NFT Art: Big Hype – Many Open Legal Questions!

The art market for non-fungible tokens (in short, "NFTs") is booming! The sale at auction by Christie’s in March 2021 of the digital artwork "Everydays: The First 5000 Days" by the artist Beeple for the (then) record price of USD 69.3 million for an NFT artwork was only the opening bell. Since then, the hype surrounding NFT art1 has continued to grow explosively and the ties between the classic art world and the digital art and crypto-scene have developed at tremendous speed.

Christie’s started a collaboration with the NFT marketplace Open Sea and held its first auction via this platform in December 2021. The competition is not sleeping either. Since the start of 2021, Sotheby’s operates an auction house in the interactive virtual world Decentraland. Users can trade in NFT art and other digital works via this digital auction house. In October 2021, Sotheby’s also announced that it was taking the next big step towards connecting the analogue and virtual art worlds with the launch of its own NFT trading platform under the name "Sotheby’s Metaverse".

A further sensation followed at the start of December 2021 with the auction of the NFT artwork "the Merge" by the artist PAK through the NFT trading platform Nifty Gateway for a record total sum of USD 91.8 million. In this case a complex procedure was used to split the work and the related NFTs into a total of 266,455 shares ("fractionalisation"), which were sold to more than 28,000 buyers. Given the total sales price, "the Merge" not only broke Beeple’s record for the most expensive NFT artwork, but it also took the record for the most expensive artwork of a living artist ever sold in a public sale.

But what makes digital NFT art so valuable? To answer this question, it helps to recognise the key problem with traditional digital art: it can be easily reproduced identically. It was impossible to create a unique digital artwork. After its release, an artist could no longer control whether her work was copied or shared.

Digital art is therefore an ideal use case of blockchain-based NFTs. NFTs are "non-fungible" by definition, i.e. they cannot be exchanged and are thus unique. They are the opposite of "fungible tokens", which can be exchanged and are primarily used for cryptocurrencies. If a digital artwork is linked to a unique NFT ("tokenisation"), the resulting certificate allows the owners to show that they are the exclusive owner of the linked digital artwork. This makes the tokenised work a kind of original digital artwork. Thus, digital art becomes really tradeable for the first time. As a result, interest in buying digital art has increased exponentially and sales prices have exploded in the last year.

There are countless further examples for the booming NFT art market. With one record price chasing the other, the question arises how legally secure the trade of NFT art is. This article provides an overview of the various existing legal issues and current discussions related to NFT art under German law.

I. Technical background

Before delving into the legal issues related to NFT art, some basic knowledge of the main features of blockchain-based NFT technology is useful.

A blockchain2 is essentially a constantly expanding, decentralised public database, which is continuously updated via a limitless number of participating computers ("nodes") in a global network. This database consists of individual blocks in which specific information of the blockchain participants (e.g. transactions) can be saved. The blocks are cryptographically connected, so that every new block clearly references the previous blocks in the chain. This linking ensures that the data saved in the previous blocks cannot be subsequently changed. Since the whole blockchain is stored by all nodes, it is also not possible to manipulate the data from a central location.

Within a blockchain, assets are represented by NFTs. NFTs can only be created ("minting") on programmable blockchains (e.g. Ethereum). Such blockchains allow NFTs to be minted through "smart contracts". These are not contracts in a legal sense, but transaction codes, which represent certain contractual provisions technically, and document and control their execution. It is not possible to make subsequent changes to smart contracts due to the described functionality of the blockchain.

Each NFT has a "token-ID" and is clearly identifiable through this token-ID in combination with the smart contract address, through which the NFT was generated. In addition, the smart contract of an NFT can contain specific information about the asset represented by the token, as well as the identity of the owner. If the token represents a digital artwork, the smart contract normally contains only a link to the image file and not the file itself. Various configurations are possible. For the Beeple NFT described above, the smart contract was linked to a "IPFS hash". This is a unique cryptographically generated fingerprint of a data file. The Beeple NFT did not link directly to the hash of the image file, but to a text file that contained the most important metadata about the image. The actual image file of the Beeple artwork can be found via another link.

II. Many open legal issues

Given the recent headlines about sales of NFT art, it is not surprising that the legal literature has also started to look more closely at this topic over the past few months. Since there is no law in Germany yet that establishes a clear legal classification of NFTs or NFT transactions and other issues in this connection, the debate about the NFT phenomenon has been lively and open. This article provides an overview of the main issues raised in this debate so far.

1. Similarity to ownership

As NFTs are not corporal objects within the meaning of Sec. 90 of the German Civil Code (Bürgerliches Gesetzbuch, BGB), there is no ownership of NFTs according to Sec. 903 BGB. Instead, it might be possible to apply Sec. 903 BGB analogously. The unintended loophole (planwidrige Regelungslücke) in German law necessary for such an analogue application should exist since the legislator has presumably not yet considered the issue. In addition, the interests of the owner of an NFT can be compared to those of an owner of a corporal object. Exactly like ownership, the NFT has, in a sense, an "assignment and exclusion function" (Zuordnungs- und Ausschlussfunktion) because it is assigned to a particular user via the smart contract and other users are excluded from using it. The assignment of the NFT to a single authorised user and the transparency guaranteed by the smart contract should also sufficiently fulfil the "principle of publicity and certainty" (Publizitäts- und Bestimmheitsgrundsatz) required under German property law. Given this similarity of NFTs to ownership, an analogue application of Sec. 903 BGB seems justifiable. The legislator could provide clarity by establishing a legal fiction (comparable to Sec. 2 (3) of the German Electronic Securities Act (Gesetz über elektronische Wertpapiere)), through which NFTs are considered objects within the meaning of Sec. 90 BGB.

There is also a discussion that NFTs should be classified as "another rights" (sonstige Rechte) within the meaning of Sec. 823 (1) BGB. The owner of an NFT should have the ownership-like position necessary for this, as outlined above. The classification of NFTs as "another rights" within the meaning of Sec. 823 (1) BGB therefore seems reasonable too.

2. Relevance of minting under copyright law

The debate also covers the issue of whether minting an NFT tied to a digital artwork results in a use of this work that is relevant under German copyright law. Since the smart contract normally only contains a link to the digital artwork (see above under I), minting does not constitute a reproduction (Vervielfältigung) of the artwork within the meaning of Sec. 16 of the German Act on Copyright and Related Rights (Gesetz über Urheberrecht und verwandte Schutzrechte, UrhG). A use of the work in form of "making it available to the public" (öffentliche Zugänglichmachung) in accordance with Sec. 19a UrhG by inserting the link in the smart contract will normally also not apply if the originator has put the work online. In this case, minting is not an act of use that is relevant under German copyright law.

3. Which rights of use does the buyer obtain?

Whether the buyer of an NFT also acquires the rights of use to the artwork represented by the NFT depends on the intentions of the parties in each case. An NFT transaction does not always result in a transfer of rights of use. The agreement should therefore be transparent with respect to which rights are acquired. Often the rights of use are regulated in the general terms and conditions of the NFT trading platform used. In addition, license terms can be linked in the metadata of the smart contract.

4. The sale of NFT art from a copyright perspective

Another issue is the question of how the sale of NFT art should be classified under German copyright law. As the artwork tied to an NFT is normally only linked in the smart contract (see above under I), the artwork itself is not touched by the transaction. The sale of the NFT in the blockchain, therefore, does not involve any reproduction or distribution of the work (Sec. 16 and 17 UrhG). The work is also not "made available to the public" within the meaning of Sec. 19a UrhG because the artwork was already linked to the smart contract during minting (which in turn normally will not fall under Sec. 19a UrhG, see above under II.2).

Therefore, at best sales-related measures, such as previews of the linked work provided via the sales platform to advertise the NFT, can be relevant under German copyright law. Such measures often constitute a reproduction (Sec. 16 UrhG) and a use of the work by "making it available to the public" (Sec. 19a UrhG).

5. Significant risk of misuse!

From a purely technical perspective, anyone can mint an NFT for a digital artwork published online. There is no guarantee that the creator of the NFT is also the originator of the artwork or at least the copyright holder. Just as a forger of a painting can write the signature of one of the old masters on a painting, a fraudulent internet user can mint an NFT for a digital work and claim that the work is an original or at least an authorised copy. Since it is not possible to acquire rights of use in good faith under German copyright law, the buyer will be left empty-handed in this case. The copyright holder also does not have any legal recourse against unauthorised minting because minting does not constitute an act of use that is relevant under German copyright law (see above under II.2).

It is therefore not surprising that the first cases of unauthorised NFT minting are already making the headlines. In November last year, various well-known artists accused the London curator and founder of the "Art Wars Project", Ben Moore, of minting and selling NFTs for photos of the works created by the artists as part of the project without their authorisation.

6. Automatic participation in the proceeds of sale

Smart contracts make it possible to automatically pay the artist a portion of the proceeds from future sales. This has great potential for NFT art. The creator of the NFT can regulate in the smart contract that he or she is to receive a particular share of any future proceeds of resale. If the NFT is sold, the blockchain will automatically transfer the relevant amount to the creator.
From a legal perspective, the creator of a digital NFT artwork is well advised to establish an automatic payment of proceeds of sale through the smart contract. The author will otherwise normally not be entitled to a share of the proceeds under Sec. 26 UrhG because the "right of resale" under German copyright law generally only applies to physical original works.

III. Implications for artists and art dealing

There are numerous open legal issues related to the trade in NFT art. The German legislator and German courts should therefore establish the framework for a legally secure token economy. Until then, it is up to the artists, gallery owners and platform providers to make NFT transactions as transparent as possible in order to ensure that all parties have the necessary legal certainty.

Above all, artists themselves can help to prevent the unauthorised minting of NFTs of their works. Digital artworks should not be released before the related NFT has been minted. This eliminates the opportunity for third parties to create the first NFT for the work. In addition, artists (and galleries) should ensure transparency by publishing information about which NFT is linked to the original artwork. This will provide at least some legal certainty.

Dr David Moll

1 The term "NFT art" refers to digital art that is linked to an NFT.
2 The term "Blockchain" refers to a public Blockchain.


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