NFTs and consumer rights

It's always interesting when a tech concept truly takes off. Inevitably, the hare-like speed of development and the appetite for the technology greatly outstrips the slow-moving legal and regulatory tortoise. Such is the case with the explosion of NFTs, around which a buying-and-selling ecosystem has swiftly formed, consisting of the NFT creators, the blockchain (or other distributed ledger technology) platforms, the marketplaces, the traders ('minters'), and of course the consumer buyers.

Why NFTs?

You might reasonably ask why a rational consumer would want to shell out their hard-earned Ethereum for an NFT in the first place. The value comes from the ownership of a unique token tied to a particular real-world, digital or virtual asset. While the asset itself may or may not be reproducible by anyone, there is a unique record of your ownership recorded immutably on a distributed ledger. In this way consumers can enjoy the collectible nature and bragging rights associated with their NFTs, while creators get a chance to add an extra layer of monetisation to existing products via a new digital space.

And yet…

And yet, for all the very tangible (not fungible) excitement, and despite the decentralised and immutable nature of the blockchain record, there remains many a pitfall for consumers when it comes to NFTs.

There are already numerous examples of unsuspecting buyers being defrauded, buying what they thought was a token for a valuable digital artwork only to receive an emoji from a scammer instead. Or NFTs being passed-off as belonging to a famous brand and bought by consumers who thought they were buying officially produced or licensed tokens, only to realise those rights were not in fact with the seller to begin with.

Seller anonymity, coupled with heavy-duty disclaimers of liability on the part of the marketplaces, and the usual principles of 'buyer beware', mean that a casual NFT consumer may be extremely exposed. So which of our existing consumer rights can be applied to the NFT marketplace?

What protections might apply?

When buying an NFT UK consumers acquire various rights. These apply whether or not the trader is based in the UK, so long as they are marketing the NFT to UK consumers. Some protections to consider include:

• Information provision: Before making an online purchase there is an obligation on the seller to provide certain key details regarding the transaction in a clear and intelligible form – these include the identity of the seller, the main characteristics of the product and any requirements the consumer should be aware of following the sale. For NFT purposes this would include (a) information regarding ownership – in particular clear information regarding how that relates to ownership of any rights in the underlying asset, and (b) details regarding the existence and functionality of any embedded 'smart contract' arrangements - these are technical features that automatically allow for certain events to occur, for example automatically applying a royalty rate for every future sale of an NFT to the original creator. Consumers should be made explicitly aware of this functionality and other key details prior to the purchase.
• Implied terms: Implied into any contract with a UK consumer is that a digital good will be of satisfactory quality, fit for purpose, and will comply with the description provided. If these terms are not met then the UK consumer may have the right to reject the digital content.
• Satisfactory quality? The test on whether or not digital content is satisfactory can include the price of the digital content, so where there is a huge disconnect between the sale value of the NFT and the value of the underlying asset, careful consideration should be given to the information provided to the consumer to ensure the features from which the quality of the NFT is derived are well understood.
• Fit for purpose? If a consumer purchases an NFT on the basis that they can use or reproduce the underlying asset, only subsequently to find out copyright or other IP rights have not been transferred or licensed along with the NFT, or that there are question marks over the actual ownership of the underlying asset, this risks breaching the implied terms as to fitness for purpose. In such a case the consumer may seek a refund.  See here for more on issues around ownership of NFTs.
• Protections against unfair, misleading and aggressive practices: Terms in goods and service contracts that do not follow the requirements of consumer law may well be found to be unfair, which would mean they are invalid or unenforceable. This could cover liability and indemnity clauses in the marketplace Ts & Cs, for example, which would need to be carefully reviewed from a fairness perspective to check enforceability.
• Complaints and redress: From a wider perspective, marketplaces should be prepared to take action against any illegal or manifestly misleading practices on their platform. We have seen with NFTs a proliferation of misleading claims and false advertising, where material information has been omitted including information regarding ownership. Marketplaces should seek to manage this with (eg) the provision of a complaints mechanism and the ability to control the NFTs that are being uploaded for sale. See here for more on advertising NFTs.
• Cooling off: Consumers typically have a 14-day period in which they may change their mind or cancel the sale contract for any reason. This will apply to the NFT sale unless certain information is provided to the consumer in advance of the purchase, which includes confirmation from the consumer that they wish to receive the NFT immediately / prior to the end of the cancellation period, and a clear acknowledgement that in doing so they will be waiving any cancellation right.

So NFT sales, despite sitting as they do on a decentralised distributed ledger like blockchain, are not exempt from consumer protections. NFT marketplaces should be aware that they are selling products that are covered by consumer regulations and should be prepared to act to support the enforcement of consumer rights. Not doing so may risk regulatory action, particularly as the consumer regulatory spotlight begins to shine on the sector.