unregulated nature of NFTs means that advertising such products comes with a significant risk of harm to consumers, even for legitimate products. At their most pernicious, false advertisements and endorsements can enable scams and fraud.
• The Committee recommends that the Government respond to the evidence gathered on misleading and/or fraudulent advertising for NFTs. It should ensure that any regime compels the entirety of the advertising supply chain take steps to mitigate the risks of harm to consumers from the marketing of NFTs.

Further information

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