Term has started again this week for students of the Art Business and Law LLM provided by IAL in conjunction with Queen Mary, University of London. This semester, students will embark on three diverse new topics: Art and Intellectual Property, covering the intangible aspects of art; Art and Money, exploring the financial parameters of the art world; and Art Disputes, where they will consider how and why art and cultural heritage become the subject of contention and how resolution might be sought.
This latter module includes a class intriguingly entitled ‘definitional disputes’. Here we look at how the courts have approached the fundamental question ‘what is art?’ and why it has sometimes proven pivotal in judicial decisions. This requires us to explore what happens when the two very different worlds of art and law collide. How does that dynamic play out? Sometimes the relationship is oppositional, sometimes symbiotic but perennially evolving and inherently fascinating.
While pondering these questions, my eye was caught by a report by artnet news that Wikipedia had taken the decision not to classify NFTs as art. The matter was apparently put to a vote amongst the Wikipedia editors of the relevant page which lists the most expensive art works by living artists. A debate ensued about whether or not the page should include Beeple’s famous, $69million record-breaking Everydays digital collage. The majority of the editors, it seems, thought not, preferring to exclude NFTs. The decision left some in the crypto world perturbed, one of the co-founders of leading NFT platform Nifty Gateway questioning whether denying NFTs the status of ‘art’ might undermine the hard-won legitimacy only recently afforded to digital artists.
But is the answer to that question (‘NFT – art or not art?’) important from a legal perspective? Are there any direct consequences? The short answer is yes, almost certainly – though the various ramifications and the particular contexts in which its impact might be felt are not necessarily straightforward. Indeed, it is a question our panel of experts will undoubtedly be addressing in our forthcoming webinar on NFTs in March.
One area where the classification may be highly significant is that of anti-money laundering (AML) regulation. As those who follow developments in the art market will be well aware, from January 2020, the AML regime in the UK has applied to ‘art market participants’ involved in transactions worth EUR 10,000 or more (broadly speaking – though the precise formulation of the regulation’s scope is, of course, rather more granular). When defining the ‘works of art’ to which the AML regulations will apply, the regulators chose to lift the definition from the 1994 VAT Act – a law enacted in times rather different from those of today. In consequence, it was not at all clear whether that definition included digital art. The Government is now addressing the matter and included a direct question in its recent consultation on proposals for amendments to the regulations, asking “whether further amendments are needed to bring into scope … those who trade in the sale and purchase of digital art”.
It seems likely that this proposal will be carried forward, particularly in light of the explosion of digital art sales linked to the exponential rise of NFTs over the past year or so. That is not to say, of course, that applying a rule to digital art necessarily equates to applying it to an NFT. The two are most certainly not the same beast, and, for what it’s worth, I have some sympathy with the deliberations of the Wiki editors pondering on whether to include NFTs in their list of top-billing artworks. Whilst the NFT is a unique piece of code (the ‘token’) linked to, or pointing to an underlying asset – which, in practice, is very often a digital artwork – it is not that artwork itself. Whether this distinction will prove consequential in the context of AML regulation, however, remains to be seen. Even if an NFT, is ‘not art’ per se, what it quite clearly is, is a means of trading in art (amongst other assets). So provided that digital art is in scope for AML regulation, it seems likely that NFT trades of such art will follow.
How the authorities choose to define and to conceptualise NFTs will undoubtedly have other serious regulatory consequences too. Focus on the regulation of cryptoassets more broadly is gathering pace. The approach of the relevant regulatory body, the Financial Conduct Authority (FCA), suggests that whether and how NFTs are regulated will depend on exactly how an NFT is used. While most forms of straightforward direct sale/purchase activity might fall squarely out of scope, if an NFT seems to operate a little like a security, then trading in it might require FCA authorisation and be subject to the Authority’s control. This might occur, for example, where NFTs are used to represent fractional ownership of an underlying asset (an artwork or otherwise), or are used to provide a stake in profits from future sales. Guidance specifically addressing NFTs has not yet emerged from the FCA, but this will surely be a matter of time.
Let us circle back, then, to where we started out with these musings on NFTs. They certainly present some challenging issues for the art world and for lawyers alike and suggest that the ‘definitional disputes’ to which the LLM students will shortly turn their minds will continue to occupy an important spot on our curriculum. If anything, the digital age only serves to continually expand the parameters of this topic yet further.
It is early days for NFTs in the big scheme of things. In its customary way, the law is playing catch up, half a lap behind on a track with an ever-extending finish line. Whether art or not, NFTs are unlikely to be able to operate in something of a regulatory vacuum for too much longer as lawyers and governments get to grips with the issues they raise. What’s clear is that they are not going away any time soon, so we will continue to monitor their evolution and the legal response to the myriad of possibilities they offer for the art market and beyond.
Many of the issues touched upon in this post will be explored in our forthcoming NFT lunchtime webinar on 22 March. To register, please follow this link: https://ial.uk.com/product/nfts/
Image: Blockchain technology by TLC-kios, CC0 1.0 via Creative Commons