There have been some rumblings in the past few years about non-fungible tokens (NFTs) and their actual classification as a token or as art. There are many differing opinions, and the truth is that the law’s broad language leaves room for a lot of interpretation.
What began as a simple post on a high-profile Wiki site has evolved into a rather heated debate with staunch supporters in each camp steadfastly expressing their loyalty to the position they’ve taken. Of course, the internet is rife with “experts” whose credentials are little more than the ability to wield a mean Google search.
To get to the meat of the matter, it takes more than a search engine and an opinion.
It begins with looking at what the law says because, like it or not, the law is our compass and should be the starting point.
What are NFTs and How are They Related to the Art World?
A non-fungible token, NFT, is a digital asset that represents a physical item or content, such as digital art, and is stored on a blockchain. This token is a unique unit of data that represents the digital item. While it is a cryptographic token, it differs from cryptocurrencies like Ethereum or bitcoin because NFTs lack the primary characteristic of currency that is they are mutually interchangeable.
Each NFT is one of a kind with unique metadata and identification codes that differentiate them from other tokens. Even if an NFT bears the same image as another NFT, the two are not the same. Each has its own set us unique data attached much like prints of a work of art. Each print looks the same, but they are not because of unique identifiers such as numbering.
NFTs are based on the Ethereum Request for Comments 721 (ERC-721) which dictates transfer of ownership safe handling of transfers, confirming transactions, and other requirements. The more recent standard, ERC-1155 brought improvements to the then six-month-old ERC-721 by reducing the cost of transactions via bundling NFTs into one contract.
It is important to keep in mind that this technology is barely a decade old. It first emerged in 2014 but did not gain solid footing in the marketplace until around 2021.
How Long Have NFTs Been Around?
Kevin McCoy created “Quantum,” the first NFT, in 2014. The Ethereum blockchain provided the foundation for this and other unique NFT collections to emerge over the next several years. In 2017, the world began to take notice. By 2021, popularity had surged, and public interest, along with increasing price points, fueled sales.
The COVID-19 pandemic created an optimal environment for NFT growth as people were relegated to their homes and spent more time socializing on online platforms. This led to a flood of interest in NFT communities on those platforms. As interest grew, so did the NFT market. Digital collectibles like art became highly sought-after investments.
During this time, several key non-fungible tokens emerged that changed the market and the course of NFTs from a passing fad to a legitimate investment opportunity. Some of these notable sales include:
- March 2021 – Beeple – “Everydays: the First 5000 Days” – $69 million
- April 2021 – Edward Snowden – “Stay Free” – $5.4 million
- June 2021 – Larva Labs – “Covid Alien” – $11.8 million
- December 2021 – XCOPY – “Right-click and Save As Guy” – $7 million
- February 2022 – Julian Assange & Pak – “Clock” – $52.7 million
- August 2021 – Tpunk – “Joker” – $10.5 million
- October 2021 – Dmitri Cherniak – “Ringers #109” – $7.1 million
- November 2021 – Beeple – “Human One” – $28.9 million
- February 2022 – Larva Labs – “CryptoPunk #5822” – $23.7 million
- December 2021 – Ross Ulbricht – “FreeRoss” – $6.2 million
Major corporations like Coca-Cola and Taco Bell have entered the NFT waters while other high-profile brands like Hot Wheels, Nike, Adidas, Gucci, and others have expressed interest in launching NFT projects.
The big picture here is that NFTs can command big payouts and have captured the attention of some of the largest, most influential brands in the world.
What is the controversy with NFTs?
The argument against NFT is a long and complex one. The majority have surfaced after huge sales have brought them directly and forcefully into the mainstream marketplace. The backlash and criticism involve a wide variety of issues from environmental to psychological to legal.
Lack of Inherent Value – There is a widespread perception that NFTs lack inherent value. Many argue that NFTs are ridiculously priced images or content that can be just as easily captured by a screenshot, cut and paste, or copy. Popular memes and digital art that can be found all over the internet and copied with ease are sold as NFTs for millions of dollars. Critics have trouble resolving this in any rational manner.
No Connection to the Physical World – The very nature of NFTs is also a major source of controversy. They are digital assets, making them solely an online experience. There is no physical object or artwork that the owner can hold in their hands, touch, experience, or connect to in real life. While some platforms do allow for linking certain NFTs to real-world assets, most critics feel that NFT ownership lacks the tangible characteristics that are typical of possessing art and other works.
Negative Environmental Impact – The energy required for minting NFTs on blockchains as well as transactions and crypto mining is concerning for environmentalists. They see this expenditure of energy as a waste, especially considering that the carbon footprint of just one Ethereum transaction is around 35 kWh. This is equal to an average EU resident’s monthly power consumption. The eco-conscious simply can’t see the value there.
High Incidence of Scams and Schemes – Anytime money or investments are involved, someone will find a way to create a scam or scheme. NFTs are no different. In fact, cryptocurrencies see many of the same financial scams that are prevalent in the real world – only they are in digital form. And because the laws are still evolving with this growing technology, the unfortunate truth is that scams and schemes are not only possible, but they are also probable. Staying well-informed is key to not being taken by a scam, but critics feel that the threat is too great to take a chance.
Danger to Intellectual Property Rights – Critics cite several areas where intellectual property rights can and are being infringed upon. One common scenario is where the NFT minter is not the same as the NFT owner. The minter of the digital asset may mint the NFT, but the owner has no part in the process. The question then becomes who owns the image? Does the minter because they essentially changed the image by minting it? Or the owner who has physical possession or was the original creator?
This argument goes very deep but while critics see it as a violation of intellectual property rights, proponents see it as an expansion of them. NFTs can be subject to trademark rights, design patent rights, and copyright among other intellectual property rights, but the waters are still somewhat murky as lawmakers attempt to sort it all out in a way that protects all involved.
Devaluation of Creativity – The emergence of artificial intelligence (AI) has further muddied the waters of NFT art. The controversy over AI art is as extensive and complex as the debate over NFT art. AI art does not require a human artist, yet it uses existing artwork to “learn.” Many consider this to be a violation of intellectual property rights or outright theft, but it is still murky, and the laws have not yet caught up.
Artwork created by humans and artwork created by AI are barely distinguishable. The concern is that AI artwork devalues human creativity and will in turn devalue NFT art if it is allowed to flood the market.
There is a lot to sort through and lawmakers must consider all sides, often basing new laws on existing ones. They also amend existing laws, extending them to encompass the virtual world of NFT.
What is the argument for NFT?
Proponents of NFTs argue that they open investment opportunities to individuals who may otherwise not be able to invest. The virtual nature of NFTs gives them a global reach which could mean an almost infinite demand. This can be beneficial when driving value to a limited supply of NFT. Anyone anywhere in the world who has an internet connection and knows how to operate on an NFT marketplace can become an NFT investor.
The electronic contract that documents ownership of an NFT can be quickly created, transferred, and verified. This cuts down on time and the costs of maintaining and managing physical contracts. It is perceived as reducing the need for legal services, although this is typically not recommended. NFT transactions, especially high-value investments, should be reviewed by your legal team to protect your interests and rights.
Ownership of an NFT is easier to prove and more difficult to challenge if it goes to court because the assets are hosted and minted on a blockchain. Blockchains are tamper-proof and legally binding, which gives the owner a great deal of security.
Many claim that NFTs deepen or expand intellectual property rights. At the very least, lawmakers are being required to take a closer look and close any holes that may exist.
How does NFT affect the art industry?
NFT has opened the art marketplace to not only digital artists but to emerging, unknown artists. They open the possibility of owning and selling digital art for the first time. Artists who were once giving away their digital art on social media platforms are not raking in thousands for a single work.
In a world where artwork was something that could be touched or had some type of physical properties, NFTs have introduced digital art as a legitimate art form by introducing it in a marketplace to be bought and sold – essentially making it part of the art industry whether the industry was ready or not.
Some say it undermines the work of physical artists while others claim it creates more healthy competition in the marketplace.
The truth is that NFTs have expanded the art industry into uncharted waters. It has legitimized digital art, challenged intellectual property laws, and raised up artists who would otherwise be lost in a sea of “struggling artists.”
Protect Your Intellectual Property Rights with a New York NFT Lawyer
Scams, schemes, intellectual property rights violations, there are so many issues that you can encounter when you begin dealing with NFTs. Whether you are a creator, an investor, or an owner, you have certain protections and rights under the law.
Contact The Litvak Law Firm and get the legal protection you are entitled to. Whether you need legal advice on owning, selling, creating, or investing in NFTs or you have been the victim of a scam or scheme, we can help. Call 718-989-2908 for an appointment today and get the law on your side.