The Culture, Media and Sport Select Committee has published its report NFTs and the Blockchain: the risks to sport and culture. It 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.
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. However, the Committee found 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, 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 having more tangible and inherent value. However, the Committee heard criticisms that they are not delivering promises on 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. It recommends 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 mean 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 to take steps to mitigate the risks of harm to consumers from the marketing of NFTs.
The government has two months to respond to the report.
