ABCs of NFTs: A Bright Future for the Arts or Just a Flash in the Pan?

Faegre Drinker Biddle & Reath LLP

Faegre Drinker Biddle & Reath LLP

Ever since the artist known as Beeple1 sold an NFT of a digital collage for over $69 million at Christie’s mid-March 2021 auction, everyone in the art world — and in other communities — has been talking about NFTs. Depending on whom you listen to, NFTs are the future of art and will bring long-hoped-for transparency and accountability to the art market. Or they are a dangerous fad. Or they are “nothing sandwiches” that provide something to purchase with cryptocurrency that otherwise just sits unused in digital wallets.

So what the heck is an NFT? NFT is short for “nonfungible token”; an NFT has been defined as a digital certificate of ownership or a digital record of a transaction. The record is “minted”, i.e. created, using blockchain technology that is stored over a decentralized computer network rather than in a centralized registry. And NFTs are purchased using cryptocurrency, most often Ethereum.

NFTs are not confined to the art world. Recently, NFTs of text, music and audio visual works seem to be everywhere. There has even been talk of using NFTs to create patent records.

What has caused a lot of confusion is that owning an NFT does not mean that you own a physical object, such as a work of art. It’s more like purchasing a digital deed to a house: You have the title search and maybe an image of the house, but you don’t get the house itself. And the image that you have may be accessible to many others.

Moreover, the purchase of an NFT does not include ownership of any intellectual property. This was a fact clarified recently by the estate of the artist Jean-Michel Basquiat when an NFT of a Basquiat drawing entitled Free Comb with Pagoda was auctioned on the OpenSea platform to a buyer who thought his purchase included copyrights. When a spokesperson for the estate stepped in to explain to the winning bidder that the estate retained ownership of the copyrights in the drawing, the sale was cancelled.

Some NFTs are accompanied by “smart contracts” that clarify what is being purchased and what is not. Recently, there have been “smarter contracts” that are attempts at greater clarity. As with any transaction, documentation is a prudent step and can avoid a repeat of the Basquiat situation or other confusion.

NFTs are touted as permanent records for the future. But then there are those who protest that blockchain technology and cryptocurrency use so much energy that their use will hasten climate change and endanger the future of the planet. Maybe so, but the art world, which requires substantial travel including by air, is not exactly renowned for its green practices. The irony of art mavens criticizing NFTs is not lost on digital artists.

Nonetheless, some in the art world are hopeful that NFTs may be helpful with regard to tracking provenance, i.e., the record of ownership of a work of art. It does appear that NFTs have the potential for creating and preserving a historical record of art transactions that could bring more trust to the art market. Perhaps NFTs could be used to track editions of works of art that are produced in multiples, such as prints and photographs. Of course, all of this would require that thought leaders in the art world agree on certain standards and principles. And the question has to be asked: Is transparency actually a goal for the art market? Some would argue that art dealers, galleries and auction houses prefer otherwise.

So will NFTs fade into oblivion like VHS and Beta tapes? Or is there a bright future for NFTs that will bring transparency and trust to the art market and perhaps other markets? We will have to wait and see.

[1] Beeple’s real name is Michael Winkelmann.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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