Summarize

Blockchain, cryptocurrency, non-fungible tokens... New technological solutions are going mainstream in different fields of our lives. What are NFTs in the art market and what legal challenges do they imply?

LL.M Clara Cassan*

NFTs and Legal Challenges Ahead 

Remember the 1999 movie The Thomas Crown Affair? It tells the story of the eponymous character, a gentleman billionaire played by Pierce Bosman, who manages to steal a Monet painting from the Metropolitan Museum of Art, and then protects his alibi by publicly donating a Pissaro to replace the stolen work. The investigation to recover the Monet lasts throughout the movie and, by the end, we discover that the Pissaro painting Crown had donated was a forgery painted over the “lost” Monet. The missing artwork had been there all along. This fraud allowed Crown to steal a different painting from the Met while keeping law enforcement and the media distracted. The public and we, as viewers, were tricked into thinking that if the unbreakable blockchain represented by an institution such as Met was unalarmed by the Pissaro’s authenticity, there was no reason to worry. Yet in the midst of the hype generated by this new acquisition, we forgot to focus on the security flaws at the core of the art institution’s system.

Twenty years after the movie’s release, we might have started to create a world devoid of art fraud. Blockchains and non-fungible tokens (NFTs) could bring us closer to a more transparent art world. NFTs carry encoded and unique ownership information regarding digital property, including that of artworks. In less than ten minutes, artists can mint themselves as NFT creators, becoming the first link in the digital custody chain that links to the work in question. If the NFT is purchased with cryptocurrency, the digital contract (“smart contract”) between the buyer and the seller is automatically encoded within the blockchain and attached to the NFT. The blockchain itself derives its reliability from the fact that its information is verified and accepted by multiple computers. Think of the blockchain as a universal catalogue raisonné that would have been approved by hundreds of art historians across the world. The chances of the ownership information being false start to run slim.

This is an important advancement in the art market world. Art provenance—a work’s “life story” since its creation—can provide essential information to help solve legal disputes around ownership, copyright infringement, and authenticity. It also plays a major role in the ongoing fight against the illicit trafficking of cultural property. In the non-NFT world, provenance researchers are regularly faced with gaps in works’ ownership history; and when an artwork’s provenance seems complete, scholars and experts still need to verify its accuracy. Standard provenance information can suffer from human mistake. Typos, misspellings, wrong dates, or mistranslations can elongate a lawsuit, or make it difficult for a good faith buyer to prove the authenticity of the work he or she rightfully owns. NFTs can certainly alleviate the risk of common errors around the ownership of digital art. Yet as we just learned, they are not yet immune to human intelligence.

Uniqueness

It turns out we have a Thomas Crown of NFTs. Only a few weeks after the Beeple auction hype, a savvy artist, Monsieur Personne, successfully minted replicas of Beeple’s work under the original artist’s name. Monsieur Personne then transferred the NFTs’ ownership back to himself without Beeple’s consent. Because the NFTs were minted to Beeple’s name, the scheme went unnoticed by the servers (sound familiar?). The result appears to be blatant plagiarism or, more legally speaking, copyright infringement, and massive fraud.

NFTs—the tokens themselves—are comparable to works of fine art in their irreplaceability. Art can be forged, of course, and some near-perfect forgeries can be bought and sold for decades before being discovered, if ever. In spite of this threat, a significant part of a physical painting’s value owes to the fact that it cannot be identically reproduced. As CEO and art collector Peter Kraus recently told the New York Times: “Scarcity is worth something.” This explains why lithographs or a series of remolded sculptures have lower monetary value than paintings. The uniqueness of NFT art, however, is relative. It seems as though the only way viewers can differentiate a “real” NFT artwork from its reproduction is through the ownership information stored in its blockchain. Of course, digital art (or Net art), which emerged with the rise of the Internet, can also be infinitely reproduced if posted online. The difference is that the owner of a digital artwork can decide not to make it freely accessible to the public. The private owner of a work of digital media, for example, is never obligated to publish an image of this work online. On the other hand, once an NFT is minted onto a blockchain, it is there to stay. The minter can decide to “burn” the image but its information will remain online. Thus, an NFT art buyer must accept that hundreds of people might have an identical copy of the NFT he/she bougt for millions, and this, for an infinite period of time.

Copyright

This relative uniqueness further complicates the subject of NFT artists’ copyrights. What happens when a Monsieur Personne-like figure cracks the system and reproduces ten replicas of EVERYDAYS: THE FIRST 5000 DAYS under Beeple’s name, without the original artist’s authorization? As explained by many intellectual property (IP) lawyers, an artist would need prior authorization to make an art NFT based on a preexisting work. If the original NFT’s authenticity lies in the blockchain, did M. Personne’s reproductions infringe Beeple’s visual work if he did so by registering information on a different blockchain? If an NFT artwork is copyrightable on its own like any other digital artwork, would its authorized reproductions generate new IP rights on the basis that each reproduction exists through new, “original,” and unique NFTs? NFTs have prompted the emergence of new creators and provided a new platform for preestablished artists. The hope is that NFTs will also provide these artists with the certainty that their digital art will be properly protected. However, unlike “regular” digital art, the value, ownership, and existence of an NFT-based artwork fully relies on technology. Copyright protection for these artworks is essential but there needs to be an extra layer of technological protection for the smart-contracts and links the works exist through.

Resale Royalties

Another risk caused by NFTs is that they might not provide artists with the financial support that was hoped for only weeks ago. One of the major differences between United States and European IP law involves an artist’s rights to resale royalties. Directive 2001/84/EC of the European Parliament and Council allows artists who sell their work in the European Union to receive a percentage of the resale price obtained on the secondary market through professionals (auction houses, galleries, online auction sites…). Whereas in France, resale rights are a fundamental prerogative that artists cannot repudiate, they are not recognized in the U.S. As of today, NFTs can be bought on competing marketplaces (i.e., OpenSea, Rarible, SuperRare). Within each of these marketplaces, artists and buyers enter into smart contracts, which allow for the transfers of cryptocurrency from one party’s digital wallet to the other. These contracts are encoded within the same blockchain as the asset (the NFT) they apply to. In theory, these smart contracts have a transnational quality that could grant artists with more control over their moral and proprietary rights, allowing them to receive a percentage of the resale prices generated by their NFTs. Many smart contracts already include an embedded resale royalty of around 10% that is automatically sent to the original artist. However, this substantial progress for artists’ rights comes with a caveat: as of today, smart contracts are platform-specific. If an NTF artist and a buyer enter into a smart contract on OpenSea, for example, and this contract provides the artist with resale royalties, the artist will only receive a percentage of these royalties if the resale also occurs OpenSea. So, while these smart contracts are transnational in the traditional sense, their non-interoperability currently interferes with the larger advancement for artists’ moral rights that was hoped for.

Future issues

On January 2, 2021, the Anti-Money Laundering Act (AMLA) came into force in the U.S, incidentally adding welcomed surveillance over the antiquities market. In a nutshell, the AMLA requires businesses to follow AML trainings, record their transactions, and report suspicious activities in order to help the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) detect criminal and/or terrorist activities. Two months after the AMLA was passed, the international organization Financial Action Task Force (FATF) issued a new set of guidelines for its Members States on the fight against money laundering and terrorism financing, including through virtual assets. FATF stated that some virtual assets could facilitate money laundering and terrorism financing even if some of these “items—or tokens—” do not immediately appear to constitute virtual assets. The likelihood that NFT platforms, which facilitate the exchange of cryptocurrencies, will fall under the AMLA’s definition of “money transmitting business” or “financial institution” is quite high. Especially since FinCEN has found that persons that administer, exchange, or transfer cryptocurrencies are “money transmitters” of “convertible virtual currency” and that, thus, they must comply with the Bank Secretary Act. Whether NFTs themselves could fall under FinCEN’s definition of money transmission is also conceivable. According to the governmental institution, if an asset can be issued or repurposed to serve as a substitute for currency, then it “could be a type of value that substitutes for currency.” In other words, when a transaction “does not involve currency, or funds, but…something that the parties to a transaction recognize has value that is equivalent to or can substitute for currency,” there is money transmission. This raises a larger issue regarding NFT art which is whether the token, the digital image, or both, can be considered as independent assets. This would determine which part of an NFT artwork might require inspection under the AMLA. It might also help unweave the complexity of some of the copyright questions discussed above.

In some ways, the digital art world was gifted with a soft opening to the risks of NFTs’ security challenges; unlike Thomas Crown, M. Personne dutifully admitted to his scheme and he claimed to have used it to reveal an alarming weakness in the NFT system that must be addressed. Hopefully, the ease with which he maneuvered his enterprise will ring an alarm bell or two before NFT cyber hacks and infringements are steered by more devious Mr. Nobodies.