NFT as a Method for Tracking, Tracing and Detecting Counterfeits

Key Factors of the Analysis

  • • NFTs, in addition to functioning as virtual assets, can also serve as a method for tracking and tracing objects, creating an extra layer of security over a variety of assets (from houses to vehicles, including animals, etc.). Likewise, they allow owners of digital assets to store and transfer them in a more secure and traceable way.

  • • Although the purpose of NFTs is to verify the authenticity of a virtual or physical object, they are also exposed to risks of counterfeiting and fraud. A very clear example of this can be seen in the fashion sector, where a kind of "black market" is now being generated in the metaverse where replicas of NFTs are bought and sold, taking advantage of certain legal loopholes that currently exist.

  • • Due to this trend, an ecosystem of companies offering security solutions to protect the authenticity and proprietary rights of NFTs against fraud and counterfeiting is emerging. These solutions are already widely used in the fashion and art industry, but now they are also being adopted by the NFT sales platforms and marketplaces themselves.

  • • There is a business opportunity for companies in the security sector to market this type of tool, for both traceability and tracing tasks and for the verification of authenticity and ownership of works, as new sectors and industries start to adopt NFTs and the metaverse.

NFT for Data Tracing and Tracking

One of the most prominent cases of use being demonstrated by NFTs in the security industry at present is related to their ability to generate fingerprints that facilitate object tracking. This functionality is now being successfully implemented in all business activities related to the supply chain, for example.

The fact that NFTs can represent a digital object in a unique and immutable way facilitates identification that, in itself, helps to establish whether an object is authentic. Furthermore, the metadata recorded in each NFT makes it easy to track and trace for, for example, where the physical version of the object is located at any given time, making it possible to monitor shipments and transport in a much more transparent way for all parties involved in the supply chain.

These metadata not only make it possible to monitor the geolocation of objects, but also another wide variety of factors of interest, such as the temperature of the containers where the objects are transported or the physical condition of the materials. In other words, NFTs can immutably report on any data collected by connected devices or sensors, without it being possible for any of the parties involved to manipulate this data.

Counterfeits and the NFT Void in the Metaverse

However, this ability of NFTs to identify physical objects is a double-edged sword. For example, in the fashion industry, many firms are suffering from the problem of "legitimate counterfeits"; in the metaverse, this happens from the time at which anybody can make a virtual replica of a physical object and market it in virtual environments, given that this is a deregulated space in which there is still no clear regulation that defines how copyright applies.

Furthermore, even though an NFT is previously registered as intellectual property with a unique hash code, another person can create a replica of the work, modifying it slightly with a different hash code and market it on the network at market price, as if the real work were real. Therefore, avoiding this type of "legal forgery", or covered by a legal vacuum, becomes a responsibility rests solely with the buyer, who must previously verify the hash code of the work and any differences it may have with the original NFT.

In this way, a kind of black market is emerging in the metaverse where some people appropriate items from fashion brands like Gucci, Nike or Balenciaga and then sell an alternative digital version on the NFT market.

This is when security work comes into play to guarantee the authenticity and originality of any virtual object. This role is even more important for security firms now that there are no global regulations and standards to define ownership policies in the metaverse.

However, it remains unclear to what extent NFTs are actually compliant with intellectual property laws. For example, Cointelegraph (7) cites an investigation by the European Union that seems to suggest that blockchain immutability is inconsistent with privacy and right-to-be-forgotten laws since, once information is registered in the blockchain, it cannot be deleted or modified. This directly conflicts with certain aspects such as the processing of personal data. To this end, a number of options being considered include the design of systems that allow smart contracts to be programmed in such a way that they can self-destruct in certain situations. The introduction of clauses in contracts in which all parties involved waive their right to revoke consent, as this cannot be executed on the blockchain, has also been proposed.

These features inherent to NFTs, and blockchain networks, are giving rise to the emergence of tools that aim to help both brands and token trading platforms as part of verification processes and in the fight against fraud and fakes.


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