NFTs, Blockchains, and the Legal Conundrum

After bidding that lasted 2 weeks, with over 180 bids in the final hour, a digital artist named “Beeple” sold his artwork for $69.3 million. The artwork, an unconventional JPG file, broke several records, primarily owing to its unique nature. This fee of $69.3 million is the third highest-paid at any auction for work by a living artist. The records for the highest and second-highest price paid are held by Jeff Koons and David Hockney.

Billed by the auction house as “a unique work in the history of digital art,” entitled “Everydays: the first 5000 days” is a collage of all the art Beeple has been posting on his Twitter account each day since 2007. Beeple, who has collaborated with celebrities like Justin Bieber and Katy Perry, makes digital art to create a visual commentary on 21st-century life. “Everydays: the first 5000 days” is an NFT (non-fungible token).

What is a non-fungible token?

NFT is not a material object. Instead, it is a digital file which has been “minted,” allowing for a record of ownership and also the possibility of transferring ownership. NFTs are part of the Ethereum blockchain, which is a cryptocurrency, like Bitcoin. Ethereum’s blockchain supports NFTs which allows them to store extra information and gives a record of ownership. However, many critics question whether these “tokens” are worth anything at all.

NFT and blockchain

NFTs rely on blockchains, which are decentralized blocks of data chained together in a way that makes the data immutable. In simpler terms, a blockchain is basically a large number of computers which are connected to the cloud and store the information regarding all the digital artworks, GIFs, tweets, etc. This means NFTs can represent a variety of copyrightable works and the blockchain can keep an unalterable record of every owner of the NFT. Another example of this is the purchase made by Sina Estavi, CEO of Bridge Oracle, a blockchain company. He bought the first-ever tweet on Twitter by Jack Dorsey for $2.9 million, which gave him limited ownership of the tweet. NFT sales do not require the artist to assign their exclusive rights to the work. This may allow the artists to retain the ability to license the work, among other exclusive rights.

The legal standing of NFTs

Beeple’s artwork, Jack Dorsey’s tweet, and other digital art sold through these exchanges are protected as pictorial, graphic, or sculptural works, under the Copyright Act. However, they must meet the other conditions for obtaining copyright. The concept of protecting artistic work is of express constitutional significance, and it allows for creating new copyright laws for the promotion of the progress of useful arts.

Now, the biggest question that needs answering is whether the NFT can be copyrighted? The answer to this is not clear but it is highly unlikely because the NFT itself is just a digital certificate of ownership; it is not a creative work. The NFT usually does not give the title of the work itself, it gives title to the underlying work. This may not be the case if the actual work is uploaded to the blockchain, and the blockchain is not able to store full images, videos, etc. It does not have that sort of capacity and the cost of writing data is often prohibitive for uploading the piece of work on the blockchain.

NFTs and artificial intelligence

What about NFTs based on works created by a team or works created by artificial intelligence? The answer to these questions is the same, it depends on the circumstances, but an AI cannot own the rights to any work. The human creator behind it will hold the copyright.

Will the copyright of the fundamental work be moved to the proprietor of the NFT? That question has been contemplated by legal specialists; the conclusion is, by all accounts, yes. Albeit the genuine modalities of moving a blockchain-verified digital document written in programming code may be complicated. A rights-holder may likewise decide to permit certain, yet not all, of their privileges related to the NFT. A critical component in the process is guaranteeing the integrity of the connection between the NFT and the basic work to be sure that any given NFT really addresses the craftsmanship on display.

Critical analysis of NFTs

NFTs offer the artists many advantages with regard to copyright tracking. They can track the use of copyrighted pieces of work and help companies in paying the royalties to the original owner more efficiently. These are now being exchanged through the bluebox platform, which is a music distribution company. One way of doing this is to split the song into multiple NFTs and break it down into each NFT representing a small percentage of the song’s copyright, and some of these are sold to the public which helps the song perform better on charts. Later, the people who bought these can re-sell them for a potential profit.

However, it has its limitations. Many artists have found their work being appropriated without permission by sellers of NFTs. They have their downsides, but they provide a new source of revenue for some artists.

Data protection law can also be an issue when dealing with NFTs. Blockchains are publicly visible, that is, a transaction made on the blockchain can be tracked by anyone. The people making transactions on the blockchain are not anonymized, which means GDPR can be applied. Especially because there are already numerous analytics services which evaluate blockchain, especially Bitcoin transactions, and can therefore even create profiles of investor behaviour, data processing on a blockchain should not be neglected from a legal perspective. However, most of the problems can be overcome through appropriate contractual provisions and additional technical measures.

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People who buy an NFT get the digital certificate of ownership of the digital asset they are purchasing, which also brings some benefits such as preventing corruption from piracy on the web. A clear chain of title grants a solid legal certainty but this may not be enough of an incentive for an average consumer to start investing in NFTs.

We will encounter NFTs in many forms in the coming years and with time many legal questions will also be asked. Undoubtedly, many new rules will have to be implemented to protect the investors, mainly from there being multiple originals of an asset.