Winter 2022 Generations – NFT Art Collectors: Caveat Emptor Applies

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On March 11, 2021, a digital artist named Mike Winkelmann, known professionally as “Beeple”, sold a non-fungible token, or NFT, associated with a digital collage of his images for $69 million. The most expensive NFT art (or crypto art) ever sold to an individual buyer, Beeple’s “Everydays: the First 5000 Days” will likely be remembered as the first major NFT art sale to break into the mainstream, bringing the concept of NFT sales art to the masses.

On the face of it, Beeple’s sale of his NFT-bound digital art was done in a form we’re all familiar with: an artist created a work of art and sold it to a third party in a auction through a reputable auction house. There are, however, major differences between the sale of a physical work of art and the sale of an NFT associated with digital art, centered on what the parties own once the purchase is finalized.

An NFT is a string of data embedded in a public ledger known as a blockchain. In the case of cryptographic art, the NFT is digitally linked to a particular piece of digital art which is usually stored separately from the NFT itself. An NFT is similar to a certificate of authenticity signifying ownership of a digital work of art. Unlike a physical painting, an NFT does not embody a work of art. Instead, the typical NFT sold on most digital art platforms simply points to a file comprising a digital image that visually represents the associated digital artwork.

For centuries, symbolic forms of ownership in the form of deeds, certificates of title and bills of sale have been accepted as proof of ownership of assets. To be effective, these tokens described in detail the underlying assets they represented. For example, a deed will outline the specific boundaries and boundaries of the underlying real estate. Boundaries and bounds are immutable in the real world, and no identical real property can ever exist. Similarly, an NFT will describe an underlying digital asset by pointing to a digital location in which the underlying asset is stored. Unlike real estate, however, the digital assets referenced by most NFTs may not exist forever in the locations specified in the NFTs, and duplicates of the digital assets can easily be created.

Digital files associated with an NFT can be stored in three different ways: (1) with the NFT token on the same blockchain (NFT onboard storage), (2) on another blockchain or decentralized storage (decentralized off-chain storage), or (3) in a private or centralized server (centralized storage). Embedded NFT storage is most desirable for a buyer of an NFT because it ensures that the digital work will be accessible as long as the NFT exists. Unfortunately, the cost of integrating digital artwork into the blockchain on the most popular blockchains (e.g. Ethereum) is far too high to make NFT embedded storage feasible. Most digital artists have opted for decentralized off-chain storage networks, such as the InterPlanetary File System (IPFS) peer-to-peer network, for their digital art. This form of storage requires the payment of ongoing “pinning” fees to ensure the continued availability of the digital work; otherwise, an NFT could be tied to an unreachable location within the IPFS network. Finally, many NFT platforms offer their own private, decentralized storage for the digital art minted on their platforms. Although convenient and easy to use, the reliability of these platforms for long-term storage of digital images is uncertain. If the platform is no longer in operation in five or 10 years, how will the owner of the NFT linked to the work access the work?

In this context, the question arises: what does a buyer actually acquire when buying crypto art? The traditional art buyer acquires the right to own the physical representation of the work, to display the work for their personal use and enjoyment, and to sell the work to a buyer. The traditional purchase of artwork does not include any right to reproduce the work (digital or otherwise), distribute or display a copy of the work, or create derivative works (for any commercial or otherwise). These rights are retained by the artist for the duration of the copyright in the work (i.e., generally, the life of the artist plus 70 years), unless the buyer does not acquires these rights by direct negotiation with the artist.

Ownership when it comes to digital art means something completely different. Unlike a painting, digital art, which is embodied in the form of a digital file, is easily reproducible at low cost. The copy is indistinguishable from the original. Thus, physical possession of a file incorporating a digital work of art means very little, since other people may possess identical files. Without the written consent of the copyright holder (usually the artist), the holder of a digital file has little more than an implied license to display the embedded image of the artwork at personal use, and nothing prohibits the copyright holder from reproducing and distributing identical files containing representations of the same work of art.

If the buyer of a digital work of art only receives a copy of a file containing a representation of a work of art, the buyer of an NFT receives even less, in the absence of a written agreement. The owner of an NFT receives a verifiable digital certificate that points to a storage location containing a file containing a representation of a specific work of art. As with traditional art sales, unless otherwise specified in the purchase agreement, the copyright in the work associated with an NFT belongs to the creator of the work, allowing them to create and sell derivative works. Since an NFT is just a token, a purchaser of an NFT does not acquire any substantive rights without also entering into an additional embedded license or associated written agreement. Absent such license or other agreement, there is no guarantee that the link between the NFT and the stored file embodying the artwork will continue to function in perpetuity.

Typically, the platform used to mint and transfer an NFT will offer standard terms of service whereby the creator retains ownership of the underlying intellectual property rights in the artwork, but grants the buyer of the NFT a license to certain limited rights in the work (eg the right to display for personal use). The most popular platforms for minting and selling NFTs, OpenSea and Rarible, do not require any rights licensing in their terms of service.

Shortly after its landmark sale of the “First 5000 Days” NFT, Beeple was quoted in the New York Times like saying “just make a[n] NFT gives it no value. There’s gonna be a time when[n] we realize we’ve gone a little crazy and put an insane value on shit. Here, Beeple was not talking about the quality of artwork associated with NFTs. Instead, he was talking about the nature of the NFTs themselves. If a buyer cannot establish with certainty what rights they are acquiring with digital art, the buyer can acquire nothing more than bragging rights to a digital certificate that has been created by an artist and transferred along a traceable and publicly accessible chain of transactions stored on a blockchain immutable.

In today’s unregulated world of crypto art, it’s still “caveat emptor”. Buying an NFT is not the same as buying a painting to hang on the wall. When a buyer acquires an NFT associated with a digital artwork, unless the buyer also enters into an agreement to the contrary, the buyer does not acquire the actual digital artwork or any rights of reproduce, distribute or display the artwork, except for personal use. . The buyer is not even assured that a stored copy of the digital artwork will always be available. Before purchasing an NFT associated with digital art, a buyer should perform the same due diligence regarding authenticity, provenance, and rights obtained in the transaction as would a buyer of a physical work of art.

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