NFTs as ‘property’ – in art and law

Posted on: September 2, 2022 by

Blockchain technology by TLC-kios, CC0 1.0 via Creative CommonsWhile some high profile artists have been somewhat underwhelmed by the NFT phenomenon, others have been much more eager to dip their toes into NFT waters. Undeterred by naysayers such as David Hockney, who in one interview, deemed NFTs as for ‘crooks and swindlers’, artists such as Damien Hirst have embraced the new technology. Hirst’s fascinating project ‘the Currency’ reached its conclusion last month. Seeking to gauge the market’s appetite for owning physical works versus NFTs, Hirst, in conjunction with HENI, an international art services business, offered for sale a collection of 10,000 NFTs of his famous dot paintings which buyers could either retain in NFT form, or swap for the physical work.  The twist in the tale was that if the choice was to retain the NFT (which linked to a digital image of the work) then the physical work was burned, and conversely, buyers who redeemed the physical artwork sacrificed their NFT. The initial offer, launched in 2021 and remaining open for a year, was reported to be more than six times over-subscribed, though sales slowed down over the course of the year, in line with the general downturn in crypto markets. Nonetheless, the project is reported to have generated around $89 million overall, so far from insignificant in financial terms.

Describing his own agonies over the physical work versus NFT decision for the 1000 works he retained, Hirst recently reported the results of the experiment on Twitter. Cue drumroll…5,149 buyers chose the physical work, with 4,851 retaining their NFT. It was a close call, and perhaps we shouldn’t read too much into it, but could it possibly signify that the attachment for the physical over the digital is still alive and kicking? Hirst himself explained in an interview how he “had a much harder problem burning the paper” than he did the NFTs – a mindset which seems to have been shared by over half of the buyers who participated in his experiment.

It might seem something of a leap from a Damien Hirst experimental work to a Law Commission consultation paper released, coincidentally, within days of the Hirst project’s conclusion. The link, however, is that both focus on the relationship between NFTs and property, defining that concept in different ways in the two contexts: For the Hirst project,  by ‘property’ we are thinking of the tangible, or the  physical versus the virtual or digital, whereas the Law Commission’s work investigates whether NFTs (amongst other digital assets) can constitute property as defined by the law. This question is more than academic: the status of an asset as property (or not) will impact on almost all legal relationships, rights and dealings with that asset, including commercial transactions through which it is traded, what happens to it on an insolvency or bankruptcy and how rules of succession apply to it.

The 550-page consultation paper is a key development in the Law Commission’s ongoing work on digital assets, first discussed on this blog a few months ago. As we noted in that earlier post, the Law Commission had already indicated in an interim statement in November 2021 that it was minded to consider NFTs as personal property, based both on earlier work conducted by the UK Jurisdiction Taskforce of the LawTech Delivery Panel (see its Legal statement on cryptoassets and smart contracts) as well as important case law in the UK and elsewhere. The focus in the current consultation is the question of what kind of property NFTs might constitute, and the implications of this for other areas of law and for potential law reform.

English law has traditionally recognised two forms of personal property: ‘things in possession’ (which have an independent existence and are typically physical, tangible items – a chair, a laptop, an oil on canvas painting etc) and ‘things in action’ (often intangible, and generally only enforceable through legal action, most commonly typified by a debt or a contractual right). Crypto-tokens (including NFTs) do not fit comfortably in either box: on the one hand, being virtual and intangible, they fail to resemble a typical thing in possession. Yet on the other, not being dependent on personal rights or legal enforcement makes them significantly distinct from most types of thing in action.

In response to this conundrum, the Law Commission has suggested that certain digital assets might more accurately be encompassed within a ‘third category’ of personal property – so-called ‘data objects’. These objects are: (1) composed of electronic data (e.g. computer code); (2) independent from persons and from the legal system; and (3) ‘rivalrous’ meaning, essentially, that use of them by one person necessarily excludes use by another at the same time and in the same manner. The relationship between these objects and the persons who hold and deal with them is more properly characterised by the concept of control than that of possession, which has traditionally occupied centre stage in questions pertaining to property under English law.

Applying the three criteria to crypto-tokens, the Commission has provisionally suggested that they are, in general, capable of falling within the new ‘data object’ category of personal property.  Whilst recognising that the breadth of potential uses and structures of NFTs means that their characterisation is “not straightforward”,  the approach preferred by the Commission is “to begin with the understanding that an NFT is a crypto-token that is capable of attracting personal property rights in itself”.  This view aligns with the case law to date in the UK and elsewhere, as discussed in our earlier blog post.

So what do these, and the Commission’s other proposals in the consultation paper mean for the future of UK law relating to NFTs? Perhaps to the relief of many stakeholders, no wholesale legislative overhaul is deemed necessary. The expansion of personal property law to incorporate the new ‘data objects’ category is something which could potentially be achieved without statutory change, though the Commission seeks views on whether, alternatively, limited legislative expansion might be preferable. Any detailed development and application of the new category however, is, in the Commission’s view, best left to the common law which is praised on more than one occasion for its flexible, resilient and iterative nature.

One intriguing question is whether the tort of conversion, historically applied only in respect of tangible property, could be expanded to cover the new category of data objects. The Commission recognises that such a development would constitute a ‘step change for the law’. It would involve addressing challenging questions about how concepts key to conversion (e.g. possession of and interference with the objects in question) would apply in the digital environment. It could, however, offer significant protection for owners of digital goods, giving them parity with tangible property owners in this regard.

The consultation closes in November and the results will then require analysis, so it will be some time before the final proposals are published. Given the speed of development in crypto markets generally, it is anybody’s guess what the NFT space might look like when that time comes. Will Damien Hirst’s Currency NFTs be holding their value, or will those who retained the NFT be wishing they’d traded them in for the physical works? How will public confidence in and enthusiasm for digital assets fare? Adaptation to new ways of thinking is rarely a quick process. Whilst acceptance of digital assets as an alternative to physical property in the art world might be a protracted process, it will possibly take even longer for the legal world to come to terms with a new category of property!

For a detailed analysis of the law relating to NFTs, see my article in the latest issue of Art Antiquity and Law. Subscriptions available here.


Image: Blockchain technology by TLC-kios, CC0 1.0 via Creative Commons