NFTs in Art Industry: Opportunities, Challenges & Solutions for Artists and Buyers

– Sujal Garg and Manjari Tripathi

The internet has become known for its role in facilitating rule violations, providing a safe haven for individuals with malicious intentions. Unfortunately, one community that has been particularly affected by this phenomenon is the artistic community. Artists invest their hearts and souls into their work, only to find it quickly copied and circulated within seconds, leading to a rapid degradation of its originality. This widespread infringement on their creations has severe implications for artists, as it diminishes the value and uniqueness of their work, often resulting in significant financial losses that artists are unable to bear.

The solution to this issue is being worked on. With the advent of , artists can now receive monetary value for their work. The recent example of Christie’s auction of a collage composed of 5000 images, Beeple’s “Everydays: the first 5000 days,” which sold for $69.3 million, created global hype over NFTs.

What are NFT and utility of it ?

NFT stands for Non-Fungible Token, has gained popularity as a concept in the world of art. They are special digital tokens that represent ownership or proof of authenticity. As the name suggests, each NFT is unique and cannot be replaced or duplicated. They are based on blockchain technology, making them indivisible and distinct from one another, unlike cryptocurrencies like Bitcoin or Ethereum, where each unit is identical and interchangeable. NFTs have a special relevance for artists because of their uniqueness, which enables them to establish verifiable ownership and scarcity for their digital creations.

NFTs are created using computer code in the form of “smart contracts,” which provide developers with various advantages. Once the code of the smart contract is created, it is permanently minted as a token on a blockchain, serving as an irrevocable digital certificate of ownership for a digital creative work. This technology allows creators to better manage the price and terms under which their digital works are sold, as well as establish new avenues for the dissemination of art, access to performances, and other valuable assets.

However, there are several legal challenges associated with NFTs that need to be addressed:

Intellectual Property Rights: Many people may not be aware that purchasing an NFT does not grant them full rights to copy, distribute, modify, publicly perform, and publicly display the art unless specifically granted by the copyright owner. Buyers who believe they have all these rights and price their NFTs accordingly may unwittingly invite infringement liability. It is generally assumed that purchases are for personal use, and misrepresentation of the rights associated with the underlying work may hold the NFT seller legally liable.

Data Protection and Privacy Rights: The immutability of blockchain technology makes it difficult to exercise certain data protection rights, such as the right to erasure or rectification of personal data. Blockchain-based systems, including NFTs, raise concerns about their compatibility with data protection rules. Once personal data is integrated into NFTs, compliance concerns may arise if personal information is included in the related metadata, potentially leading to privacy issues for individuals. People have the right to have their personal data erased under specific conditions under data protection laws, such as the General Data Protection Regulation (GDPR) of the European Union[1]. Fulfilling this right is complicated by the immutability of blockchain technology, which records data in a decentralised and permanent manner. Once information is stored on a blockchain, it is very challenging, if not impossible, to change or remove it without jeopardising the integrity of the entire system. When personal data is integrated into NFTs, this concern becomes particularly relevant. NFTs may not inherently be in violation of data protection rules, but compliance concerns may arise if personal information is included in the related metadata. An individual could be subject to privacy issues if their personal data is connected to their identity, transaction history, or other sensitive information.

Royalties: NFTs have built-in smart contracts that enable the distribution of funds for royalty payments to the creator each time the work is resold. However, unless the NFT is resold through the same platform, automated resale royalty payments may not take place, creating a loophole in the system.

Data Hosting and Storage: NFTs and the digital assets they represent are typically kept separate. The location of the digital asset is disclosed in the NFT, which is kept on the blockchain. If the digital asset is erased, the hosting server crashes, or it goes offline, the link between the NFT and the digital asset can be broken, rendering the NFT useless. This can lead to data loss, regulatory violations, and business interruptions, depending on the specific use of the NFT.

To address these challenges, some potential solutions can be considered:

Including Certifications: NFTs should include a clause that allows users to “certify” that the asset they are holding is an original and that the person issuing the token genuinely holds the necessary intellectual property rights. By attaching some kind of proof or illustration to the NFT, users can have more confidence in the authenticity and legitimacy of the underlying asset.

Legal Interference: As the NFT market is still in its infancy, it is important for legal and regulatory frameworks to evolve alongside it. Legal challenges surrounding NFTs, such as intellectual property rights and data protection, should be addressed through legislation and regulation to protect the rights of artists and buyers. Market participants should not assume that NFTs are exempt from existing laws and regulations.

Improved Infrastructure: As the NFT market continues to develop, it is crucial to establish a robust infrastructure that includes intermediaries, tokenization platforms, distribution channels, custodial solutions, and e-commerce connections. This infrastructure should prioritize transparency, security, and compliance to ensure the integrity of NFT transactions and protect the interests of artists and buyers.

Enhanced Data Protection Measures: To address concerns about data protection and privacy, efforts should be made to find solutions that balance the immutability of blockchain technology with individuals’ rights to control their personal data. This may involve exploring techniques such as anonymization or encryption of personal information in NFT metadata.

Backup and Redundancy Systems: To mitigate the risk of data loss and business interruptions, NFT platforms and users should implement backup and redundancy systems for the digital assets associated with NFTs. This can involve storing multiple copies of the digital assets in secure locations or utilizing decentralized storage solutions.

Education and Awareness: Increasing awareness and educating both artists and buyers about the intricacies of NFTs can help mitigate potential legal challenges. Artists should understand their rights and how NFTs can protect their work, while buyers should be aware of the limitations of their ownership rights and the importance of verifying the authenticity of NFTs.

Conclusion

NFTs provide reliable information only with respect to what is on the blockchain, they make no claims on the legitimacy of the underlying asset. The NFT should include a clause that allows users to “certify” that the asset they are holding is an original and that the person issuing the token genuinely holds the necessary intellectual property rights. By attaching some kind of proof or illustration to it.

Three conditions must generally be met for an infringement to occur. First, the violator will have illegally used one of the author’s exclusive rights. Second, there must be a direct line of descent from the original work—that is, there must be a causal relationship—between the NFT and the original piece of art. Third, the entire work or a significant portion of it will have been duplicated. It is difficult to understand how an NFT would satisfy these requirements, but it is obvious that this will be a contentious issue in the future. Legal interference is much needed because the NFT market is still in its infancy, a sizable infrastructure will probably still be developed, including intermediaries, tokenization platforms, distribution channels, custodial solutions, e-commerce connections, and the like. The legal and regulatory challenges change in step with the market. The novel and uncharted character of NFTs should not lead market participants to believe that NFTs are exempt from all rules. A class-action lawsuit that was recently filed is one illustration of how NFTs prompted the adoption of distinct legislation.

It is important to note that while NFTs provide new opportunities for artists and buyers, they also present unique challenges. By addressing these challenges through legal frameworks, improved infrastructure, and enhanced data protection measures, the potential of NFTs to revolutionize the art industry can be harnessed while safeguarding the rights and interests of all parties involved.

Reference

• OpenGeeksLab, “Legal Issues of NFTs: 7 Estate and Sequence Planning,” OpenGeeksLab, available at: https://opengeekslab.com/blog/legal-issues-nfts/#7_Estate_and_Sequence_Planning.
• White & Case LLP, “The Rise of NFTs: Opportunities and Legal Issues,” White & Case Insight Alert, available at: https://www.whitecase.com/insight-alert/rise-nfts-opportunities-and-legal-issues.
• GamingTechLaw, “NFTs, Art, and Cryptoart: Legal Issues,” GamingTechLaw (Oct. 2021), available at: https://www.gamingtechlaw.com/2021/10/nfts-art-cryptoart-legal-issues/.
• World Intellectual Property Organization, “How Blockchain and NFTs Are Reshaping the Creative Economy,” WIPO Magazine (Apr. 2021), available at: https://www.wipo.int/wipo_magazine/en/2021/04/article_0007.html.
• https://industrywired.com/legal-risks-and-issues-around-nfts-a-guide-for-beginners/
• Legal Risks and Issues around NFTs: A Guide for Beginners,” IndustryWired , available at: https://industrywired.com/legal-risks-and-issues-around-nfts-a-guide-for-beginners/.
• [1] GamingTechLaw, “NFTs, Art, and Cryptoart: Legal Issues,” GamingTechLaw (Oct. 2021), available at: https://www.gamingtechlaw.com/2021/10/nfts-art-cryptoart-legal-issues/.

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