Written evidence submitted by Cat Auburn

Evidence for DCMS inquiry on Non-fungible tokens (NFTs) and the blockchain

Author: Cat Auburn                                                                     

A glossary of terms is provided on page 4.

Author Biography

Cat Auburn is an AHRC Northern Bridge doctoral candidate at Northumbria University. Her doctoral research is a practice-based exploration of the authorship and ownership of collective memory. Auburn is an award winning, international artist and filmmaker; her research takes the form of artistic engagement with archival material, sculpture, film and NFTs. The research relevant to this DCMS inquiry has come about by Auburn’s collaborative, artistic investigation into NFTs, the blockchain and its implications for the cultural heritage sector. This investigation has included creating NFTs with a collaborator, conference presentations, and conversations with professionals in the artistic, academic, museum, and policy making sectors.

Key recommendations: NFTs need to be regulated.

• Regulation should happen in a vertical manner, with policy for NFTs and blockchain technologies considered as a whole, rather than attached ad hoc to other pieces of legislation. This is due to the diversity of NFTs. For example, NFTs are not solely the domain of art market policy because the majority of NFTs are not works of art.

• Ethical considerations need to be taken into account when regulating NFTs. For example, what are the possible repercussions when something that shouldn’t ethically be owned becomes ownable in the form of an NFT? A theoretical example of this being the creation of an NFT of a living person; what are the implications for ownership and identity in regards to this? This is important to consider if NFTs are used for identity checks in the future - they are already being used as proof of education certification in some instances.

• There are concerns about the environmental impact of energy consumption in relation to NFTs and the blockchain. This needs to be regulated for.

• Policy makers need to consider the strengths and weaknesses of an unalterable historical record when regulating NFTs. Once an NFT is created it is unalterable and essentially undeletable. This offers benefits for tracing financial transaction, but presents a major risk when considering child and revenge pornography.

• UK legislation currently protects artists’ resale rights – in the event an artwork is sold on the secondary market, UK artists receive a royalty that is worked out according to a sliding scale from 4% to 0.25% of the sale value. Royalties are calculated on the sale price for galleries and dealers, and the hammer price for auction houses excluding VAT[1]. The sale of NFTs as artworks is not currently covered by Artist’s Resale Rights. Online NFT market platforms offer varying resale royalties – this is at the discretion of each platform and is not protected by law. At the moment, artists retain copywrite of NFT-based artworks sold via online marketplaces but that could be subject to change in the future - this is another point to consider whilst developing NFT policy.

Overview

A 2022 article on reuters.com defines non-fungible tokens – or NFTs for short - as: “a type of cryptoasset that exploded in popularity last year. They use the technology behind bitcoin to record who owns a digital file - from an image to video or piece of text.”[2] The ‘technology behind bitcoin’ is called the blockchain - an internet-based system, or ledger, on which cryptotechnology-based transactions are recorded – including NFTs.

An NFT is a way of marking a digital asset online as being unique. The problem before NFTs existed was that digital files are easily replicable, so the concept of owning a digital painting, for example, was meaningless as many other people could have an identical copy of the same file, thus making it essentially valueless.

Because NFTs enable digital uniqueness, they are a way of publicly tracking the ownership of digital assets. The development of this technology is a big change that has revolutionised the ability to own digital things and has enabled a marketplace for digital art, amongst other things. It would seem that most things can be turned into NFTs - including a famous basketball dunk meme[3], a pair of sneakers[4] and proof of education certification[5].  NFTs have a similarity to the certificate of authenticity that would accompany an artwork.

Qualities of NFTs to consider

Unalterable

In theory, an NFT is unchangeable once created and the information stored in them lasts for as long as the blockchain system exists. This is due to the functionality of the blockchain (or ledger) on which new NFTs are registered and through which digital uniqueness is authenticated.

Decentralized

The blockchain system (or ledger) is decentralized, meaning that NFTs don’t exist on a single computer server or physical storage space. This potentially removes a layer of local threat as infrastructures are usually tied to geography and political dynamics. The information in an NFT can’t be targeted in the same way as traditional methods of safeguarding information. 

Transparency

The creation and ownership history of NFTs (and other kinds of transaction on the blockchain) are transparent and accessible to anyone with an internet connection. However, this transparency only goes so far once cryptoassets leave a crypto wallet[6].

The risks and benefits of NFTs and the blockchain to individuals and society

Alongside the hope that NFTs and the blockchain may be of benefit to society, there are concerns about the potential to abuse this technology. As with many things in society, there is a lag between real-time use and misuse of new technologies and the development of appropriate policy and legal frameworks.

Potential Risks

• The lockable/unalterable properties of NFTs pose a risk. NFTs cannot be deleted like emails or social media posts. This has implications for child and revenge pornography.

• Artists’ resale rights and intellectual copywrite are currently at the discretion of NFT online marketplaces and not safeguarded by legislation.

• The largest resistance to NFTs and the blockchain that the author has encountered across various professional sectors is the perceived environmental impact of creating NFTs and running blockchain technology. It takes an inordinate amount of energy to run the blockchain system online and as a result, the commerce of buying and selling NFTs has a huge carbon footprint[7].

• The author’s collaborative, artistic investigation into creating NFTs brought up ethical questions such as: can people create NFTs of things that they shouldn’t rightfully own? What can be turned into an NFT? For example, can an NFT of an historic event be created? Since an historic event is a piece of collective, intangible cultural heritage, can it ethically be owned?[8] Can an NFT of a living person be created and what are the ethical and real-world implications of this? It is useful to think about futureproofing these concepts, as this technology will continue to develop and have implications for sovereignty of both individuals and society.

Potential benefits

• The lockable/unalterable properties of NFTs offer potential benefits. With knowledge and culture often seeming to be targets of war and other threats, the fixed nature of NFTs offers the potential to keep information safe in perpetuity for the future. 

• NFTs and the blockchain has the potential to provide accessible and unalterable documents of provenance for cultural items. This has the potential to contribute towards the prevention of illicit trafficking of cultural property.

• The UK has ratified the 1954 Hague convention[9][10]. NFTs have the potential to support several of the obligations outlined in the convention to protect cultural property in the event of armed conflict.

The specific obligations that NFTs have the potential to support are:

• Adopting preventive measures such as preparing inventories, planning emergency measures to protect property against the risk of fire or the collapse of buildings, and preparing the removal of cultural property to places of safety.
• Developing initiatives which guarantee respect for cultural property situated on their own territory or on the territory of other States Parties. This involves refraining from using such property in any manner that might expose it to destruction or deterioration in the event of armed conflict, and by refraining from all acts of hostility directed against it.
• Registering cultural property of very high importance on the International Register of Cultural Property under Special Protection in order to obtain special protection for such property;

A nascent example of this in action can be seen in Ukraine’s use of NFTs and the blockchain to both fundraise and attempt to safeguard cultural heritage during a time of threat[11][12][13]. Over time, Ukraine’s implementation of cytotechnology to safeguard its cultural heritage may prove to be a helpful case study.

Glossary

bitcoin:              a type of digital currency in which a record of transactions is maintained and new units of currency are generated by the computational solution of mathematical problems, and which operates independently of a central bank.

blockchain:              a system in which a record of transactions, especially those made in a cryptocurrency, is maintained across computers that are linked in a peer-to-peer network.

cryptoasset:              secured digital representations of value or contractual rights that use some type of distributed ledger technology and can be transferred, stored or traded electronically.

cryptotechnology:              an umbrella term for the world of cryptocurrencies.

crypto wallet:              online storage for cryptoassets. They also allow you to send, receive, and spend cryptocurrencies.

NFT:                                          Non-fungible token. A type of cryptoasset.

practice-based:              an alternative form of knowledge production or academic research, often undertaken through creative outputs other than standard academic formats.