Before Spice DAO dropped $3 million on a rare copy of Alejandro Jodorowsky’s production book for Dune at Christie’s, the group tweeted its intention to “tokenize” the book.
It can’t do that.
The decentralized autonomous organization has since backpedaled, now saying (somewhat implausibly) that it never believed owning a copy of the book would equal ownership of copyright, with the attendant rights to reproduce the work in NFT form or prepare derivative works. The incident has nevertheless captured the attention of crypto skeptics, who point to the Spice DAO purchase as an example of what can go wrong when crypto enthusiasts get ahead of themselves.
Whoever was tasked with legal research at Spice DAO seems to have bungled it badly, but many legal questions about NFTs are confusing because there really are no clear answers yet. Because NFTs are just encrypted units of data stored on a digital ledger, usually the Ethereum blockchain, they do not themselves contain any visual content. They are rather tokens that merely refer to works of digital art by linking to them. Purchasers of NFTs typically acquire neither a physical object nor the copyright to a digital one. To own an NFT is to own a signifier without a referent.
NFTs, or non-fungible tokens, emerged from the anarcho-techno libertarian recesses of an internet where “normies” are the enemy and anything as insipidly mainstream as “the law” is to be treated with suspicion. 2021 was the year that NFTs burst into mainstream awareness, with the artist Beeple’s NFT Everydays: The First 5000 Days selling at the storied auction house Christie’s for $69 million—an unfathomable amount of money for an asset that, in an important sense, does not exist.
For some, this is why NFTs represent the ecstatic apotheosis of conceptual art. To others, NFTs are a collective delusion, or one more symptom of apocalyptic capitalism. Polarizing and perplexing, NFTs are nevertheless exploding in popularity, attracting investors who are excited about this new asset class but do not necessarily share the utopian impulses of the crypto artists who have been operating in this space for years. “There’s a new class of investors who are attracted to NFTs and meme stocks because they’re interested in stories,” says investment strategist Yuri Cataldo, “but I would classify NFTs as extremely high risk. It’s exactly like gambling.”
That makes a lot of people uncomfortable, and a culture clash seems inevitable as lawmakers begin to eye this volatile new market, contemplating regulation that will strengthen protections for consumers.
Matt Kane, a former oil painter who now designs his own software, using code as a medium for NFTs, recalls that “those of us who came into it when there was no money had a more collective spirit and a collective vision for the selfless direction this technology should go in.”
The idea was that “smart contracts” would replace traditional legal frameworks governing ownership. Traditional contracts are agreements between parties, usually written in natural language, that create legally enforceable obligations. If one party breaches a traditional contract, the other party can take them to court. The downside of this age-old model is that litigation is often prohibitively expensive. Too often, the wealthier of the two parties in a contract can breach it with impunity because the other party lacks the resources to compel enforcement.
Smart contracts, or self-executing transaction protocols, are software. They are written in the formal language of code. Since they live on the blockchain, backed up by a vast distributed network, one cannot breach a smart contract the way one could an ordinary contract; their terms are effectuated automatically. Theoretically, there are no court costs involved. No lawyers’ fees. No need to trust the other party or the flawed and frequently inaccessible justice system. For these reasons, smart contracts are attractive to some artists, particularly early-career artists, who tend to have less in the way of financial resources.
Artists like Kane have worked to ensure that many of the smart contracts controlling NFT sales contain provisions for artist royalties. In the analog art world, an artist gets paid when they sell a painting to a collector, with their gallerist taking a cut as large as 50 percent. After that first sale, even if the value of the painting has appreciated a hundredfold, the artist gets nothing when the collector resells it. Remedying this perceived injustice, NFT contracts now often provide for artists to automatically receive a 10 percent royalty for any and all secondary sales.
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“Royalties allow artists to participate in their own success,” says Kane, “and that’s the way it should be.” This idea is much older than the crypto art movement. Individual American artists and advocacy groups have been trying to write royalty provisions into their contracts since at least 1940, when American Gothic painter Grant Wood announced that he would only sell paintings with the stipulation that he get half of any appreciated value upon resale. Such private agreements have had little success, though. While these “droit de suite” resale royalty laws have been in place in France for a century and throughout Europe for decades, similar legislation has not fared well in the US. In 1976, California enacted a state resale royalty act, but a court subsequently gutted it.
The fine art market is shrouded in secrecy. When physical objects are being traded away to anonymous buyers behind closed doors, it can be difficult for individual artists to monitor resales, let alone enforce their quirky agreements with collectors.
The crypto art community has done what individuals and governments have so far failed to do for American artists. “It really comes down to ethics,” says crypto artist Sarah Zucker, who uses analog video and other obsolete technologies to make NFTs that pulsate in Lisa Frank colors. “If you are going to have a multibillion-dollar industry based on the labor of a class of people, do you believe that that class of people should at least be provided with enough to ensure that they’re not dying in a gutter somewhere, impoverished?”
When I spoke to Kane, he was a long way from the gutter, reveling in the recent $1.25 million resale of his Monetization Generation, an NFT he originally sold for $75,000 in March. “Normally, in the traditional art world, I would not see a cent,” he says. “This time, I had the equivalent of $125,000 just dropped on me. It’s life-changing.”
Having done well by the blockchain, Kane is understandably skeptical about government regulation of NFTs. “There’s grown to be a community consensus that artists are entitled to royalties, and community consensus is more enforceable than laws in some ways,” he says. “We’re all participating in this new system that’s more concerned with the benefit of the many over the profit of the few. And that’s the spirit of crypto.”
Confusion about what an NFT actually is, and what rights ownership of one entails, has already led to some recent, high-profile snafus. An NFT of a Jean-Michel Basquiat drawing was recently withdrawn from auction on the platform OpenSea after the Basquiat estate made it clear that the seller did not own any rights to the work. The sellers claimed, wrongly, that the transaction would confer ownership of the physical drawing. There are some aspects of the law surrounding NFTs that remain murky and undefined, but this is not one of them. If I mint an NFT of a picture of your cat, that does not mean that your cat has to come and live with me now.
Similarly, the Basquiat NFT sellers wrongly claimed that the highest bidder would obtain reproduction rights, but NFTs do not have the power to vaporize existing copyright protections. Only an image’s lawful copyright holder can transfer the reproduction rights to that image. A crypto artist who makes an NFT out of an original image could theoretically sell their copyright along with the NFT indexing the image, but copyright transfer would not automatically be rolled into the transaction; it would have to be explicitly stipulated.
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Other legal issues presented by NFTs are truly novel. For example, because the image associated with an NFT is not itself backed up on the blockchain, if the platform hosting it is discontinued, that work of art could easily disappear. “We don’t have a ton of legal definition around whose responsibility it is to maintain the archival documentation of this artwork,” says Zucker.
In the analog art world, of course, the collector bears all the responsibility. With NFTs, things are not so clear. Zucker pays a monthly fee to back up her oeuvre on a distributed storage protocol called the InterPlanetary File System. But many artists do not, and Zucker wonders what will happen to her work once she’s no longer around. While much of the crypto community remains skittish about the law stifling innovation, this is one of many questions that the law could help resolve. Lawmakers are also signaling that they plan to crack down on fraud in the space. Wash trading, for example, where a buyer and seller collude to artificially inflate the value of an asset, is a serious problem in the NFT market.
Not all of the crypto art world’s legal problems are crying out for public law solutions in the form of new legislation or regulation, though. For now, many of the issues presented by confusion surrounding NFTs may be best addressed by private law initiatives, meaning more education and better contracts.
Some of the more established digital art marketplaces have carefully written terms of service that go a long way toward clarifying legal issues, but many only add to the confusion. Strikingly, Christie’s 31-page Conditions of Sale document contains only a single anemic sentence specifically addressing the copyright question: “We do not offer any guarantee that you will gain any copyright or other reproduction rights to the lot.” Elsewhere in the same document, Christie’s says that ownership of an NFT carries “property rights for the lot (specifically, the digital artwork tokenized by the NFT).” At the moment, this is only metaphorically true, that is, not true in any legally meaningful sense. That one of the most important auction houses in the world is selling NFTs for tens of millions of dollars using a contract like this is more than a little concerning.
The NFT marketplace Nifty Gateway does a better job of capturing the curious legal (and ontological) status of NFTs, or “Nifties,” in their terms of service: “NIFTIES ARE INTANGIBLE DIGITAL ASSETS. THEY EXIST ONLY BY VIRTUE OF THE OWNERSHIP RECORD MAINTAINED IN THE ETHEREUM NETWORK … WE DO NOT GUARANTEE THAT NIFTY GATEWAY OR ANY NIFTY GATEWAY PARTY CAN EFFECT [SIC] THE TRANSFER OF TITLE OR RIGHT IN ANY NIFTIES.”
Rather than seeing this wide-open space as an opportunity for industrywide transformation, too many legal actors seem to be more interested in using the law to mold the crypto art world in the image of the traditional art world, with all its limitations and inequities. One strain of thinking suggests that artists’ royalty agreements—perhaps the most promising development in the crypto art space—are untenable and that a stable, mature NFT market will require their elimination. NFTs should be treated as digital personal property, the argument runs, owned free and clear of any legal obligation to their creators. This is a policy choice that would certainly make things simpler for the investor class. It would also miss the point of crypto art, which in the hands of sophisticated practitioners like Brian Frye—a law professor/artist whose work puns on intellectual property regimes and Securities and Exchange Commission regulations—has the potential to become a new form of institutional critique, the self-reflexive 20th-century movement associated with artists like Andrea Fraser and Hans Haacke.
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By experimenting with frameworks tailored to the aesthetic and structural innovation already underway, legal actors can instead help remake the art world. They might, for example, help further the aims of the crypto art community’s open source movement. Advocates of this approach to intellectual property are already launching NFT projects governed by Creative Commons licenses. At their least restrictive, these licenses allow artists to waive all rights to their work, making their images freely available to anyone to use or adapt for any purpose.
To answer the question of digital storage, legal actors might decide that artists and their estates are the ones best situated to look after their work by backing it up in perpetuity, and not collectors buying objects and keeping them out of public view while waiting for their value to appreciate. With artists assuming more power through royalty agreements, it might be appropriate to give them this additional responsibility. Putting artists in charge of maintaining their own work could help eliminate other evils of the art world.
The meaning of art ownership could be transfigured. Instead of ownership entailing possession or exclusivity, ownership of the works of art of the future could look more like patronage. In a few years—who knows?—we could even begin to see the traditional art world borrowing from legal frameworks developed to suit the needs and aspirations of the crypto art world.
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