The Digital Ecosystem of Art - NFTs: What are the Legal Aspects? 2021

What does it mean to create and distribute a digital art piece associated with an NFT from a legal standpoint? Which legal framework is used for the creation, circulation, exhibition and management of financial usage rights for digital creations associated with NFTs?

In order to better understand this innovative identification system for digital art creations, it is necessary both to examine the instruments and strategies adopted by conceptual artists to survive in the art market and the identification systems used so far in the sphere of digital art creations.

Classical art has led to the creation of “traditional” categories to qualify and evaluate it such as: uniqueness, authenticity, traceability, property and provenance. Throughout their careers, conceptual artists have challenged these categories. They have subverted the reference system for these values, by creating easily replicable art pieces where the concepts of property, uniqueness and exclusivity are represented by the certificate and not the art piece itself. In the case of digital art, where the lack of a physical and tangible support and the ease with which it may be reproduced are intrinsic characteristics, applying traditional artistic categories is even more complex. Therefore, over time, digital art has developed ways to protect itself by leveraging on alternative solutions, such as certificates with multiple watermarks for a single art piece. Nowadays, applying the NFT technology to easily reproducible art works is a solution gives the opportunity to replace traditional certificates by recording the artwork’s information on the blockchain, while simultaneously conferring uniqueness, exclusivity and non-modifiability to the uploaded artwork.

As the conceptual art world created its own system of rules, the same is progressively happening in the movement of NFT artworks. In the latter, rules are not imposed by the artist on collectors and the art world, but instead by intermediaries who manage NFT platforms on their users. In order to upload their artworks on such platforms, creators have to adhere to the rules. Although at first sight it may seem a non-regulated system, it is actually highly self-regulated and it includes the protection of artists’ rights. All aspects on these platforms are highly contracted and detailed rules support these platforms’ functioning.

Currently, everything is based on self-certifications as described below:

• Uniqueness: determined by the attribution of a distinctive code for the artwork once it is uploaded on the platform. In the case of platforms where the artwork is uploaded directly by the artists, artists have the responsibility not to create two tokens for the same art piece. In this way, an easily reproducible artwork becomes non fungible.

• Originality:  the artist declares and explicitly guarantees that the art pieces uploaded on a platform (e.g. Super Rare) only contain original artistic contents or that the artist is entitled to their use. Should rights be violated, the artwork is removed from the platform. In the case of artworks with illicit provenance, the artist’s account may be suspended and removed from the platform with the consequent deletion of all his or her tabs and concealment of personal resources. However, it should be underlined that not all platforms monitor uploaded and traded contents.

• Authenticity: if the art piece was created by the artist himself, who then uploads it on the platform and recognizes it as his own artwork, the creation of the NFT in itself represents the artist’s signature and proof of authenticity. On the platform Superrare, only artists can upload artworks. If the artwork is uploaded by a third party (e.g. a gallerist), the artwork’s owner must possess the copyright rights for the artwork’s utilization in order to so do.

• Provenance: all transactions are recorded on a public blockchain. At present, these are published on Ethereum but more sustainable alternatives are under development. As all forms of technology, also the blockchain is subject to a rapid evolution with the risk of it becoming obsolete in the future. Should this technology become obsolescent, many artists would lose their artworks with the consequent impossibility of transferring them to more up-to-date solutions. To protect themselves from this risk, artists save copies of their artworks in an Interplanetary File System (IPFS), a decentralized archiving system capable of creating exclusive HASHes, to transfer artworks in high resolution directly to the collector.

The rights tied to NFT artworks should be managed as follows:

Exploitation rights- Copyright: Based on what established by platforms specialized in the trade of NFT artworks, exploitation rights are kept by the artist who only grants the collector (buyer) a very limited set of rights such as the rights to buy, to exchange, to transfer and to use the purchased item. On the contrary, the General Terms and Conditions of these platforms prohibit collectors from using the purchased artworks for commercial purposes or from creating and distributing copies of it.

The General Terms and Conditions are very articulated and include a detailed regulation concerning artists’ moral rights ex lege. It is forbidden for collectors to edit, distort and mutilate the artworks in ways that may damage the artist’s reputation; to hide or misrepresent the artwork’s paternity; to use the artwork’s image for any kind of commercial purposes, to incorporate it in a movie or video and lastly to further tokenize the artwork or to create additional cryptographic tokens which represent the art piece.

Resale right- the payment of royalties is required in the secondary market. The amount of royalties to be paid, which is often improperly labeled as “resale rights” may be decided directly by the artist and it is generally higher than those established in the resale right legislation which in Italy poses a maximum limit of € 12.500,00. In countries where the resale right legislation is in place, the seller is still obliged to pay resale rights to artists in addition to the royalties established by the artists related to their digital artworks.

Commissions and GAS: transaction fees must be payed to cover for the cost of production, for the energy consumed and for the consequent CO2 emissions.

Fiscal aspects: all platforms encourage the payment of taxes. If artists or collectors face issues or are convicted of tax evasion, their personal profiles on these platforms are blocked.

Lastly, whether a collector purchases conceptual art, Cattelan’s banana or the NFT artwork “Stay Free” by Snowden, in the end he or she is buying a certificate. The latter has traditionally been the true protagonist but in the case of NFTs there are actually two protagonists: the certificate and those who manage the art NFT platforms. The conditions with which transactions take place vary from platform to platform and it is fundamental to always consider this.

The lawyer Alessandra Donati is a Professor of Comparative Law at Università degli Studi di Milano Bicocca, teaches Art Law at NABA’s Master in Art Markets and is a lecturer at the Opificio delle Pietre Dure di Firenze’s Master in Restoration of Contemporary art. She works as an Art Law expert at the NCTM Legal Firm and her main areas of competence are contemporary art and all legal aspects tied to it.