by : Zoe Li
Impressionist, Postimpressionists, Expressionists, and Surrealists, to name a few, all have claimed to reinvent art, and, in their wake, have created an uproar and palpable frenzy among collectors. For some, NFTs generate the same type of revolution, which would explain the keen interest in them: buying the first NFTs is like buying the first Monets, it’s madness! In fact, who really knows what an NFT is and what are the legal implications of its creation, sale, and acquisition? This is what we will explore in this article.
What is an NFT?
An NFT (non-fungible token) or JNF (in French: jeton non-fungible) is a non-fungible digital asset which uses blockchain technology in order to imitate the phenomenon of scarcity.
Each NFT is unique, hence why they are called non-fungible. A fungible property is interchangeable (ex.: money) whereas a non-fungible property is not interchangeable (ex.: a painting or a sculpture). An NFT becomes identifiable and traceable by being transcribed on a blockchain, a transparent and decentralized network. Thus, the value of each token resides in its authenticity and the certainty of its origins. Therefore, an NFT may be the object of transactions such as selling and purchasing like any other property.
Concretely, an NFT is a series of data hashed together, including a unique identifier created from one or more non-fungible cryptocurrency tokens, a digital file, and a smart contract. A smart contract is a computer program in which the contractual obligations, instead of being standard clauses, are translated into lines of code and automatically executed when the programmed conditions are met. The digital file to which the NFT is attached may be of various formats: a work of crypto art, a Tweet, a video, a virtual property, or a tangible property.
What is the state of the law regarding NFTs?
Here comes the million dollars question! Considering this is an especially thorny question, we have consulted Ms. Bianca Lessard, a lawyer specialized in emerging technologies law and cofounder of 0x Society, the very first crypto art gallery in Canada, in order to enlighten us on this matter.
According to Ms. Lessard, at the moment, NFTs are not specifically defined in Canadian law nor Quebec law. It is however certain that NFTs are not works of art and, above all, acquiring an NFT do not grant any intellectual property rights to the work of art linked to said NFT, unless specified otherwise. An NFT is only a tool, a digital asset serving as a certificate of proof of the property right on said NFT and of the provenience of the asset to which the NFT is linked to, without prejudice. There are unfortunately many cases of fraud.
The rights linked to NFTs (and the work of art linked), including copyright, may vary depending on the operating systems on which they are sold and depending especially on the contents of the linked smart contracts. Since we can program a sale in an NFT, we can also program a licence or cession of certain rights. To know more on licences and cessions, see our articles titled: License Agreement, In Brief and La cession de droits d’auteur.
Since some NFTs are now worth astronomical numbers, such as the case for Bitcoins and Ethers, acquiring a fraction of an NFT is possible in certain situations. If it is the case, one must however stay cautious, since fractioned NFTs may be assimilated to securities within the meaning of the Securities Act (Loi sur les valeurs mobilières, LVM). Indeed, according to a recent notice from the Canadian Securities Administrators (CSA), issuing NFTs may be considered as an investment contract if (1) money is invested (2) in a common enterprise (3) in order to make profit and (4) said profit is mainly from others’ efforts. This could subject sellers of NFTs, including artists, to reporting issuers’ obligations under the Securities Act.
For the moment, there are yet clear answers in Canadian and Quebec laws regarding the legal handling reserved to NFTs.
How do NFTs affect artists’ rights?
For the artists, NFTs possess both positive and negative aspects.
The main negative aspect linked to the buzz around NFTs is the confusion they cause in the market. Indeed, most buyers believe they necessarily become owners of the work of art linked to an NFT and/or entitled to the copyrights of said work. However, the object acquired during the transaction of an NFT varies greatly depending on the anatomy of each NFT and especially the contents of the linked smart contract.
Many scenarios are possible, including the following two:
- The purchase of an NFT may only grant a property right on the token linked to the work of art and the right to resale, transfer or bequeath it, without any copyrights attached. Very similar to the traditional art market on this point, the owner only possesses a non-commercial right to display the work of art in a private place.
- The purchase of an NFT may only include the license (authorization) or the cession (transfer) of copyrights (ex.: right to reproduce and communicate the work of art). Some operating systems allow and will integrate this in their NFTs’ smart contracts (ex.: Bored Ape Yacht Club and World of Women).
In order to know the consequences of purchasing an NFT, consulting the terms of service of the operating systems of sale and the contents of the smart contracts attached to NFTs are essential. Since buyers must understand what they buy, artists must stay alert regarding what they sell regarding to their works.
Another danger which lies in wait for fans of NFTs is the question of the preservation and perennity of these intangible assets, since corrupted files, data erased forever, hyperlinks not functioning, etc. may always happen. Nonetheless, many argue that the transparent and decentralized model of blockchains acts as sufficient protection against these risks.
Despite negative aspects, NFTs could bring positive repercussions to artists. Here are some of them:
- Authentication of works of art: Although differentiating original paintings from fakes may be complex, NFTs, each benefiting from a unique digital identifier, can facilitate distinguishing between copies of an original or establish the provenience of copies amongst them, if an artist chooses to issue many official reproductions of the same work. Once more, this is not an exact science. No one is unfortunately safe from fraud!
- Control and royalties: The fact that an NFT is attached to a smart contract allows an artist to program it with various provisions in order to keep some form of control on their work. Royalties can be programmed in a smart contract in order to receive a percentage of the reselling price for all subsequent resales. This right constitutes an important progress for Canadian artists since royalties are still not recognized in Canada.
- Democratization: The model of NFTs could help artists reduce the intermediaries which separate them from the public. However, there is a downside to this, considering the current confusion in the domain of NFTs, which may render jumping into selling NFTs without being knowledgeable risky and dangerous.
To conclude, what should we do when an NFT is worth $10, 000 whilst it is attached to a simple drawing of a smiley face? In other words, how to determine the value of an NFT?
The value of art is an excessively subjective concept, but also intersubjective, which means that society’s preferences will have a great influence on what is considered a “good deal”. Let’s say, for example, Picasso. Why do Picasso’s works sell for so much? True, others could have done what Picasso has done, but society has collectively decided that Picasso’s works have some sort of worth. Thus, the value of digital works on the NFT market is like what we may see on the traditional art market. In all cases, education remains a big part of the answer in order to avoid individuals investing in projects which could be considered as “frauds”. Before investing in NFTs, it is not only important to be informed about the provenience of a work of art and its artist, but also to be informed about what investing in digital assets implies.
IN SHORT:
- NFTs are tokens attached to works of art but are not works of art.
- Except when explicitly mentioned, purchasing an NFT does not comprise any transfers or cessions of copyrights nor property rights on the work of art or the asset to which it is linked.
- Education is an essential tool in order to dispel the confusion surrounding transactions of NFTs and to make the public aware of what they truly acquire in this type of transactions.
- And above all, before jumping into this, it would be especially judicious:
- To verify and do extensive research by consulting credible sources on digital assets in general but also on what we plan to acquire
- To be informed about the fiscal consequences of these transactions
- To learn how to secure and manage a portfolio of cryptocurrencies
- To consult a specialist in the domain, if need be.
We remind that such an article does not, in any case, replace a legal consultation and that the volunteers at CJAM are only authorized to communicate legal information and are not authorized to give legal advice.
We kindly thank Me. Bianca Lessard for her precious contribution to this article.
