Vino on the blockchain – how a new Penfolds NFT may change the course of wine & spirit collecting
Overview
Australia’s much-admired winemaker, Penfolds, has recently announced its endeavours to partner with BlockBar, a leading non-fungible token (NFT) marketplace for luxury wine and spirit products. An NFT is a unique online token that exists on a blockchain and cannot be replicated.
The collaboration between Penfolds and BlockBar requires that Penfolds provide the tangible product, whilst BlockBar creates a platform for the purchase and exchange of the NFT associated with the tangible product. Accordingly, the partnership has launched a limited edition NFT tied to a rare Penfolds Magill Cellar 3 Barrel made from the 2021 vintage (the Barrel NFT).
The NFTs (both the barrel and bottles) can be purchased using either Ethereum or USD. The NFTs are built within the Ethereum blockchain and therefore ownership of the bottle can be tracked back to the distillery itself. By purchasing these NFTs the purchaser enters a smart contract with Blockchain.
More specifically, the wine is a 2021 Magill Cellar 3 Old Vine Barossa Shiraz Coonawarra Cabernet Sauvignon, which represents some of the finest of Penfolds’ stock. The Penfolds’s Barrel NFT launched on 24 November 2021, selling for $130,000 USD to the online account @iggy.
Background on blockchain and smart contracts
NFTs can be used to represent both tangible and non-tangible products. Some NFTs (like the Penfolds one) allow the owner to ‘trade-in’ their NFT for a physical product. This results in the NFT being essentially ‘burnt’ – that is, no longer being a token on the blockchain and meaning there is one less NFT in circulation. There are also NFTs that are purely non-tangible, whereby the NFT only exists online and cannot be ‘traded-in’ for a physical product.
A blockchain is essentially an online database that is shared among the nodes of a computer network. As a database, a blockchain stores information electronically in digital format. Each transaction is independently verified by peer-to-peer computer networks.
In this case, Penfolds mint their own NFTs using BlockBar’s exclusive smart contracts on the BlockBar platform. The original owner on all NFTs on the BlockBar marketplace will be the brand itself, which further proves authenticity. Once Penfolds mint their NFTs, they ship the bottles to BlockBar’s secure warehouse in Singapore.
The purchaser of this Penfolds NFT enters into a smart contract with the current owner, under which the transaction takes place. A smart contract is an agreement between two entities in the form of computer code. Smart contracts work by following simple “if/when…then…” statements that are written into code on a blockchain. A network of computers executes the actions when predetermined conditions have been met and verified. Here, these actions could include releasing funds to the appropriate parties or registering the NTF in the purchaser’s wallet. The blockchain is then updated when the transaction is completed. Unlike a traditional contract document, these contracts are embedded into the blockchain, which means that they are stored on a public database yet are secure and cannot be altered.
How the Penfolds NFT works
The Barrel NFT will be able to be traded on the BlockBar marketplace up until the bottling date projected to be in or around October 2022. However, the owner cannot redeem the NFT for the physical barrel NFT.
As part of this program, the owner of the Barrel NFT at the time of bottling in October 2022 will receive;
a personalised keepsake barrel head;
a private tasting in Magill Cellar 3 (Penfolds Magill Estate Winery South Australia);
a vineyard tour, with regular video updates and imagery from the winemakers; and
a virtual tasting and visit to Penfolds Magill Estate Winery, South Australia for a ‘day in the life’ of a Penfolds winemaker experience.
On the bottling date, the Barrel NFT will be converted into 300 bottle NFTs (Bottle NFTs), which represents the 300 physical bottles that will come from the actual barrel. The whole process will be verifiable through the blockchain, each bottle being identified with a barrel and bottle number. The Bottle NFT serves as a digital receipt that verifies the purchaser’s ownership and authenticity of the wine bottles.
The Bottle NFTs can be resold or transferred through the BlockBar platform by the purchaser and can be redeemed by the purchaser for the physical bottle after the date of release of the wine in October 2023. It is unclear whether the owner of the Barrel NFT, once converted into 300 bottles, will then become the owner of those 300 Bottle NFTs, or whether the general public will have the opportunity to purchase one of the Bottle NFTs upon release.
Each bottle will be stored in limited edition gift boxes at BlockBar’s temperate facilities in Singapore until the purchaser decides to redeem the Bottle NFT for the physical bottle.
Legal considerations regarding BlockBar’s Terms of Service
BlockBar’s platform facilitates consumers to purchase asset backed NFTs directly from BlockBar through their smart contracts with purchasers. According to BlockBar, their smart contracts verify authenticity, and its partnership with top cyber and crypto security firms ensures that transactions are fully protected and transparent.
BlockBar specifies that it is a company registered in Panama, and the internal laws of Panama shall govern any action related to their Terms of Service, the use of the BlockBar.com site or the BlockBar business. It is also worth noting that there are very extensive limitation and indemnity included as part of their Terms of Service. As a result, purchaser rights are highly limited and the laws of Panama will make any form of dispute with BlockBar complex to say the least.
For the Penfolds NFT specifically, it is worth noting several of BlockBar’s terms and conditions, including;
NFT experiences must be redeemed and used by the purchaser in October 2022. If the experience is not redeemed by the purchaser at that time, the purchaser’s right to participate in the experience will expire and the purchaser will not have any further right to engage in the experience later.
All travel costs and accommodation costs are to be borne by the customer.
Each NFT does not represent ownership in the actual physical asset it corresponds to. Each NFT is an independent work of art purchased directly from the brand. The owner of each NFT simply has a contractual right to apply for an exchange/redemption of the digital asset to the physical asset, but it is unclear exactly who this right is exercisable against – BlockBar or Penfolds. The terms state that the title and ownership of all NFTs pass from the supplier to the purchaser, and then if redeemed, it is BlockBar’s sole responsibility to ship and/or arrange for shipping of the physical asset. In effect, BlockBar may be subject for claims in relation to the delivery, but not claims in respect of the physical asset itself. The ambiguous nature of the terms is concerning if an issue does arise in the future.
BlockBar retains the ability to take back the NFT. This is merely a ‘security measure’ and can only be done in two scenarios. Either the NFT owner violates BlockBar’s terms and conditions, or, as a security measure for a consumer who loses access to their digital wallet.
Collectors receive 90% of their selling price and the remaining percentage is split between BlockBar and Penfolds as a sort of commission payment.
BlockBar is not liable for indirect, punitive, incidental, special or consequential damages or any damages whatsoever. Including damages for loss of use, data or profits arising out the use of the website, services or any events or information.
The terms of the contract also require purchasers to hold BlockBar and its affiliates innocent from and against any and all claims, damages, losses, costs, liabilities.
What is the difference between a voucher as we know it and this Penfolds NFT?
In short, think of an NFT as a unique, digital version of a certificate of authenticity, publicly rubber-stamped by the blockchain. The Penfolds Bottle NFT not only gives the owner the right to ‘cash it in’ for the real bottle (which is how a generic voucher may work), the NFT serves as proof of authenticity, and ownership, as well as being secure from hacking. A voucher can be seen as a bond of the redeemable transaction type which is worth a certain monetary value, and which may be spent only for specific reasons or on specific goods. However, an NFT by nature has no fixed monetary value, and only exists digitally.
Future implications of NFTs
As this space is new and constantly changing, it is often difficult to ascertain the rights and obligations on the owner of the NFT and any other associated party.
It is important for the purchaser/owner to understand their rights and obligations, whether they own the IP, or any rights to physical assets involved with the NFT, or whether it is purely digital. Considerations also must be had to the form of ownership, being the digital wallet the NFT is stored in and the owner’s understanding of how their digital wallet works. In addition, there are tax considerations to be had in regard to the type of ownership, costs, and disposal of the NFT and the associated tax liabilities.
Our team is well-versed in this complex area of law – if you have any queries regarding NFTs, please don’t hesitate to contact:
Paul Gray
Principal
T: 03 5225 5231 | M: 0414 195 886
E: pgray@ha.legal
Laura Spencer
Senior Assoicate
T 61 3 9611 0110 | M 0436 436 718
E: lspencer@ha.legal
Hugo Le Clerc
Lawyer
T: 03 5225 5213
E: hleclerc@ha.legal
Ryan Popovski
Lawyer
T: 03 5226 8572
E: rpopovski@ha.legal
