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Nonfungible Tokens and the Law

Cliff Ennico on

Like most Americans, I was intrigued by the recent Christie's auction in which "Beeple," a digital artist, received $69.3 million for a digital artwork that was authenticated by a "nonfungible token" (or NFT).

Like most Americans, I hadn't the foggiest clue what an NFT was.

As a lawyer, I represent quite a few artists, photographers, writers, software developers and other content creators, and I know it's only a matter of time before they start asking me, "Is this something I should be doing?"

So, I've done some research, and, in the words of Mr. Spock from "Star Trek," I find the NFT "fascinating."

NFTs transform digital works of art and other collectibles into one-of-a-kind, verifiable assets that are easy to trade on the blockchain. A content creator can digitize or "mine" his or her works and upload them to one of several NFT marketplaces, which charge a network fee called "gas" for the privilege.

Because NFTs currently can be sold only for cryptocurrency, the creator will also need to open an account on Coinbase to accept payments in the cryptocurrency Ethereum.

Then, at least in theory, the creator can sit back and wait for the digital payments to flow in the door as people buy their NFTs.

So, what's good about NFTs?

First, each NFT is a unique creation. When you buy the NFT of an artwork, you own an "original" of that artwork, just the same as if you bought an oil painting at a brick-and-mortar art gallery.

Second, each purchase and sale of an NFT is recorded on a blockchain, making it almost impossible for someone to sell knockoffs of the artwork without getting caught. If your name does not appear in the chain of title for an NFT, you have no legal right to that artwork. What you have instead is a copy, which may be an authorized reproduction or an illegal knockoff.

Third, the artist can include a "smart contract" in each NFT specifying that he or she gets a percentage of the purchase price each time an NFT changes hands, something that never happens in the brick-and-mortar art world.

 

Lastly, digitizing an artwork in an NFT is a terrific way for artists to prove its date of first publication without having to go through the tedious and often inefficient process of registering a copyright (my one-hour video on copyright law can be found on YouTube). Anyone claiming prior rights to the artist's work will have to prove that he or she created the exact same artwork before the NFT was created -- an almost impossible task.

But there are numerous downsides to NFTs as well.

First, just like buying a painting in a brick-and-mortar art gallery, when you buy an NFT, you buy only the artwork itself, not the artist's copyright -- the legal monopoly giving the artist the exclusive right to exploit the artwork commercially for a period of years. Unless an artist specifically sells his or her copyright to an artwork to someone else, the artist retains the copyright to the work and is free to license it to someone else and make copies of the artwork, even though the artist is no longer in possession of the original.

Second, if an artist creates multiple NFTs for the same artwork, which are the "originals" and which are the "copies"? While each NFT is unique, it is possible for a content creator to create multiple "editions" of a particular artwork or collectible available for sale, each evidenced by its own NFT.

With digital artwork (either a work created in a digital medium or a digital image of a physical work such as a painting or sculpture), the "copies" are virtually identical to the "original," down to the last pixel. If I create 50 NFTs of the same artwork, which one is the "original"? Or are they all "originals"? Or are they all "copies" with the "original" existing off of the blockchain in some universe of Platonic forms?

Third, it isn't clear at the present time how NFTs will apply to copyrightable works other than digital art -- for example, works of literature, architectural designs and musical works. If I write a novel and post the text to an NFT, is the NFT merely the original author's manuscript that can be resold only as a collectible? Or, if I add a smart contract claiming a percentage of each sale of the NFT, have I just self-published the book?

In the case of musical works, if I write a song and upload the music and lyrics to an NFT, is the NFT the sheet music of the song, a recording, a live performance or all three? How will the music industry's traditional distinction between publishing rights, reproduction rights and performance rights apply to an NFT?

As with any new technology, NFTs raise more legal questions than can be answered with just a few hours of online research. We will have to wait for Congress and the courts to decide how our copyright laws, dating back to the 1700s, will handle these new and exotic digital creatures.

Cliff Ennico (crennico@gmail.com) is a syndicated columnist, author and former host of the PBS television series "Money Hunt." This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our webpage at www.creators.com.

 

 

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