By now, even the less internet-savvy amongst us have heard of NFTs, although not everyone quite understands them. With the help of local legal-eagles Harwood Andrews, we’ve dipped our tourism toes into the blockchain to figure out what all the fuss is about.
NFT stands for non-fungible token. While that sounds a bit spongey, it simply means that they are unique and cannot be replaced or exchanged for the same thing. An NFT is a unit of data stored on a digital ledger which demonstrates the ownership of a tangible asset or an intangible asset.
For example, last year Latvian airline airBaltic ran a tourism campaign that included issuing NFTs linked to digital artwork of airplanes and local cities. The purchasers of the NFTs hold the unique code associated with virtual pieces of art, making them instant art collectors!
How can NFTs be used in the tourism industry?
While NFTs remain a relatively new concept, it’s not all celebrities and bored monkeys. In fact, the use of NFTs in the tourism industry is growing. Tourism businesses have been exploring their use in a variety of ways, including providing exclusive access to experiences or customer loyalty programs.
For example, Penfolds launched a limited edition NFT tied to a rare wine, Marriott Hotels are in the Metaverse and Dream Hotel in Hollywood offers customers a membership program purchasable through an NFT system. Online booking company Travala has developed NFT ‘keys’ for their exclusive Tiger Travel club, while The Great Tapestry of Scotland is incorporating a digital treasure hunt into their in-person attraction. Virtual tokens for a virtual experience!
Contemplating an NFT project or campaign for your business? Keep in mind…
The potential that NFTs offer the tourism industry is exciting. However, as with all new technology, there are issues to keep in mind including intellectual property, commercial and taxation law issues.
Intellectual Property – who owns what?
Myth and misconception still abound when it comes to distinguishing NFT ownership and intellectual property (IP) rights. It’s important to understand the difference, and what rights you do (or as the case may be, do not) retain and/or acquire!
Many NFTs traded include illustrations, photographs or other works of art all of which are protected by copyright. However, acquiring an NFT does not mean that you are acquiring the original work nor the exclusive right to display, reproduce or sell copies. There are several formalities needed to transfer copyright including an express, written agreement between the original author and the assignee.
Businesses must understand that ownership of an NFT does not automatically give rise to the sale of the underlying asset and does not confer IP rights. Even though you may spend considerable capital to acquire an NFT, you would not be able to copy and distribute the artwork without permission from the original artist or subsequent owner. Similarly, where businesses are launching NFTs consideration needs to be given as to what rights are in fact being transferred to the purchaser under the terms of the transaction.
The Commercial Nitty Gritty
It can be a scary proposition when considering what rights associated with any given NFT are legally enforceable. Each NFT is governed by its own “smart contract” that is essentially coded into the NFT however the code often only considers the mechanics of the transaction rather than more complex legal terms such as licensing, risk, and dispute resolution mechanisms. If the creation and transaction of an NFT is completed through a mainstream platform such as OpenSea then the platform itself will have more detailed terms and conditions to consider. A clear understanding of these terms and the overall arrangement is therefore key.
There is currently little direct regulation and guidance in respect of digital assets. However, in some circumstances we have seen NFTs constitute a financial product under the Corporations Act. As a result, they are subject to the ASIC regulatory framework and the company may be required to obtain an Australian Financial Services Licence.
It is worth noting that more general contract and consumer laws may also apply if the creation and trade of the NFT is conducted between Australian parties. The extent to which these general laws apply will vary depending on any representations made or ancillary agreements in place.
The Tax Man
As with cryptocurrencies, NFTs are deemed to be capital gains tax (CGT) assets for tax purposes. When an NFT is held, developed or disposed of, a CGT event will occur and CGT may be payable on any gains. Certain concessions may apply to reduce the CGT payable. However subject to the basis upon which you hold or dispose of the NFTs, they may fall outside of the CGT provisions and instead be taxed at your relevant marginal rate without the application of CGT concessions.
Where NFTs form part of a smart contract, the rights provided under that contract may result in the asset having both revenue and capital elements. It is therefore critical that tourism providers considering holding or developing NFTs ascertain how such NFTs will be treated for tax purposes. NFT specific guidance from the ATO is limited and as NFTs with new functionalities are developed, the complexity becomes even more significant.
What’s next?
As is often the case with new and emerging technologies, NFTs present opportunities for the tourism industry. However, they also carry risks. Business operators should approach these new technologies with enthusiasm but care and seek specialist advice as appropriate.
This article was written by Laura Spencer, Senior Associate at Harwood Andrews and current at time of publishing.
Harwood Andrews is an Industry Partner of Tourism Greater Geelong and The Bellarine. To see more of what Harwood Andrews does, to get in touch with the team or to find out more about NFTs for your business visit harwoodandrews.com.au.
