Insights
NFTs - a legal minefield
Non-Fungible Tokens: Part 4 - Q&A with Pierre Valentin, Lawyer, Constantine Cannon LLP
In the fourth in our series on NFTs, the Stonehage Fleming Art Management (SFAM) team catches up with Pierre Valentin, Lawyer and partner in charge of the Art & Cultural Property Law Group practice at Constantine Cannon LLP.
SFAM: What legal issues should you consider when creating and selling NFTs?
PV: NFTs are a legal minefield in the way that worldwide online platforms such as eBay and Amazon were in the mid 1990s. An NFT can link to different artworks, each with their own characteristics and legal challenges. When you buy an NFT linked to a digital artwork, you do not buy the digital artwork itself, but some lines of code known as metadata that link to that digital artwork. The code contains information about where the original artwork is located and who owns it. The code and the record of transactions involving that code are held on a ‘block’ that forms part of the blockchain. The entry of your name into the code as owner of the NFT does not prevent anyone else from downloading and viewing the digital artwork.
SFAM: Do you acquire the copyright in the digital artwork when you buy an NFT?
PV: Not usually. When you buy a painting, you buy the physical artwork but not the ability to make and sell copies or create new works that wholly or substantially reproduce the original. The same is true of NFTs. Copyright is not automatically acquired. Owners can sell, lend or transfer the NFT, depending on the specific terms of the marketplace on which it is purchased, which should be checked thoroughly prior to a sale.
SFAM: How can you protect yourself when buying an NFT?
PV: Rigorous due diligence is essential. It is important to ascertain whether the seller is the creator of the underlying artwork and if they have obtained the permission of any third party whose intellectual property is enshrined in it. You should also establish the reputability and terms of use of the platform offering the NFT to understand what you are paying for. Digital artworks may be hosted on third-party servers. Buyers should consider how the value of the NFT would be affected were a server to stop running for any reason. Finally, technology as it relates to NFTs is changing on an almost daily basis. If a buyer cannot guarantee the technology supporting their NFT won’t be obsolete in five years’ time, there can be no guarantee of its worth - another risk to consider when setting the price.
SFAM: Are there any regulatory risks around issuing NFTs ?
PV: Money laundering a concern for a few reasons: the relative anonymity afforded to creators and buyers, the use of cryptocurrency and the fact that some NFTs trade for significant amounts. The EU’s Fifth Anti-Money Laundering Directive (5AMLD), requires art market participants to comply with a range of new obligations, including verifying the identity of other parties in the transaction. However, NFTs and digital art are not expressly included in the definition of ‘work of art’ set out in the VAT legislation used for UK AML purposes. The UK Government recently launched a consultation calling for evidence as to whether digital artworks should be captured by the AML Regulations.
SFAM: How do you register or transfer the ownership of an NFT?
PV: The first step is to set-up a digital wallet that allows you to store NFTs and cryptocurrencies. Next, you will likely need to purchase some cryptocurrency be it Coinbase, Kraken, eToro or PayPal. Once your wallet is set up and funded, you can start shopping for NFTs, the current largest marketplaces for which are OpenSea.io, Rarible and Foundation. Your ownership of the NFT will be recorded automatically when you pay for it on the marketplace of your choice. It is possible to transfer your NFT through the marketplace hosting your NFT collection.
SFAM: Have you had many client requests for advice on NFTs?
PV: Only a few. The market for NFTs is still in its infancy and considering how fast they appeared on the art scene, I am not surprised. At the outset, the concern with NFTs was about the security of transactions. Collectors and art market professionals are only now starting to consider the legal issues. The fluctuation in cryptocurrencies in recent months is likely to generate greater caution and increased due diligence amongst collectors of NFTs.
Over time, the law as it applies to NFTs linked to art, will no doubt evolve in the same way as the law related to online platforms has evolved. In the meantime, for artists, creators and buyers alike, the NFT market is fraught with risk. As with any risky market, there are opportunities for significant gains, and for significant losses. Buyer beware.
Photo by Viktor Forgacs on Unsplash
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