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17 December 20215 minute read

Beyond JPEGs: Innovation in fashion and luxury goods NFTs

In October 2021, Dolce and Gabbana (D&G) sold its nine-piece Collezione Genesi non-fungible token (NFT) collection of digital / physical couture (including access to exclusive D&G events) for a record-breaking USD6.1 million. The sale dispelled the perception of NFTs being limited to niche internet culture and demonstrated their potential for use in fashion and the luxury marketplace.

This article explores the opportunities and risks of using NFTs, including the ability to streamline shared ownership of luxury assets, confirm product authenticity, facilitate environmental, social and governance (ESG) transparency and further personalize customer experiences.

What are NFTs?

NFTs are unique tokens stored on a blockchain. These tokens embed smart contracts tied to an asset such as an artwork. These contracts also contain information about the asset such as its ownership, provenance, and how to distribute funds from asset-related transactions.

The non-interchangeable aspect of NFTs allows them to be linked to a specific item, so it’s useful for situations where provenance is important, for example luxury goods. Because NFTs operate on the blockchain, users are provided extra certainty since the blockchain acts as a publicly accessible ledger recording an NFT’s ownership and transaction history. For a more detailed explanation of blockchain, refer to our article on the blockchain revolution, smart contracts and financial transactions.

Streamlined shared ownership of luxury assets

Luxury goods and high-end fashion, such as collectible classic cars, high-end accessories (watches, jewelry and handbags) and couture, are often purchased for investment purposes and NFTs can facilitate:

  • shared ownership of assets that were previously difficult to be easily divided into parts; and
  • certainty around ownership and distribution of royalties (such as if an asset was a collaboration between brands), or other forms of income from transactions involving the asset.

For example, in November 2020, DLA Piper’s TOKO platform was used to create multiple NFTs of a painting by Chinese artist Wang Xiaobo. The painting was divided into 16 squares, each represented by a single token, and smart contracts were embedded in the tokens to facilitate the distribution of revenue generated from renting out the artwork to the token-holders, and distribution of proceeds if the piece was sold.

Where an NFT links to a physical asset, additional protection under personal property security laws may be required. Similarly, NFTs that allow holders to receive revenue from their token may be considered a financial product and related regulations could apply. For example, the issuer may be required to hold a financial services license and comply with restrictions on representations about the product. These laws vary between jurisdictions and should be considered before issuing NFTs.

Authenticity and ESG considerations

The ability to embed product information in an NFT, such as the product’s manufacturer and location, material composition and carbon emissions created during production, have the potential to benefit both brand owners and consumers. For example:

  • As NFTs are on the blockchain, the chain of ownership and provenance of the asset are publicly trackable and verifiable. This also makes digital luxury goods more desirable – before now, there has not been a reliable method of ensuring the authenticity of a digital luxury good.
  • Brand owners can demonstrate ESG credentials for their products, and greater transparency over these considerations improves corporate accountability while also helping to substantiate ESG marketing claims.
  • Brand owners and designers can track the lifespan of products from production to disposal or recycling, which could aid the design of more sustainable products.
  • Brands and labels can launch digital collections of goods to assess demand before proceeding to manufacture physical items and thereby reducing waste and carbon footprint. Recently, luxury e-tailer FarFetch launched pre-orders for several luxury clothing collections entirely virtually.

However, brand owners should also remember that creating NFTs is carbon intensive and could counteract the benefit of incorporating NFTs into a sustainability strategy. Notwithstanding this, brands can potentially mitigate this risk by using proof-of-stake platforms (as opposed to proof-of-work), such as Hedera when creating NFTs. Proof of work blockchains rely on computers solving complex equations to verify transactions, which relies on computational power and is energy intensive. By contrast, proof-of-stake platforms rely on users verifying transactions in return for a transaction fee, which requires less energy.

Improving customer experience

NFTs can also help verify customer identity and personalize client relationships. By identifying customers using NFTs, brand owners can track customer purchase history and style preferences. As NFTs are designed to be moved from platform to platform, this information can be carried across brands and platforms and allow access to information about customers before a first interaction. This would allow more tailored multi-channel marketing and cross-selling.

Where brands are collecting personal information from NFTs, privacy obligations apply and brand owners should consider whether their privacy policies allow collection of this information and if their use of this personal information is consistent with appliable privacy legislation, particularly the GDPR.

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