With help from Derek Robertson

The future of NFT art, and metaverse commerce, might be determined by a virtual handbag.

In November 2021 digital artist Mason Rothschild released a line of MetaBirkins — fuzzy, virtual handbags with a tiny padlock that mimic the popular luxury Birkin bags made by Hermès. The visuals on the MetaBirkins were inspired by artists like van Gogh, Rothko and Kusama. They were rare, they were chic and they were extremely lucrative. The first one sold for $42,000.

But they were not made by Hermès, and scarcely a month later, Rothschild revealed on Instagram that he’d received a cease-and-desist letter from Birkin's real-world manufacturer. In his defense, Rothschild cited the First Amendment, saying it gave him “every right to create art based on my interpretations of the world around me” and equating the sale of his MetaBirkins as NFTs to that of physical art prints.

If the metaverse turns into the trillion-dollar economy that some envision, questions like this one are going to be colossally important to sort out. When an NFT copy of a real-world object can be created with a few keystrokes — and, crucially, assigned real-world value as digital property — what qualifies as protected artistic expression, and what are just virtual pirated goods?

In January 2022 Hermès sued Rothschild in the U.S. District Court of the Southern District of New York for trademark infringement and dilution, false designation of origin and cybersquatting, among other claims. It’s a case that the Web3 world is watching closely and has already been cited in other Web3 lawsuits that tangle with the question of how to balance digital artists’ freedom with copyright-holders’ claims.

Mauricio Uribe, head of the software and IT practice at intellectual property and technology law firm Knobbe Martens, described the case to me as a “test” to see “how well our existing laws apply” to the digital frontier.

If Hermès wins the day, he says, then it’s likely not much will change. But if Rothschild wins, it would indicate that there is “something unique to NFTs” that opens up room for “a new paradigm that merits slightly different treatment” under the law.

The key to it all is something called the Rogers test: a two-pronged test from 1989 that seeks to balance artistic expression protected by the First Amendment with the rights of the trademark holder.

The first part of the test simply asks if the use of the trademark has any minimal artistic relevance to the item under review. The handbags have already passed this test: they’re cute and a little ironic, and Judge Jed Rakoff of the New York District Court found that digital images of handbags could constitute a form of artistic expression. The NFT factor, he said, doesn’t change that: using an NFT to authenticate that digital image and trace its subsequent resale and transfer did not “make the image a commodity without First Amendment protection.” Basically, NFTs made from digital art can still enjoy First Amendment protection, as long as it passes the rest of the Rogers test.

The second part of the Rogers test is whether the use of the trademark "explicitly misleads as to the source or the content of the work." So the question becomes: did Rothschild’s use of the “Birkin” name confuse consumers into thinking they were buying a luxury good made by Hermès? That question gets to the heart of what actually creates value in the digital world — the artist or the brand.

Rothchild did himself no favors by suggesting that the MetaBirkins were intended as an “experiment” to see if he could create the “same kind of illusion that it has in real life as a digital commodity,” when he spoke to Alexis Christoforous on Yahoo Finance back in December 2021. Rothschild noted in the interview that the craze around his virtual handbags was not that different from the desire to possess a Birkin handbag in real life. (We reached out to Rothschild several ways for this article, with no reply.)

Hermès’s complaint cites Rothschild’s statements as evidence of consumer confusion. Whether it’s enough to stop him from selling his MetaBirkins will be for a jury to determine during a trial set for Jan. 30, 2023 before Judge Rakoff.

To Uribe, whose firm tends to represent corporate clients, when artists move from making digital art to selling it in the metaverse, then it could be argued that the underlying good is “no longer purely artistic expression,” as Uribe told me, but instead “has a function and is part of commerce.” That’s the inflection point at which “you’ve swung the balance between First Amendment and trademark laws,” Uribe said.

If Hermès can prove that Rothschild’s use of the Birkin name caused enough consumer confusion over the genuine article, then they’ll be able to stop the trading of these virtual luxury handbags dead in its tracks, much like real-world fakes. If they lose, the metaverse gets to keep its MetaBirkins — and could well open up room for people to launch their own versions of Web3 Big Macs, Formula 1 racing teams and Nike sneakers, prepping the virtual landscape for a new set of trademark fights.

Congress finally released the text of its end-of-year spending bill early this morning, and a couple of long-awaited pieces of potentially important legislation for the metaverse are out.

As POLITICO’s Brendan Bordelon reported in a feat of heroic sleep deprivation for the benefit of Pro subscribers in today’s Morning Tech newsletter, the Kids Online Safety Act (KOSA) and the Children and Teens’ Online Privacy Protection Act (COPPA) were both left out of the omnibus. A source who requested anonymity told Brendan that Democrats pushed for their inclusion, but were rebuffed by Republicans.

Privacy and safety considerations for children and teens are especially important for the development of the metaverse, given how central gaming platforms like Roblox and Minecraft are to its nascent development. Earlier this year Sen. Ed Markey (D-Mass.) and a group of representatives implored Congress to pass COPPA, and the FTC to use its regulatory power to block companies from algorithmically manipulating young gamers — the latter of which is, for now, the government’s primary tool for policing virtual worlds, as demonstrated by the massive settlement reached yesterday between Fortnite developer Epic Games and the FTC. — Derek Robertson

What does Ethereum founder Vitalik Buterin, one of the crypto world’s most idea-forward players, think about the state of the technology after a brutal year?

In a blog post earlier this month, Buterin laid out, in his words, his excitement for “a few specific categories of applications that are proving themselves already, and are only getting stronger” — and a few about which he feels quite the opposite. Some highlights:

• On the “currency” part of “cryptocurrency”: “Cryptocurrency is the only thing currently being developed that can realistically combine the benefits of digitalization with cash-like respect for personal privacy. But… cryptocurrency is far from perfect. Even with all the technical, user experience and account safety problems solved, it remains a fact that cryptocurrency is volatile, and the volatility can make it difficult to use for savings and business.”
• On stablecoins: “...stablecoins are very popular among precisely those users who are making pragmatic use of cryptocurrency today. That said, there is a reality that is not congenial to cypherpunk values today: the stablecoins that are most successful today are the centralized ones, mostly USDC, USDT and BUSD.”
• On DAOs: “Many applications of "decentralizing for efficiency" probably could also be done on a central-bank-run chain run by a stable large country; I suspect that both decentralized approaches and centralized approaches are good enough, and it's the path-dependent question of which one becomes viable first that will determine which approach dominates.” — Derek Robertson

• Epic Games settled with the FTC to the tune of $520 million in a children’s privacy case.
• A Chinese EV company was hit by a massive Bitcoin ransom.
• How are those private-industry spacefarers making good on their research promises?
• Crypto is at a crossroads after the worst year of its young existence.
• FTX is trying to recover its political donations to pay creditors.

Stay in touch with the whole team: Ben Schreckinger ([email protected]); Derek Robertson ([email protected]); Steve Heuser ([email protected]); and Benton Ives ([email protected]). Follow us @DigitalFuture on Twitter.

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