Non-Fungible Tokens (NFTs)

Non-Fungible Tokens, or NFTs, are big news these days. After an NFT for a piece of digital art by the artist Beeple (Mike Winkelmann) sold for $69 million in March 2021―making it the third-most expensive artwork by a living artist―businesses and their lawyers have been scrambling to understand the legal issues surrounding NFTs, not to mention the meaning and value proposition of this novel class of digital assets for online marketplaces and digital content developers.

An nfts defined is a unique digital asset. For example, NFTs can be associated with a blog post, a sports highlight, or in the case of Beeple’s “Everydays: The First 5000 Days,” a digital collage of images. Unlike cryptocurrencies, where one Bitcoin has the same value as another (i.e., they are fungible), each NFT is unique. In a way, the only value of an NFT is the fact of owning it, though it can also be related to a real-world asset, like a parcel of land. In its simplest form, you might think of this as similar to what happens if you donate money to your school to build an athletic stadium, and they add your name to a plaque of donors. You don’t own the stadium, or the plaque. You only own a place on the list.

Coming years will undoubtedly raise a sea of legal issues about NFTs, just as for cryptocurrency during the late 2010s.

Artists, Vendors, and Online Marketplaces Must Clearly Describe to Purchasers the Rights Associated with an NFT to Avoid Transaction Disputes

Copyright

Owning an NFT and owning the right to exploit a copy of a digital work―which is mainly covered by copyright―are distinct. Digital works can be infinitely reproduced with no diminution of quality, and therefore are not scarce by definition. Artists and media companies create scarcity for digital assets via technical means (like DRM for digital music) and via copyright law (which controls the right to make copies).

Because NFTs are so new, IP rights associated with a sale may be unclear unless carefully set by contract. There has long been a presumption in copyright law that fine art is always tangible, and NFTs challenge that presumption. The sale of physical artworks historically has not come with any intellectual property rights, though, by implication, a buyer probably has a right of public display of the physical copy purchased. Older artworks, of course, no longer enjoy copyright protection. Museums have long relied on these principles for accessioning. But buyers of digital art will probably also expect some right to display or use the artwork, and the law to support this expectation has not yet been settled. Any artist, online marketplace, or other vendor selling or reselling rights to NFTs should clarify those rights in a written agreement or terms of service. Otherwise, buyers may misunderstand the rights that an NFT confers and dispute the transaction as a result.

Moral Rights

In the US, moral rights are limited to visual “fine art” under the Visual Artist Rights Act. Particularly in the EU, moral rights (droit moral) are much broader. VARA enacted the moral rights required in the Berne Convention on copyright, but the US interpretation of this requirement was much narrower than in Europe. Rights under VARA include rights of attribution (right to claim authorship) and integrity (right to prevent mutilation or destruction, or to disclaim authorship as a result). California also has a parallel law, the California Art Preservation Act (California Civil Code §987). Droit moral in the EU also confers other kinds of moral rights. Moral rights in the UK may be unclear currently due to Brexit.

Because purely digital works are relatively new to the fine art world, the extent to which moral rights applies to them is also unclear. For example, VARA only protects works of “recognized stature” and NFTs have not yet been tested against this standard. An artist might, for example, insist on the ability to claim or disclaim authorship, or prevent destruction of the work―and with an NFT it is unclear what that might mean. Under the VARA, moral rights for works created today have the same duration as copyright, which is quite long (author’s life + 70 years). This duration will likely long survive current assumptions about technology used to deploy NFTs.

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