NFTs are currently the talk of the art world but what exactly are they? “NFT” stands for “non-fungible token” but this still leaves many of us none the wiser. In short, however, an NFT is a unique (non-fungible) code which is linked to a digital asset, such as a piece of digital art which exists on the internet. As a starting point for understanding, almost everything about an NFT exists in or is linked to the digital world and is intangible, and in the case of art, is therefore the opposite to what has traditionally been understood and accepted in the art world. NFTs bring their own set of considerations for anyone who wants to be involved with them, including new and unprecedented legal questions.
A is for Artist and Authenticity
If an artist creates a piece of digital art (there does not have to be any underlying physical work of art), they can choose to “mint” it or “tokenise” it on a digital marketplace and thus sell it directly as an NFT on that marketplace. To do this, an artist can upload their work onto the marketplace and specify details such as a starting price or the number of limited editions. NFTs have “smart contracts” built into them which means the artist automatically gets a percentage of the sale price each time their work is subsequently traded on that digital marketplace. The artist might even be able to choose how much this percentage cut will be.
Each digital marketplace has its own terms, and it is worthwhile for an artist to read these to understand what their different advantages might be, especially because the smart contract cannot subsequently be amended. By contrast, artists who create art works in any physical media are usually linked to a gallery who might charge them a set commission of 50% on the sale of their work. A digital artist could thus be seen as having more control over their work if they mint it as an NFT since they can go directly to a digital market to sell their work and choose their own terms.
It appears, however, that there is currently nothing to stop someone else creating a digital image of an artist’s work and then minting that image as an NFT to sell it for their own financial gain. The duplicate digital image might not be considered authentic if it is not the original artist who has minted it, and indeed puts into question the notion of “non-fungibility” or “uniqueness”.
Furthermore, there are already instances of digital artists whose works have been commissioned by, for instance, online game developers who have found that those art works have now been turned into NFTs without their consent being sought: for instance, game developer Jason Rohrer launched an NFT auction in March comprising 155 works he had commissioned from a range of artists in 2012 for one of his online games. This issue may therefore arise if NFTs did not exist at the time of the original commission, and so could not have been anticipated in any contractual wording, assuming that the commission was documented in a contract in the first place. Some may view this as part of the democratisation of digital art, but artists may prefer to think about having wording in agreements to set conditions on how or if their art may be turned into NFTs, either to prevent this completely, or to ensure that they are fairly remunerated and that the NFTs are sold with their approval. Indeed this would apply not just to digital artists but could also be something that contemporary artists creating physical works, or artists’ estates should think about, or even, for instance, owners of art works who are sending digital images of them to prospective buyers.
B is for Buyer, Blockchain, Banksy and Beeple
NFTs are supported by blockchain technology and each creation and sale of an NFT is recorded on the blockchain. Blockchain activity leaves a permanent chronological record.
As a buyer this means that you can track all previous sales and prices of NFTs. This transparency is often contrasted with the records of art sold through auction houses or dealers, where some believe there is a lack of transparency and that, for instance, past sales or prices are not always cited. However, this is in some ways a misplaced comparison. If any art is sold through the open market (as opposed to privately), such as at auction, then the previous sale history should be publicly accessible even if it may at times be up to a buyer to find it through their own due diligence. Furthermore, transaction history may be incomplete for understandable reasons such as the fate of works during a war, the fact that opinions as to the attribution of a work may have changed over time, or simply that due to the age of a work, not all records have been kept. None of these factors apply to NFTs which are effectively starting with a clean slate. Nevertheless, the transparency of the blockchain record may well appeal to NFT buyers.
But what are buyers getting when they purchase an NFT? In short, buyers acquire the token, which is a distinct code of letters and numbers, which is linked to the digital art work and allows them to access it, look at it for their personal use and trade it. They are therefore not acquiring the right to commercialise the digital art work. Copyright should remain with the original artist. While blockchain seemingly provides a complete and open record, buyers would be advised to check that the address on the blockchain record is that of the original creator of the digital art work who “minted” the token or is by the artist they believe it is by.
For instance, NFTs of art works which looked like those of the street artist Banksy, minted by someone calling themselves “Pest Supply” (Banksy’s works are officially authenticated through “Pest Control”), have been sold for significant sums on digital marketplaces but Pest Control has said that there is no connection between these NFTs and Banksy.
Perhaps more disturbingly, on 3 March 2021, an art collective burnt an authentic limited edition screen print by Banksy, and videoed this event, having first created a digital image of the screen print which they then sold as an NFT. The reason they gave for this act of destruction was that “if we had the NFT and the physical piece, the value would be primarily in the physical piece”. This may have been a one-off stunt, possibly inspired by Banksy’s own transformation of one of his works by shredding it at a Sotheby’s auction in October 2018, but both these Banksy-related examples challenge the notion of value in relation to NFTs.
It is undeniable that NFTs of digital art works are currently selling for record prices. NFTs are most commonly available to buy on a digital marketplace but recently auction houses have also been getting in on the act. In March 2021, Christie’s offered a digital art work by the artist known as “Beeple”, comprising every digital image he had posted since 1 May 2007 (“Everydays: The First 5000 Days”), with accompanying NFT. This was minted exclusively for Christie’s and it sold for a staggering US$69,346,250.
Now Sotheby’s have offered “The Fungible Collection” by digital artist Pak, released from 12 to 14 April 2021 and auctioned exclusively on the “Nifty Gateway” digital marketplace. Interestingly, this sale included a collection called “Open Editions” which Sotheby’s describes as “a set of NFTs that can be bought infinitely by collectors during the time of the sale, questioning the relationship between scarcity and value”.
C is for Cryptocurrency and Collectors
At the heart of the NFT phenomenon is cryptocurrency. NFTs are traded in cryptocurrency and even to mint an NFT an artist first must buy into Ethereum. The Beeples work sold by Christie’s was payable in Ethereum, including ultimately Christie’s buyer’s premium (originally only payable in US dollars). NFTs are therefore one way for holders of this cryptocurrency to spend it; as yet, cryptocurrency is not accepted for the purchase of physical paintings, sculptures or works of art through auction houses, galleries or dealers. NFTs may appeal in particular to technologically savvy buyers who may not have any existing links to what has been described as the “analogue” art world. Thus NFTs are creating new art markets.
Nevertheless, there is no reason why the two cannot co-exist alongside each other and some are already finding ways for them to combine and even challenge each other. The art historian Ben Lewis has minted an NFT of a digital version of the controversial painting “Salvator Mundi” which sold at auction at Christie’s for $450 million, but which had been sold by its original owners for just $1,175 in 2005. He is hoping to split the proceeds from the sale of his NFT-linked “Salvator Metaversi” with those original owners. While Ben Lewis is clearly making a specific point about fairness in the art world, it is conceivable that collectors may consider minting NFTs of their art works as an alternative way of recording them for posterity and indeed raising money from them while still enjoying the physical experience of having the art on their walls – if indeed it is not kept unseen in a warehouse.
D is for David Hockney
Not everyone is convinced by NFTs. One of the greatest living artists, David Hockney, who ironically was ahead of the curve in producing digital art on his iPad, recently used a rather derogatory alternative acronym (which shall not be printed here!) to describe his views on NFTs. Hockney prefers to print out his digital art so that it can be displayed physically. That being said, there are many who are excited about the possibilities of NFTs and art, and there is no doubt that new legal conundrums will emerge as the developments continue.
This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.