On March 11, 2021, a piece of digital art sold for $69,000,000.00 (yes, sixty-nine million United States dollars) at Christie’s Auction House (online, of course). That happened roughly five months after its original sale, meaning that the piece created by the artist known as Beeple sold for over 100,000% of its original price ($66,666.66), pushing Beeple to become one of “the top three most valuable living artists” according to Christie’s. Other than the price, what makes the Beeple sale noteworthy is the fact that the work was in the form of an NFT.
What Is an NFT?
NFT stands for “non-fungible token,” or a bit of digital code written onto a blockchain (also called distributed ledger technology). Through an NFT, a digital asset like a piece of art, a video clip, or the very first Tweet can be permanently registered on a blockchain forever. Ownership and provenance can be verified instantly. For the first time, digital scarcity can be achieved for digital items and, with it, the promise of higher prices for digital assets, outside of cryptocurrencies like Bitcoin. You might pay a small fortune for an authentic Ted Williams rookie year baseball card, but not for a reproduction made today that is physically identical in every respect. The same idea is fueling a boom in NFTs sold by artists, athletes, and others, because the digital item is registered and its quantity limited. As a result, the owner has “the one” (or one of 100 limited edition items, for example) and can prove it. In this context, ”digital” may now mean scarce, and therefore valuable.
New Legal Issues
But just as old legal issues (such as piracy and counterfeiting) may be addressed, new ones arise:
- Will creating an NFT violate an artist’s existing music publishing deal or other exclusivity obligations?
- What is the scope of intellectual property rights being transferred to the buyer?
- Who bears the legal risk when an NFT becomes subject to third-party intellectual property infringement claims?
- Is an NFT considered to be a “security” for purposes of regulation under federal and state securities laws?
- What happens if the blockchain marketplace on which an NFT trades ceases to exist?
- What sort of audit rights will the artist have to ensure proper accounting of royalties?
- To what extent may the NFT marketplace use the artist’s name and likeness in promoting the marketplace?
- What confidentiality protections can be applied if an NFT goes unsold or sells for a disappointing price?
NFTs are a new and exciting means for artists, athletes, celebrities, and others to monetize their works and leverage their personal brands. Before taking the leap into new territory, however, it is important to understand the legal landscape. Venable’s Blockchain and Digital Currency attorneys stand ready to advise the entertainment industry on the nuances of this emerging trend.
Please visit our blockchain blog, Blockchain Report, for the latest legal, policy, and regulatory news on blockchain technology and digital currencies.