Metaverse series #10: 3D fashion and the digital revolution of the fashion industry

In the digital world, the question of what to wear is a complicated one, yet one that designers, brands and consumers are eager to explore. The launch this week of the second Decentraland Metaverse Fashion Week signals continued growth opportunities for fashion in the metaverse. Indeed, some predict that the metaverse will reshape the $1.7 trillion global fashion industry – one of the world’s largest. Whenever frontier technologies transform mainstream commerce, novel legal issues are bound to arise. While the industry is starting to get answers to certain foundational legal questions, new questions will continue to emerge as technology adoption in the fashion industry increases.

Developments in AR, NFTs and AI

New technologies present tangible opportunities for creative business models that leverage virtual fashion. Online showrooms provide options for 360-degree views and 3-D virtual runways and avatar models offer designers and brands the opportunity to take fashion shows online. Non-fungible tokens (NFTs) and other digital collectibles provide increasingly sophisticated links between digital assets and real-world assets, and the possibility to “own” (and therefore trade) digital fashion. Generative AI also has potential in supporting the design process, for example it can input all forms of “unstructured” data (from raw text, images, and video) and output fully-fledged 3-D designs.

Estimates as to the potential upsides are high: Morgan Stanley predicts that metaverse games and NFTs could constitute 10% of the luxury goods market by 2030, representing a $57 billion revenue opportunity and a potential increase of 25% in industry profits.

The money is already rolling in: over the course of 2022, major brands such as Adidas, Nike and Gucci reportedly generated $137.5 million in NFT sales alone. Dolce & Gabbana produced a digital Glass Suit which sold for $1 million, making it the most expensive suit ever. D&G’s collection of 9 NFTs raised $6 million, while Gucci’s Queen Bee Dionysus virtual bag sold for 350,000 Robux (the in-game currency for Roblox) which equates to about $4,000 — more than the value of the same bag in real life.

Appealing to Gen Z and beyond

Consumers are spending more time online – 8 hours a day on average for Gen Z – so creating a more interactive, immersive online experience is a natural evolution. And in digital spaces, personal expression appears to be key – for example one in five gamers in Roblox change their avatars daily. As highlighted by McKinsey, “personal fashion is one of the top three categories on which Zers seek to splurge or treat themselves”.

Indeed, for people of all ages, the metaverse offers the opportunity to transform their own images to more closely reflex their personal “ideal”. From contouring filters, to avatars, fashion skins and virtual fashion accessories, the metaverse offers various different ways to present a digitally enhanced personal image.

While no one can predict exactly how the metaverse will unfold, at the very least, fashion’s foray into the metaverse offers promising new opportunities for luxury brands, retailers, and consumers.

Fashion events in the metaverse

According to Vogue in 2022, Decentraland’s Metaverse Fashion Week “received far more industry attention than any digital fashion event before it”, with over 70 brands attending the inaugural event. That interest looks set to continue with Decentraland Metaverse Fashion Week 2023, involving big name brands looking to engage with their growing communities of fashion NFT collectors.

Real world fashion shows are also getting a taste of the metaverse. At the September 2022 New York Fashion Week Nolcha Shows, blockchain games ecosystem Chain Guardians showcased their physical and digital designs through a line of “digital twin” clothing. A physical anime-style bodysuit included an NFT chip that, when scanned, linked to an identical NFT wearable in the Chain Guardians metaverse – enabling a “phygital” fashion experience for the wearer.

Use cases and markets

Experts have identified five major use cases for digital fashion:

• Digital-only garments sold as NFTs – e.g., skins for avatars
• AR photo filters – used to create overlays on social media platforms
• Digital tailoring or superimposing NFTs on real life photos
• Fashion NFTs as investment assets
• Proof of ownership via blockchain

These use cases translate into four main markets for “on-chain” fashion:

• Gamers interested in in-game fashion
• Web3-native purchasers of fashion NFTs to wear in the metaverse
• Social media users looking to use AR filters and digital tailoring
• Collectors who buy digital fashion assets for speculative investment.

Fashion brands collaborations with games

Videogaming – an industry worth over $197 billion, with more than three billion players globally – has certainly been the biggest opportunity for digital fashion to date. Several big name brands are already collaborating in metaverse-like games. "Gucci Town" digital in Roblox includes a virtual store for digital Gucci gear, and its two-week interactive virtual exhibit “Gucci Garden” in Roblox reportedly saw 19 million visitors. Balenciaga has collaborated with Epic Games to offer high-fashion skins in Fortnite. In addition, Burberry has launched successful collaborations with Chinese tech giant Tencent and, separately, with Mythical Games.

Luxury brands haven’t been the only winners in the games world. Forever 21 has had success in offering physical in-store versions of in-game virtual items, so gamers can match the look of their avatars in real life.

How can brands protect their IP in digital worlds?

With luxury digital and hybrid collectibles predicted by Morgan Stanley to constitute a $25 billion segment of a $300 billion NFT market by 2030, brands need to be focused on IP protection in the metaverse.

While digital worlds represent a wealth of opportunities for brands, they also pose new challenges to IP protection. In the digital realm, the IP rights protection struggle is real, as an infringing copy may be produced in a matter of seconds. As the fashion industry becomes increasingly digital, these new challenges are likely to increase in tandem.

The ”Metabirkin” verdict in the U.S. provided a positive first signal that IP rights may be enforced in the digital world, just as they are in the physical world, and Hermes prevailed. Yet the Metabirkin case was decided by a jury, and the infringing artist, Mason Rothschild, had the right to present his defence of artistic expression. It is possible that a different jury and differing facts may have yielded a different verdict. 

As the industry awaits the creation of additional case law, brands are creating new portfolio management strategies and specific enforcement techniques to address the risks of operating in the digital economy.

For brands, another key question concerns how to deliver and manage IP rights in the context of interoperability. This will become increasingly important as customers seek to take their virtual fashion from one platform to another.

Old laws for new tech

A related legal question still to be answered, is whether AI generated digital art and fashion may be copyrighted effectively. On March 16, 2023, the U.S. Copyright Office (USCO) launched a new Artificial Intelligence Initiative and issued new registration guidance to “address the copyrightability and registration issues raised by” works containing material(s) generated by AI.

In addition, the USCO recently decided that a “fan-fiction”-style graphic novel comprised of human-authored text combined with images generated by the AI service Midjourney constituted a copyrightable work, but that the individual images themselves could not be protected by copyright because they were not created by a human.

Although no court has yet ruled on the question in Continental Europe (e.g. Belgium and France), it is likely that a court would also deny copyright to pure AI generated works as in most jurisdictions, copyright may only be attributed to human-authored works. It remains to be seen how courts will tackle the more difficult scenario of works that are only partially based on AI and also include human authorship.

Broader legal risks

As highlighted in the rest of this metaverse series, forays into the metaverse present a variety of new legal issues to be navigated. Regulators face multiple challenges in policing the emerging virtual economy, in which novel digital products and systems test existing laws and regulations.

When it comes to fashion and the role of NFTs, many questions remain unanswered. With respect to any digital collection, there may be significant regulatory compliance questions and hurdles, many of which are likely to be highly facts-and-circumstances specific and potentially influenced by “manner of sale” – in other words, marketing.

For instance, under U.S. federal securities laws, there may be a risk that the offer and sale of an NFT could be characterised as a “security” or that an NFT trading platform could constitute an “exchange”. Sanctions, “know your customer”, anti-money laundering and anti-terrorist financing compliance requirements are likely to apply and compliance failures may result in severe consequences. Even questions concerning the taxation of NFTs are still being considered and addressed.

The legal and regulatory landscape, like the fashion world, appears to be evolving continually. Tech-savvy legal advice from a firm that can look across the full regulatory and legal spectrum will be key.