Written evidence submitted by the Institute of Art and Law

 

Introduction to the Institute of Art and Law and reason for submitting evidence

The Institute of Art and Law (IAL) is an educational organisation founded in 1995, engaged in teaching, research and publication in the area of art and cultural heritage law. The IAL consists of an executive body, researchers and a broad membership made up of public institutions and private entities, as well as individuals. It runs training courses for the museum sector in the UK and abroad and publishes academic and practical texts on many areas of law relating to cultural heritage and the arts. See more at www.ial.uk.com.

 

The NFT market has played an important and much-discussed role in the wider art market since 2020, and as such is of keen interest to the IAL. The IAL has thus provided insight and comment into the legal issues arising through the IAL’s regularly updated blog and its quarterly journal, Art Antiquity and Law (see in particular Art Antiquity and Law, vol. XXVII, Issue 2 (August 2022) pp. 97 – 132).

 

  1. Is the UK’s light-touch NFT regulation sufficient?

 

Whilst it would be misleading to suggest that trading in NFTs in the UK is entirely unregulated since there are numerous pre-existing general laws which will apply, there has been little progress towards legislation specifically directed at the NFT market.

 

The approach of the authorities has been largely functional in nature, aimed at bringing NFTs within existing regulatory structures (or not) depending on the precise function they fulfil. Two examples demonstrate this approach:

 

There is a suggestion that the failure to legislate for NFTs specifically, as a distinct asset class, relates to a characterisation of NFTs as “more akin to a digital collector item than financial services products” (see the response to a consultation on cryptoassets and financial promotions: Cryptoasset promotions: Consultation response’, HM Treasury, January 2022, para. 4.10). A focus on the non-fungible quality of NFTs has contributed to a perception that the risk they pose to purchasers, or ‘collectors’ is at a lower level than the risks posed by more clearly fungible crypto tokens such as cryptocurrencies.

 

Some NFTs (a token attached to a single work of digital art, for example) might fall squarely within this characterisation – a ‘non-fungible collector item’. At their core, however NFTs represent a mode of trading, with applications or use cases which are multi-faceted and extremely broad-ranging, possibly limitless. As such, the risks they entail are equally broad, suggesting the requirement for a more holistic and broad-based approach to their regulation than one focusing largely on their perceived non-fungible quality.

 

Anecdotal evidence suggests that one of the risks for those trading in NFTs, and in particular, those selling contemporary artworks through NFTs, is copyright infringement.[1] The sale of an NFT of a digital artwork does not, without more, transfer copyright in that artwork to the buyer. Rather, the buyer will generally acquire limited rights in accordance with specified licensing terms prescribing the scope of the buyer’s permitted use. Licensing terms vary markedly, from those granting broad commercial rights to those restricting permitted activities to nothing more than accessing, using and storing the work in question solely for personal, non-commercial purposes.

 

Copyright law is complex and multi-faceted, involving questions of originality, authorship, fixation, fair dealing (in the UK) and more.[2] Reports of incidents arising in NFT markets suggest that some of these key copyright principles are ill-understood by some NFT traders.[3] Despite such misunderstandings about copyright law, however, this is not necessarily an area for legislative attention. Detailed and relatively recently updated copyright law exists in the UK, and can likely be applied to NFT markets without the need for significant change. Risks associated with copyright infringement might therefore be adequately addressed by dissemination of information and education, rather than regulatory or legal change.

 

  1. What are the potential harms to vulnerable people of NFT speculation?

 

NFT markets are demonstrably volatile, with prices fluctuating markedly and unpredictably. Those who invest in NFTs falling outside of the regulatory regime risk losing considerable amounts of money if prices fall. Furthermore, anecdotal evidence suggest that scams and fraudulent activity are rife in NFT markets, perhaps in part owing to the perception (and reality to some degree) of the NFT market being unregulated. Cases involving thefts or hacks of NFTs have already arisen in the UK and elsewhere. (In the UK, see for example: Osbourne v. Persons Unknown and Ozone Networks Inc. (t/a OpenSea) [2022] EWHC 1021 (Comm) and Tulip Trading Ltd v. Bitcoin Association For BSV & Ors [2022] EWHC 667 (Ch)).

 

The complexity of some NFT sales may also present risks to purchasers/investors. Where such trades include ‘gaming’ elements (pitting potential purchasers in competition with one another, for example), gaming regulation (the Gaming Act 2005 and related regulations) may be applicable (see Soleymani v. Nifty Gateway LLC [2022] EWHC 773 (Comm)[4]).

 

  1. Do blockchains offer security to British investors?

 

As regards investment risk and market volatility, a blockchain does not offer any form of security or protection per se.

 

Blockchain technology does, however, provide a degree of contractual protection by means of its creation of an immutable, real time record of transactions conducted through it. Such a record is transparent, to the extent that it can be viewed simultaneously by anyone with access to that blockchain – potentially millions of users across the globe. The security this may provide is limited however, and depends on a number of factors, including: the degree to which blockchain standards and operations are universally applied and accepted (noting that there are currently a number of different blockchain platforms which operate in different ways); how the legal issues which blockchain trading involves are addressed in different jurisdictions and legal systems; the extent to which the traceability of transactions online equates to transparency as regards the entities behind such transactions.

 

  1. What are the potential benefits to individuals and society of NFT speculation?

 

The rise of NFTs has been regarded by some members of the artistic community – in particular, digital artists – with a degree of optimism, as providing new possibilities and potential benefits. It has been considered that the non-fungible, or unique quality of an NFT can provide a route to market for digital artists who have previously struggled to monetise their work owing to the ease with which digital works can be replicated. The ability of artists and creators to sell their works directly to purchasers without the need for intermediaries (the agents and dealers commonly engaged in the traditional art market) is another attractive aspect of the NFT marketplace. The online sales environment also provides opportunities for artists and collectors to build up communities of interest.

 

Two other potential benefits have been identified:

current owner back to the creator has a fundamental impact on the value and marketability of artworks generally. The immutable real time records provided by blockchain technology have been considered capable of fulfilling this function.

 

Whilst these features of NFT art sales may certainly provide benefits in many cases, the advantages they offer carry limitations. For example, the provenance information on a blockchain is only as good as the data introduced to the system (which could be as vulnerable to fraud as provenance details provided for works of art in the analogue world). It seems likely that any benefits as regards tracing provenance may only become evident over the longer term. As regards the resale royalty, it is currently not generally transferrable across most NFT marketplaces (though this glitch may ultimately be overcome, in time, through technological solutions). A development of concern reported in recent months has been the apparent move by some NFT marketplaces away from the implementation of resale royalties (such that they become optional for a buyer in some cases; see article in the Art Newspaper by T. Akers, 2 December 2022).

 

Submitted by the Institute of Art and Law, 3 January 2023.


[1] For examples, see the attempted sale of an NFT of a Basquiat work with associated intellectual property rights by an entity which did not own such rights, reported in the Art Newspaper (A. Shaw, 28 April 2021); and the offer for sale of NFTs of artist-designed Storm Trooper Helmets without the consent of the copyright holders, reported in the Art Newspaper (R. Prior, 23 November 2021).

[2] Note that the copyright exceptions encompassed by the concept of ‘fair dealing’ in UK copyright law are addressed differently in other jurisdictions, perhaps most notably, in the US where the more fluid concept of ‘fair use’ prevails.

[3] See, for example, the incident involving the burning of a Banksy print and the subsequent offer of the recording of the stunt as an NFT, reported by the BBC (C. Criddle, 9 March 2021); and the reports of an adaptation of Frank Herbert’s famous science fiction novel ‘Dune’ being purchased at auction by a group intending to undertake an NFT project based on it without the necessary copyright permissions in place to allow for such use (see article in the Art Newspaper by G. Angeleti, 17 January 2022).

[4] The decision was appealed. The appeal judgment (Soleymani v Nifty Gateway LLC [2022] EWCA Civ 1297) is available here.