Modern Issues with Modern Art: the risks and rewards of NFTs

The world of crypto is growing at light-speed. What started off as a largely mysterious phenomena called “bitcoin” has now become a more accepted and legitimate form of currency. However, the world of crypto is not limited to currencies. Recently, there has been an explosion of interest around non-fungible tokens, aka NFTs, with reports of eye-watering sums of money being spent purchasing them.

What are NFTs?

An NFT is a unique token which is traded between parties as proof of ownership. Popular examples of NFT transactions include the sale of digital artwork such as Beeple’s Everydays: The First 5,000 Days which sold for $US69 million in March 2021 or Jack Dorsey’s first published Tweet which sold for $US2.9 million in the same month. However, NFTs expand much further than the world of art. An NFT may attach to sound recordings, video, gaming features, virtual real-estate or physical property.

A common misconception is that an NFT is a product. In the case of digital art, the misconception is that the NFT is the JPEG or the GIF. However, NFTs are merely tokens which are used to represent ownership of the product and point its location. The digital artwork will almost never be stored on the blockchain, or even the purchaser’s hard drive, rather it will be hosted on an external server.

If you are buying or selling NFTs, or an artist whose work is being traded as an NFT, here’s what you need to know.

Copyright in NFTs

Although the idea of an NFT is somewhat futuristic, NFTs are unlikely to have a material effect on the application of existing copyright laws.

The art which is being sold pursuant to an NFT may be a digital work, a digital copy of a physical work, or the physical work itself. Regardless of which form the art takes, it will be covered by the definition of an artistic work in the Copyright Act, essentially any work of artistic craftsmanship, whether or not the work is of artistic quality or not. Accordingly, and consistent with traditional sales of art, the sale of an NFT will not constitute a transfer of the underlying copyright in the art, unless it has been expressly contemplated by the parties.

However, artists should be aware of implied rights. These are rights which are automatically passed to the purchaser of the artwork in order to give the sale efficacy, such as a right to display the art or a right to re-sell the art. The extent and nature of implied rights will ultimately depend on the nature of the sale. To minimise the risk of unexpected implied rights, or to deter purchasers from misusing art, artists should consider embedding licence terms within the NFT’s metadata, or in a contract of sale. For example, Mike Shinoda, a member of the band Linkin Park, sells NFTs pursuant to the following NFT terms on his website.

“Only limited personal non-commercial use and resale rights in the NFT are granted and you have no right to license, commercially exploit, reproduce, distribute, prepare derivative works, publicly perform, or publicly display the NFT or the music or the artwork therein.  All copyright and other rights are reserved and not granted.”

Artists should also ensure that they are familiar with the terms and conditions of the platform which they are using to mint NFTs. Most platforms will include terms which require the artist to licence their intellectual property to the platform. Some platforms will have more favourable terms for artists than others.

There are two main commercial advantages which NFTs offer over traditional sales of artwork. Foremost, because all NFT transactions are recorded on the blockchain, the history and origin of an NFT is publically available. This may assist buyers in verifying the authenticity of the asset and artists in proving ownership of copyright in the asset.

Unlike other forms of intellectual property, copyright is notoriously hard to locate and keep track of as there is no central registry of ownership. As a result, copyright in some of the world’s most famous artworks has been lost or obscured overtime. For example, Leonardo da Vinci’s Salvator Mundi was traded between parties for less than $US2,000 before being identified as a da Vinci. If Salvator Mundi had utilised an NFT, the value of the art would not have been lost, and it is likely that royalties would have been directed to the owner of the copyright upon each transaction.

Artists may seek to embed royalty rules into their NFTs. This means that each time an NFT is on sold, the artist will receive a specified percentage of that sale. The payment of royalties will be automatic and does not require any active steps to be taken from the artist, after the rules have been set up.

Risks with NFTs

There are two main risks associated with NFTs.

Where the NFT attaches to a digital asset, such as a JPEG or GIF, there is a risk that the JPEG or GIF may cease to exist, regardless of how much has been paid for the NFT. This is because the JPEG or GIF is being hosted on the internet rather than the blockchain, or on the purchaser’s hard drive. If the artwork is simply stored at a URL and the domain is not maintained (think of the 404 Error which appears in a web browser) then the asset will no longer be accessible. An example of an NFT which utilises this storage method is Grimes’ animated video entitled “Death of the Old” which sold for almost $389,000 in February 2021. If the video is primarily stored on Nifty Gateway and Cloudinary, its existence relies upon the maintenance of those domains.

Some NFTs rely on InterPlanetary File Systems (IPFS) to overcome the risks which are associated with domains. IPFS are peer-to-peer storage networks which means that content may be accessed through multiple peers, rather than a singular domain. IPFS also allow for the purchaser of an NFT to play an active role in maintaining the storage of the digital asset, through paying hosting bills. Beeple’s Everydays: The First 5,000 Days primarily relies on IPFS storage.

However, there are still risks associated with IPFS. In March 2021, the team at Check My NFT, who assess the strength of NFT storage, announced that high profile artworks by musicians Grimes, deadmau5 and Steve Aoki were temporarily inaccessible. Buyers should act diligently and consider the storage mechanisms of digital assets prior to purchasing an NFT.

Buyers should also scrutinise who they are buying an NFT from. While the history of an NFT’s ownership will be publically accessible on the blockchain, there is no guarantee that the person or entity who minted the NFT was entitled to do so.

For example, in April 2021 an NFT was minted on OpenSea for an artwork by Jean-Michael Basquiat entitled “Free Comb with Propaganda”. The NFT purported to transfer ownership of the artwork, including reproduction and IP rights to the highest bidder. However, prior to the auction, the estate of Jean-Michel Basquiat claimed ownership of the copyright and caused the NFT to be delisted.

Due to the digital nature of NFTs, there is an increased risk of false claims to copyright (often referred to as copyfraud) occurring. Due to the nature of crypto-trading, buyers will struggle to take legal action where they have fallen victim to copyfraud.

If you need advice in relation to NFTs or have a question about how NFTs may affect you, please contact a member of Thomson Geer’s Intellectual Property Team.