Non-fungible tokens, or NFTs, have recently generated significant activity across several fields, including the art world. In March, Christie’s became the first major auction house to offer a fully digital artwork by the artist known as Beeple, which sold for more than USD 69 million. Some musicians have also started using NFTs to release previously unpublished tracks accompanied by visual art. In addition, various platforms have emerged on which artists can market and sell their NFTs.
An NFT is a unit of data recorded on a blockchain that represents a unique digital item. It may relate to many different types of content, including visual and audiovisual works, animations, photographs, sound recordings, three-dimensional works, GIFs and other digital formats. In essence, an NFT creates artificial digital scarcity around a particular item.
An NFT is non-fungible because a unique identifier, usually a sequence of numbers and letters, is added to the blockchain record when it is created. This identifier also records the date of creation. An NFT cannot therefore be directly replaced by another token, because no two NFTs are identical. It is also indivisible and is always transferred as a whole, similarly to a concert ticket.
By comparison, Bitcoin is a fungible token. One Bitcoin may be transferred and exchanged for another Bitcoin, subject to any change in value during the transaction. Bitcoin may also be divided into smaller units known as satoshis, in the same way that euros are divided into cents. Unlike an NFT, Bitcoin is therefore divisible.
Blockchain Platforms Offering Art Tokenisation
A growing number of platforms enable users to create, purchase and sell NFTs. In many cases, users need an Ethereum wallet through which they can send and receive the cryptocurrency Ether, as is the case with platforms such as OpenSea and SuperRare. Other platforms offer a more accessible user experience and allow payments by bank card without requiring users to hold a cryptocurrency wallet. Nifty Gateway is one such example.
Nifty Gateway
Nifty Gateway allows users to trade NFT artworks, often referred to as “Nifties”. Users register on the platform with an email address and can then purchase and sell digital artworks. The platform manages the technological processes required for creating, purchasing and selling NFTs.
Artists wishing to offer their work as an NFT must complete an application providing their full name, links to their social-media profiles and portfolio, information about the type and style of the project, their short-term and long-term career objectives, and an introductory video. If the platform approves the proposed collaboration, a Nifty Gateway representative contacts the artist, although submitting an application does not guarantee a response.
An artwork may be purchased directly from its creator through an auction, commonly referred to as a “drop”, or from a previous purchaser on the secondary market. According to Nifty Gateway, artists may determine the percentage they receive from each secondary sale. The platform also retains a fee from secondary sales completed by credit card.
A buyer may submit an offer for a specific NFT or make a global offer indicating a willingness to purchase any edition of a particular NFT. For example, an artist may issue 40 NFTs associated with the same artwork. Purchases may be completed using a credit card or Ether deposited on the platform. Each auction lasts 24 hours, and any bid submitted during the final five minutes extends the auction by an additional five minutes. Once the auction closes and the full purchase price has been paid, the NFT is minted and transferred to the user’s account.
SuperRare
SuperRare is a marketplace for unique, single-edition digital artworks. Only one NFT may exist for each individual work, meaning that the same artwork cannot be represented by several different NFTs on the platform. Users must register and connect their accounts to an Ethereum wallet, while all transactions are conducted using Ether.
Creators wishing to offer NFTs on SuperRare must complete an application similar to the one required by Nifty Gateway. They must also provide links to three to five of their best works, explain the story behind them and confirm that none of the submitted artworks infringes copyright. Once the creator has been approved, each digital item is created through SuperRare’s smart contracts. The creator must upload the original digital work, provide information about it, verify its authenticity and complete the token-minting process.
When purchasing digital art, the buyer pays a transaction fee to the platform. On the initial sale, the creator receives most of the purchase price, while SuperRare retains a commission. The creator also receives a royalty from each subsequent secondary sale. The creator or holder of an NFT may eventually transfer and sell it on other platforms.
All works are nevertheless subject to the SuperRare licence. The artist retains all exclusive copyright in the artwork minted on the platform, including the rights of reproduction, adaptation, public display, performance and distribution. A collector who purchases the work may display, promote and share it, provided that doing so does not infringe copyright.
By using the service, the artist also grants SuperRare a licence covering all works minted on the platform. This allows the platform to copy, display, perform, reproduce and distribute the works for the purposes of operating, promoting, developing and advertising the platform.
Legal Aspects of NFTs
NFTs raise a number of legal questions that will need to be addressed in greater detail over time.
Intellectual Property
An NFT essentially functions as a certificate of authenticity that may provide evidence that a particular person is the creator, purchaser or seller of a digital item. However, rights that exist outside the blockchain environment, including intellectual-property rights, remain fully applicable.
Anyone using a platform to create, purchase or sell an NFT should therefore carefully review its terms of use. These terms generally contain provisions governing intellectual-property rights. An NFT does not normally transfer copyright in the underlying artwork. Instead, the purchaser receives only limited rights to use, display or otherwise deal with the work. Both purchasers and sellers must therefore clearly understand which rights are actually transferred together with the NFT.
Another challenge is that the creator must ensure that the NFT contains exactly the content they intend to market, since modifying an NFT after it has been recorded on a blockchain may be considerably more difficult. Problems may also arise where an NFT incorporates a copyright-protected work without the permission of the rights holder. Such cases have already involved tokenised digital photographs and tweets.
A rights holder may contact the platform on which the NFT was sold, although the ultimate outcome may be uncertain. Due to the decentralised nature of blockchain systems, identifying and pursuing an infringer may also prove difficult. Further complications may arise if competing blockchain services each claim to provide an authoritative record of an NFT’s uniqueness. Although major NFT marketplaces generally allow tokens to be transferred between platforms, counterfeit marketplaces imitating established Ethereum-based platforms have already appeared.
Creation of Unregistered Investment Products Through NFTs
Because NFTs are non-fungible, they are generally less likely to be treated as securities. However, the development of increasingly varied and creative forms of NFTs means that this area must continue to be monitored.
Prevention of Money Laundering
As the market for digital NFT artworks grows, the risk of money laundering may also increase. Where an NFT has no established sales history, its price may effectively be set at any amount that a purchaser is prepared to pay.
Public authorities may gradually impose requirements on NFT marketplaces to verify the identities of all parties involved in transactions. Data recorded on the Ethereum blockchain may also be examined retrospectively. NFT marketplaces must operate in accordance with applicable legislation and facilitate cooperation with blockchain forensic investigators and analysts where funds need to be traced.
Criminals may nevertheless prefer fungible tokens because such tokens do not contain the same unique identifying information and may therefore be more difficult to trace than NFTs.
NFT Theft
Nifty Gateway experienced a security incident in which attackers allegedly gained access to several user accounts, took control of multiple NFTs and used a user’s credit card to purchase additional NFTs, which they then transferred or sold. Nifty Gateway stated that users should have enabled two-factor authentication, which could have prevented such incidents.
It is also important to consider the role of the private key that provides access to assets held in a particular wallet. Anyone who possesses the private key may access and transfer the NFTs associated with that wallet. On a centralised platform, the platform may hold users’ private keys. However, following a security breach, it may not be able to recover the NFTs or reverse unauthorised transfers.
The platform must also assess the circumstances of each reported incident and determine whether an account was genuinely compromised or whether the report may involve fraud by a user who was dissatisfied with a purchase or attempted to obtain an unlawful financial benefit.
Environmental Impact
It should also be noted that blockchain transactions may consume substantial amounts of electricity. Their environmental impact therefore represents another issue that must be addressed in the context of sustainable-development objectives.