In early 2021 the $69M sale of Everydays – The First 100 days, by Beeple, sprung NFTs from a niche but growing section of the digital art world into the mainstream public consciousness. Google searches for NFTs skyrocketed. Saturday Night Live spoofed the rapid sector growth with a parody of Emenim’s “Without Me” entitled “What the Hell’s an NFT.” A 10 second clip of the sketch was subsequently turned into an NFT which sold for $365,000. As pop culture awoke to and embraced this facet of the digital art world, so too has the urgency for artists, museums, and collectors to understand the rapidly evolving legal considerations within the NFT space.

Defining an NFT

NFT is an acronym for Non-Fungible Token. Tokens come in a variety of forms, may function in very different ways. Broadly speaking, tokens may represent a virtual property, such as a unit of cryptocurrency, or a right to an action, such as the ability to access a feature, to which the token holder is entitled. The term Non-Fungible describes the token, and denotes that the token has individual characteristics that can identify it from any other token.  An NFT’s ownership is recorded on a blockchain, thereby providing clear provenance for the token.

Although NFTs are often associated with digital or digitized art, because a token may function in a variety of ways, the underlying reference asset of an NFTs may not represent an ownership over the original artwork, or the underlying copyright, each of which may have their own independent legal existence. Likewise, the provenance recorded on the blockchain is the provenance for the token, not necessarily the associated work. The extent to which any rights associated with the work are transferred  in conjunction with token ownership is governed by an underlying smart contract.

Smart contracts conceptually emerged in the 1990s. The idea behind smart contracts was to create a contract where the terms were embedded in computer code, and when external conditions triggered specific contract parameters, the document would self-execute its terms via the web. For example, if a consumer purchased travel insurance via a smart contract, and experienced a flight cancelation, then program would receive the flight cancelation information and automatically release the reimbursement.  This process would eliminate the need for filing and verifying claims. - Jenee Iyer

NFT Terms and Conditions

NFTs are creatures of contract, and contracts come in more shades than Pantone could ever dream of. The rights a purchaser acquires when buying an NFT will vary dramatically on the terms and conditions associated with the NFT’s smart contract, the terms and conditions of the minting or marketplace site, and any off-chain contracts applicable to the work.

Copyright

Copyright law protects original works of authorship fixed in a tangible medium of expression (17 USC § 102(a)). Authors hold several exclusive rights over the work, including the right to copy, make derivative works, and to public display (17 USC § 106). An author has discretion to sell or license their rights in a variety of manners, and to numerous individuals if so desired. In the context of an NFT, this means that the author may afford the NFT purchaser all, none, or somewhere in between, the full suite of rights the author holds in the work. Further, if the NFT minter is not the author, they may only transfer the rights they hold, no more. This broad scope of possibilities can cause confusion.

Particular challenges can arise when a work is a joint work of authorship. Currently a number of NFT sites require the minter to be the sole author, or sole owner of the copyright. (Kushner)

For example, in April 2021, an NFT of a drawing by Jean-Michel Basquiat was minted and placed up for auction, purportedly included in the sale were various IP rights including the right of reproduction. The artist’s estate intervened and halted the sale of the NFT after it confirmed that the seller did not own or license rights in the work.

Resale Royalties

Many NFT smart contracts contain a resale royalty component whereby the NFT minter, often the artist, will automatically receive a defined portion of future sales. Artists in the United States currently do not have resale rights, and the doctrine of first sale (17 UCS § 109) permits lawful owners to sell works without the authors permission. Over the years, artists have attempted through contract and other avenues to benefit from post first sale value increases in their work, but with mixed results.

The smart contracts deployed in NFTs are not conventional contracts, but self-executing bits of code, which for resale royalties are appealing in their simplicity. If a resale royalty is built into the smart contract, once the NFT is sold, the minter will automatically receive the preset compensation directly to their wallet.  In 2019, Simon de la Rouviere’s released an NFT featuring a bar code and the words “This Artwork is Always on Sale.” The first edition featured a royalty rate of 5% per annum. The current valuation is valued at: 130.0 ETH (~$333710 USD). A V2, released in 2020, has a per annum royalty rate of 100% and is currently valued at: 7.0 ETH (~$17969 USD). The long-term impact and benefit of these resale royalties for artists will likely be the subject of further inquiry.   

NFTs and the Public Domain

While most NFTs are minted by the artist, or the copyright owner, legal and moral questions remain regarding minting NFTs of Public Domain works. The Rijksmuseum in the Netherlands was an early leader in the OpenGLAM movement to promote free and open sharing of digital versions of public domain works. In early 2021, a group calling itself the Global Art Museum minted NFTs of many of the works available free online from the Rijksmuseum and attempted to sell the NFTs. The move was not well received by the broader artistic community, and the organization later claimed it was all a social experiment. Social experiment or not, the third-party commodification of public domain works housed in museum highlights the myriad of ways NFTs will raise legal and ethical questions about the future of the art ecosystem in the digital economy.

While NFTs just recently entered into the broader public consciousness, today’s NFTs are based on years of development and growth in the broader blockchain landscape. As with all technologies, they will continue to grow, evolve, and present new questions and opportunities as the confluence of art and technology continues to flow.