An introduction to NFTs – unique digital files
The recent explosion of interest – and investment – in digital art has highlighted one more area where blockchain is steadily encroaching into all aspects of modern life. While blockchain is now reasonably well established technology, using it to attract and protect the staggering sums of money being poured into digital art represents a new and innovative use-case. How safe are those investments? And what risks do those investors face around ownership and intellectual property rights?
What is a NFT? A NFT (or ‘nifty’) is a Non-Fungible Token: a unique, immutable entry on a blockchain. Once ‘minted’, it can be used to identify and track a specific object – a diamond, a plot of land, a shipment of food, or even a work of art. But a NFT is more than a glorified serial number; it can also form part of a ‘smart contract’ and so can be programmed so that a future event automatically triggers a predetermined response. Thus a subsequent resale of a work of art might generate the automatic payment of a royalty to the artist – clearly an attractive prospect! Alternatively, the NFT may be set to expire after a certain period, essentially allowing the artwork to be leased rather than sold.
How does the law view NFTs? In general, the law treats NFTs and digital artworks in the same way as other non-tangible assets. It allows them to be owned, bought and sold, and will step in to enforce property rights (including intellectual property rights) and contractual obligations, even smart contracts. But in the absence of specific arrangements, the law falls back on default remedies — often retreating to the position of a ‘reasonable’ person — which may not be suitable in the present circumstances and may be far removed from what the parties intended. A prudent player in the NFT market will be aware of this and will take sensible steps to protect their position.
What kind of issues can arise with NFTs for artists and investors?
NFTs and Authenticity
One of the most fundamental differences between analogue art and digital art is the extent to which each can be replicated. Where an original analogue artwork is copied, the original and each copy will retain own separate and distinct identities. Digital artworks, on the other hand, are inherently reproduceable — perfectly and limitlessly — with no meaningful hierarchy of original or copies.
In an attempt to impose some measure of ‘authenticity’ or ‘originality’ (and therefore value) on digital art, the art world has seized on NFTs as a way of artificially marking out a particular embodiment of a work as the ‘one’ against which all other versions must be judged. This is (to put it bluntly) a bit of a fudge: it does nothing to prevent multiple NFTs being minted in respect of a single artwork, nor to stop non-NFT copies being made and sold. Such restrictions can however be agreed by contract, and this would be a prudent move for anyone seeking to protect their investment in digital art.
NFTs and Copyright
As with analogue art, a sale of digital art does not usually include the underlying copyright. This clearly restricts what can and can’t be done with the art – a purchaser will typically acquire only a right to use their artwork for personal enjoyment but not to commercialise it.
While it may be possible to buy out the commercialisation rights, or even the entire copyright, this will require separate negotiation. Even then, the associated NFT may (as mentioned above) constrain whether or how a digital artwork can subsequently be resold or dealt with.
Furthermore, legislation (e.g. s72 Copyright Act 1968 (Cth), s64 Copyright Act 1988 (UK)) may preserve a digital artist’s right to create similar works in future.
Digital Art and Third Party Rights
In the current goldrush atmosphere of blockchain art, many NFTs are being minted with little or no regard for long-term maintenance or third party rights. This can expose artists, owners and galleries to the risk of potentially complicated, lengthy and expensive legal proceedings.
In response to claims of intellectual property infringement, many online marketplaces are implementing ‘take down’ procedures to delink or dehost works which cannot be shown to have cleared all necessary rights. An owner of a digital artwork which incorporates a third party’s proprietary material may therefore find their access to it blocked for fear of litigation.
In such a situation, it will be useful to be able to fall back on appropriate warranties, representations and indemnities, but these may not necessarily be included in all contracts. The golden rule here (as elsewhere) is ‘Get it in writing!’
How secure is a NFT?
A NFT is, needless to say, not the same as the work of art it relates to. It functions more like a digital certificate of ownership of the art, which will be a separate file hosted elsewhere, often in the cloud or on a peer-to-peer storage system.
The world of fine art is very used to the idea that ownership can be separate from possession. Many famous works of art never leave their museums or galleries, even as they legally change hands in the auction rooms of London and New York. Such an arrangement is supported by a complex web of contracts between owners, agents, bailees, mortgagees etc. Since an owner of digital art may be reliant on one or more third parties to maintain and preserve both the artwork and their access to it, a similarly complex arrangement may well be necessary, even for the most modest digital art.
When purchasing a digital artwork, it is important to ensure that the transaction is recorded promptly and correctly. Often, in order to save transaction charges, multiple transactions are saved up to be processed when cost-effective to do so. Unless and until this happens, the purchaser’s investment remains at risk.
Additionally, innovation within blockchain technology itself can also leave even experienced operators struggling to catch up. In some reported cases, newer versions of NFTs are not yet compatible with all aspects of the technology.
Blockchain is rapidly opening up new markets to digital artists and allowing art collectors to explore whole new styles of art. As with any new technology, it is easy to get carried away in the excitement of novelty, especially where significant sums of money are a stake. But this makes it all the more important to keep a cool head and remember there are as many risks as opportunities.