The boom of non-fungible tokens – or ‘NFTs’ – in the online art world has seen the first tweet on Twitter sell for $2.9m, and Canadian musician, Grimes, achieve $6m for one of her digital artworks. But the jackpot fell to Mike Winkelmann, known as Beeple, who secured the third highest sale value by a living artist when a collage of 5,000 Instagram posts, bundled as a single JPG file, was sold for an eye-watering $69m.
NFTs are crypto-assets that comprise unique metadata designed to guarantee provenance and safeguard against forgery. While an NFT may relate to a high-value piece of artwork, it is the same technology used to hold images, videos and music on a computer to validate rights and ownership.
Held securely using blockchain technology, each NFT contains ownership details for easy identification and transfer between token holders, and owners can add further metadata or attributes, such as an artist adding their signature to the metadata for a digital artwork. NFTs may also be combined to create further, unique NFTs. This separates them from fungible tokens like cryptocurrencies, where each unit will always have the same value as another unit, and no unique value can be made by adding units together.
Both NFTs and cryptocurrencies use the same blockchain technology, which is effectively a digital ledger shared and verified across innumerable computers worldwide, protected by complex cryptography to make it secure and resistant to fraud. While the technology is playing an increasingly important role in securing cyber transactions, it is not guaranteed to be foolproof. Together with the uncertainties around valuations, authenticity, copyright and trade mark registration, this makes investment in NFTs potentially high risk.
Rights
While the acquiring owner of a physical painting may expect to put it on display to the public without worrying about intellectual property rights, the law has not yet been tested by the purchasers of digital art who wish to display their treasures to the world.
Owning an NFT does not automatically give the right to exploit the underlying asset through reproduction, display or distribution. The rights granted by the NFT will be unique to that token, and copyright must be expressly provided for and agreed by the original content creator. It’s an approach that reflects the need to safeguard against the potential of infinite reproduction, which is implicit in digital assets, to make them more closely aligned to physical works of art. Similarly, while trade marks and publicity rights are well established for physical artists, there is uncertainty as to how such rights may be protected for digital artists.
NFTs are not only relevant for the art world; several sports teams have begun developing collectible tokens relating to players and unique memorabilia, some of which can even be used on specific gaming platforms. It is essential that the party creating these tokens has the right to use the sportsperson’s image rights in this way.
Many of the legal questions around NFTs are yet to be answered, but to improve certainty, licensees and licensors alike should clearly define which rights they are giving and receiving, and may wish to review existing agreements to determine if the licensee has the right to tokenise the licensed assets.
Authenticity and safeguarding
Blockchain technology means that each NFT will carry its unique chain of title, but there is no guarantee that the original entry is not false, or an error has not been made. This has a direct impact on validating authenticity and undermines certainty and security. On the flip side, those considering acquiring NFTs should expect to be subject to authenticity checks themselves, as transactions conducted through cryptocurrency or token exchange can raise compliance issues under anti-money laundering regulations.
Another complicating factor is that no matter how secure and robust blockchain platforms may appear, all digital assets are potentially vulnerable to cyberattack. Alongside due diligence, insuring against these risks is an essential part of the acquisition process.
What may be harder to guard against is the obsolescence effect of technological development. With blockchain under fire for its huge energy consumption, it’s possible that new technologies will be developed to replace it, and the compatibility and maintenance of NFTs in the future is impossible to foresee. All digital investments are likely to be more of a gamble than going for the real thing. This is a very young market, where sustainability of value has yet to be proven within the legal landscape, not only in the UK but worldwide. It is advised that those looking to invest should always approach with caution.
This is not legal advice; it is intended to provide information of general interest about current legal issues, if you need to speak to a member of team about what is written please contact Iona Caseby (
ioc@blasermills.co.uk) on +44 (0) 1494 738 063.