By Louise Carron.
The following is being reprinted with permission from: Entertainment, Arts and Sports Law Journal, 2021, Vol. 32 No. 2, published by the New York State Bar Association, One Elk Street, Albany, NY 12207.
Much has been said and written about non-fungible tokens (“NFTs”) and attorneys are getting up to speed. Relying on blockchain technology, NFTs refer to a concept of ownership of digital or physical assets that is recorded, encrypted, and reliant on cryptocurrencies. When it comes to art, NFTs have the potential to shift control to artists, to push regional boundaries, and to reduce transaction costs. Lawyers are starting to grasp the complexity of the legal issues they have to address as clients ask them to navigate a field evolving on a daily basis.
A is for Art
NFTs challenge the traditional art market and have the potential to reshuffle the cards when it comes to giving artists independence from galleries or auction houses. Fine artists and digital creators alike may decide to offer their pieces for sale and the possibilities are endless. NFTs link to a unique asset, which may be a .jpg file, a GIF, a song, a limited edition print, or even an “analog” painting. On the collector’s side, purchasing an NFT means acquiring a certificate of authenticity which, simply said, cannot be destroyed, lost, or modified.
One way of doing so is through one of the many platforms that exist. Foundation, Nifty Gateway, and SuperRare are among the marketplaces offer a curated selection of original digital artworks where pieces can be bought with a simple click. You may argue (as any good lawyer would) that you could already do that without the need to get blockchain involved. The innovation offered by blockchain is the creation of an immutable record of ownership, or ledger, each time the piece gets transferred, which also points to the artist as the original author. This present an interesting solution to age-old issues that the art market faces, such as authenticity, authorship, and transparency.
Creators now have the ability to almost instantaneously sell artworks to a collector they would never have met otherwise, without an intermediary, and without having to pay them the traditional 50% commission. However, they still have to pay various platform and minting fees and studies show that NFTs are far from being a “sure thing.”
B is for Blockchain and Crypto Law
The large majority of NFTs rely on a self-executing program (“smart contract”) that runs on the Ethereum blockchain, called ERC-721 (or the more recent ERC-1155), which identifies a unique asset (“token”) existing on the blockchain. NFTs can be bought using cryptocurrencies such as Ether and require buyers and sellers to connect a crypto wallet.
NFTs ride on the concept of scarcity: they link to a unique asset, which cannot be duplicated or replaced. In contrast, fungible tokens like cryptocurrencies rely on the ERC-20 standard and are interchangeable, divisible, replaceable.
The creation of an NFT is called “minting” which refers to the process of turning a digital asset into a token recorded on Ethereum blockchain, and creating a unique address for it, or “hash”. This requires the payment of fluctuating “gas fees”, which vary based on the demand for Ether at the time of minting.
With the blockchain lingo out of the way, here comes the legal lingo. Blockchain technology, cryptocurrencies in particular, have been the subject of regulation attempts across the world. From the Securities and Exchange Commission’s point of view, an NFT may be qualified either as a commodity or as a security, depending on the factors of the Howey Test. From the Internal Revenue Service’s point of view, transactions involving cryptocurrencies are taxable events. NFTs are likely subject to regular capital gains rate or may qualify as collectibles. The application of state sales tax is also a big question to which the answer is, as always: it depends.
You may also wonder: who collects those taxes? What about consumer protection? How do you safeguard the right to privacy and compliance with the GDPR or anti-money laundering protocols? As this is not an exhaustive list of all legal issues in NFTs, it might be wise to move on before falling into the rabbit hole.
C is for Copyright and Royalties
When it comes to art, there are a lot of intellectual property-related opportunities and issues associated with the NFT model.
Minting an artwork without the consent of its author could lead to copyright litigation. Whether that use was “fair” under the factors laid out by the Copyright Act will be a matter for the courts to resolve. Most platforms’ Terms and Conditions contain representations and warranties that the seller is the author of the NFT and outline take down procedures. Then comes the question which platforms have to address: how do you remove an asset from a ledger that is designed to be immutable?
Another quirk of NFTs is that the collector does not automatically receive copyright ownership. Again, the terms of the marketplace may impose upon the seller a mandatory, sometimes limited license to the buyer to display the work, but not all platforms do. And some may grant themselves a very broad license to reproduce and distribute copies of the artwork. Artist beware?
By this point you may ask yourself: why would artists go through all this trouble? The answer is: resale royalties. By relying on programmatic smart contracts, NFTs have the potential to recreate equity in the art market by ensuring that artists get a share of each resale of their piece on the secondary market. Most marketplaces offer a standard 10% royalty and a few of them offer artists with the possibility to pick the exact level of royalty. At this time, custom resale royalties are not portable across all platforms but developers are on it.
Consequently, NFTs offer a new way to create, sell, and collect art through a technology that leaves many baffled and which promises to be around for a while. The legal community will certainly be watching very closely.
Author Bio: Louise Carron is a practicing attorney at Klaris Law and a former Executive Director of the Center for Art Law. Louise advises visual artists and creative entrepreneurs on contracts matters, copyright use, and business law, and teaches workshops on legal basics for artists. She frequently writes and speaks about art law and co-chairs the Pro-Bono Steering Committee of NYSBA’s Entertainment, Arts and Sports Law Section. Louise may be reached at
For more reading on the subject, take a look at the recent publication fro PLI
Lerner, Ralph, Amanda Rottermund and Sarah Verano, “Insights into Blockchain Tokens and Crypto Art’s Effect on the Art Market,” The Journal of PLI Press, Vol. 6 (2022), https://plus.pli.edu. Vol. 6 (2022).