NFTs – contemplating copyright and contract conundrums (part I)

Posted on: May 28, 2021 by

Blockchain technology by TLC-kios, CC0 1.0 via Creative CommonsIt hardly seems possible that the now world-famous sale of Beeple’s ‘Everydays’ NFT at the eyewatering price of $69 million happened less than three months ago. The sale was still underway when we first offered a few thoughts on the explosion of NFTs onto the mainstream art market. Bidding was at what now feels like a modest $8.75 million with two days to go.

At that stage, NFTs were the new ‘buzz word’ in the art world, and questions about the extent of their disruptive power and their potential longevity seemed legitimate. Since then, there has rarely been a day when they haven’t featured prominently in the arts press, frequently dominating the headlines. Touching on topics as diverse as copyright law, taxation, market regulation, fraud and even inherent sexism in art history, the NFT continues to spark fascinating conversations and the debate shows no sign of dissipating.

Too much has happened and too many issues raised to provide a comprehensive overview since our previous post on the topic. What will follow, then, is a brief exploration of two key areas of law where stories from the NFT world have continued to pose intriguing questions. Today, we’ll consider copyright, moving on to tackle contract law in a post later this week.

Let’s begin with the woeful tale of an aborted sale of a Basquiat NFT. The sale, due to take place on one of the largest NFT marketplaces, OpenSea, was announced in late April and greeted with predictable excitement – particularly given the somewhat unusual features of the offer. As articulated by the sellers, along with an ‘encrypted digitized token’ of the Basquiat original (a mixed media work on paper entitled Free Comb with Pagoda), the lucky buyer would receive ‘all related IP and copyright in perpetuity’. What’s more, the sale would include an option for the buyer to have the original work ‘deconstructed, leaving the NFT as the only remaining form of Basquait’s [sic] work to exist’. Or not, as it turned out. As swiftly as the sale had been advertised, the lot was withdrawn when the Basquiat Estate confirmed in no uncertain terms that copyright in the work was owned by the estate, and that no rights had been granted to the seller.

The incident suggests either a fundamental misconception about some of the basics of copyright law, or a willingness to ride roughshod over them – a matter of concern either way. Similar stories and the commentary which has accompanied them indicate that the Basquiat sellers were not alone in their confusion, however. The fact that the question ‘what do I get when I buy an NFT?’ has been addressed in innumerable recent articles, podcasts and seminars the world over suggests that the answer isn’t always crystal clear.

In essence, a buyer of an NFT receives an encrypted data file (the ‘token’) linked to an asset. It is unique (‘non-fungible’)  in that no one else can own that particular token. A useful – if somewhat simplistic – real world analogy might be receiving the deeds to a house. Where the asset in question is a work of art (digital or physical), what the buyer is quite clearly not receiving (absent any bespoke additional agreement – highly unusual in practice) is the copyright in that work. In almost all cases, the copyright will remain with the artist, with very limited rights granted to a buyer which might include rights to use, copy and display the work for personal non-commercial purposes and to share it on digital marketplaces, for example, subject to certain conditions. Outside of those rights specifically licensed, of course, other limited uses might be possible as a matter of copyright law, remembering that copyright isn’t a monopoly right and there are some activities a copyright owner may not be able to stop. The ‘fair dealing’ exceptions in the UK allow for a range of uses such as criticism and review, parody, pastiche and quotation to name but a few, and the much more fluid principle of ‘fair use’ in the US has provided a lifeline for many a creative over the years (though its application can be a little unpredictable and uncertain – see our blog post from earlier this month for some interesting recent examples).

In their offer to have the original Basquiat work ‘deconstructed’, the sellers’ proposed transaction bore more than a passing resemblance to the ‘Burnt Banksy’ stunt which we addressed in our March musings on NFTs. We considered there the potential moral rights issues at play. Whilst an action based on moral rights in the UK or the US might not work in the Basquiat example since the artist died before the relevant legislation was enacted, in other circumstances, it seems more than arguable that the ‘deconstruction’ contemplated in cases like these could amount to prejudice to an artist’s honour and reputation, thus grounding a claim for infringement of the moral right of integrity.

Moral rights issues were also raised by this next story. Among the key features of blockchain technology frequently lauded by its proponents are its transparency and its immutability. Once a work is minted (i.e. registered on the blockchain) then sold on, its provenance and subsequent transaction history will be clear for all to see, providing a concrete and trusted provenance record. But what if you could mint a work to a false identity? This risk seems to be what the pseudonymous Monsieur Personne sought to lay bare when he purported to put up for sale a ‘second edition’ of Beeple’s famous Everydays blockbuster. If even this, possibly the world’s most iconic NFT, was not sufficiently protected, Personne asked, “how can we guarantee that any NFT is safe from intentional malice, fraud, forgeries, theft, etc.?” Whilst the stunt does not appear to have had any direct legal repercussions for M. Personne (or at least none that we have seen reported) there are almost certainly a number of potential grounds for legal claims. As well as possible moral rights claims in some jurisdictions (if there is prejudice to the wronged artist’s honour or reputation) copyright infringement might also be established (if the piece is reproduced, or published on a website without consent). Misrepresentation, or even criminal fraud are also possibilities, for situations involving intentional deceit as to the origins or creator of the underlying work.

Fraudsters and swindlers are no strangers to the traditional art world, of course, but the rise of NFTs presents opportunities for new modi operandi with which the legal world will need to come to grips. And there’s no doubt that many a legal brain has applied itself to the issues at play over the past few months.

In our next post later this week, we’ll explore some of the questions the NFT ‘disruption’ has raised for contract law.

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