NFTS: AN OVERVIEW OF LAW AND REGULATION IN 2022 AND BEYOND.
| Author | Gould, Emily |
INTRODUCTION
Just three years ago, very few participants in the art market were familiar with the concept of an NFT or non-fungible token. Since then, however, this new phenomenon has taken the market by storm to such an extent that there are unlikely to be many artists, dealers, gallerists or other art traders today who do not have at least a passing understanding of NFTs and how they operate. Although the first NFT is said to have been created in 2014, (1) it was not until the record-breaking sale in March 2021 of the work by digital artist Mike Winkelmann (better known as Beeple) entitled Everydays: the First 5000 Days for $69 million that NFTs came to the attention of the art market and the wider public. NFTs have rarely missed a week in the headlines since. Whilst estimates vary quite widely (2) and volatility abounds, (3) the NFT market is considered to be worth billions of dollars.
NFTs have raised questions for almost every branch of the law: from copyright to contracts, taxation to trade marks and property law to privacy. The intention of this article is to provide an introduction to some of the issues which arise for digital artists who might be considering entering the NFT market. It will examine the approach which the legislature, the regulatory authorities and the courts appear to be taking to some of the legal questions which have arisen, acknowledging that this is a rapidly developing area. These matters will be addressed principally from the perspective of the law of England and Wales, with reference to other jurisdictions where useful, acknowledging that any meaningful discussion of such a global phenomenon--and indeed, the most appropriate and efficient legal response--will ultimately require a broader, supra-national approach.
The explosion of NFTs onto the market has posed difficulties for traditional legal frameworks and requires an adaptation to new business models and unfamiliar structures, ft is not altogether unusual for the law to be placed in a position where it is required to react to changing societal and business habits, but the speed at which NFTs have secured a multi-billion-dollar market has posed significant challenges for legislators and regulators, such that at present, there are almost certainly as many questions as answers. Nonetheless, it is a fascinating time to be exploring these questions, as the responses to the multitude of pertinent issues begin to crystalise.
This article will take as a framework the lifecycle of an NFT, exploring the legal questions which arise at each stage, from the creation of the underlying asset (taking a work of digital art as the example) through to its minting as an NFT then onwards to its trading on the blockchain.
PRELIMINARY DEFINITIONS--THE NFT
It is worth noting that there is no universally accepted, official legal definition of an NFT. As yet, no legislation, authoritative guidance or decided court case is known to have offered a definitive, all-encompassing description. Conversely, a multitude of attempts to define NFTs colloquially can be found in press articles, blogs, websites and other commentary.
For current purposes, a basic breakdown of each aspect of the acronym is offered. The 'token' in 'non-fungible token' is essentially a line of computer code, or a set of metadata which is linked to, or which points to an underlying asset and which can potentially represent 'ownership' of that asset. In practice, the asset in question is very often a digital artwork, and this is perhaps the most common characterisation of an NFT. In reality however, a vast, and possibly limitless range of assets could be attached to or represented by an NFT. Other common examples include: video-clips of sporting events, (4) music files, online games or gaming commodities, (5) tickets for events, (6) club membership benefits, even physical artworks (7) and other tangible collectibles. The distinction between the NFT and the asset it links to is one which must always be borne in mind but which is often lost when NFTs are discussed in the media and in common parlance, where the NFT is often conflated with the underlying work. An NFT has been likened to the deeds to a house or a certificate of title or authenticity for an artwork or other collectible. (8) Although the analogy is somewhat oversimplified, it may at least serve as a reminder of the crucial distinction between the token (equating to the deeds) and the underlying asset to which they link (i.e. the house).
The first element of the acronym, the 'non-fungibility', describes the unique quality of an NFT. There is only one version of the particular line of code comprising any single NFT so that it is not fungible or exchangeable with any other token on a like-for- like basis. Again, it is the token, the computer file or package of files, which is unique, rather than the underlying asset. There may be multiple copies of a digital artwork, for example, located on many computers and available to be viewed by anyone with a digital device anywhere in the world, but only one NFT attached to that work, authenticated by the artist himself. This quality of singularity distinguishes the NFT from other forms of digital tokens such as cryptocurrency, which, by their nature, are necessarily exchangeable. One unit of bitcoin is readily exchangeable with another because they will always have identical values and qualities. The unique nature of NFTs is one of the prime characteristics which have attracted the attention and adherence of digital artists. In the digital world, where replication, access and availability are almost unbounded, the ability to imbue works with the formerly elusive quality of scarcity has undoubtedly contributed significantly to the burgeoning of digital art sales through NFTs over the past two years.
INITIAL CONSIDERATIONS FOR THE NFT CREATOR--COPYRIGHT LAW
A basic understanding of a broad range of legal disciplines is undoubtedly a useful tool for any artist seeking to enter the NFT space, not least among these being the law of copyright, and an awareness of its key principles is crucial for those trading in NFTs. Copyright issues feature at almost every stage of the NFT lifecycle and instances arising in the NFT world in recent times suggest that misunderstandings about some of its fundamental tenets are fairly widespread.
Copyright arises in a variety of works including original artistic, literary, dramatic and musical works, films and broadcasts. (9) It is an automatic and informal right, arising as soon as a protectable work is created (in contrast to registrable rights such as trade marks and patents, where protection starts only once an official registration has been granted by the relevant authority). With the important exception of works created in the course of employment, the first owner of a copyright work is the creator. (10) Copyright gives the right holder a bundle of quasi-exclusive rights, most obviously in relation to the copying of a protected work, but also with regard to other activities including communicating a work to the public (for instance through a broadcast or on a website). (11) It is often characterised as a negative right, enforced by the right holder preventing others from exercising his bundle of rights, or any of them, without a licence. (12) It is also a national right, so that, despite a degree of harmonisation through the operation of international conventions and treaties, (13) copyright laws still vary, sometimes in important respects, from one jurisdiction to another.
The two most fundamental questions for a digital artist wishing to sell a work or collection of works through NFTs are firstly whether copyright subsists in the work and if so, who owns it. The answers to these questions will impact significantly on any dealings with that work.
In some circumstances, the answers to these fundamental copyright questions might be quite straightforward, but in practice, complicating factors will often arise. As to the subsistence question, in most jurisdictions a work must be 'original' to attract copyright protection. The threshold for originality differs somewhat across jurisdictions. In the United Kingdom, the bar has traditionally been set very low (merely that the work 'originated' with the author and was created through labour, skill and judgment). (14) This test has been modified in recent years by EU legislation and subsequent case law from the Court of Justice of the European Union (CJEU) requiring a work to constitute the "author's own intellectual creation". (15) Other jurisdictions apply a different (arguably higher) threshold, perhaps most notably the United States, where at least a 'minimal degree of creativity' is required. (16) The assessment will always turn on its particular facts, of course, but some digital works (like their analogue siblings) may fail to reach the required originality standard.
The authorship of the works in question might also raise challenges. Artistic endeavour is frequently a collaborative enterprise, whether in the digital or analogue worlds. Any work created by more than one author, where the contributions of each author as expressed in the resulting work are inseparable, will be a work of joint authorship. (17) The copyright in such a work will be jointly owned by all contributing authors. The exploitation of any such work in the UK (and many other jurisdictions) requires the consent of all joint authors. This means that if one of a number of contributing authors were to create an NFT of the work without the consent of all others, he risks infringing the rights of those other joint authors. (18)
Other questions more specific to the digital world might also arise. The rapid developments in computer-generated art--works created through the operation of an algorithm, or artificial intelligence (AI)--has been a notable feature of the art world in the past decade. (19) A good example of such works in...
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