Digital Art, Blockchainization and NFT: Legal Analysis
By Olga Simson
A year ago, V-Art explained to investors what digital art is and what are its advantages over one that smells of paint, and today the digital art market is starting a real boom, accelerated by a pandemic, the rise of cryptocurrency and a real NFT fever.
What has changed in the world with the advent of digital art?
Digital art has revolutionized the art world by providing tools and technologies that artists have begun to use to create interactive and immersive artwork. The highest degree of technologization was generative art.
Christie’s first high-profile sale of an artificial intelligence portrait of Edmond Belamy for $ 432,500 made digital art re-imagined and immediately sparked a copyright dispute. The engraving was created by Obvious, three 25-year-old French students whose goal was to explain and democratize art using artificial intelligence. However, the code used to create the print was the work of another artist and programmer, 19-year-old Robbie Barratt, who shared his algorithm online under an open source license.
The very type of algorithm — the generative adversarial network (GAN) — was first developed by researcher Ian Goodfellow, who now works at Google. Experts still cannot calm down that all the glory and money undeservedly went to Obvious, who used someone else’s technology, but were able to build a PR strategy correctly and approached the project as entrepreneurs, leaving behind a large number of similar and even more advanced analogues.
Digital art has opened up to the general public through the Internet and social media. With their development, a large number of sites for viewing and buying art have emerged. If earlier art was considered only what could be seen and touched in special places: museums, galleries, exhibition spaces, then Instagram offered an alternative market, where artists could get access to a global audience in one step.
If earlier the traditional art market was easily managed and controlled by a narrow circle of experts and dealers by limiting physical access to works, then by the end of the first decade of the 11th century, even conservatives of the art world began to introduce online platforms for access to art objects and become digitalized. The notorious “chosenness” of the art industry has led to resistance to major changes, slowing down the processes that have begun to occur faster in the world of music, games and design. Even after the implementation of online access, electronic platforms excluded direct sales of art objects, preferring to work with material art that was delivered to the end consumer with a solution to a large number of logistical problems: protection from physical damage, insurance and returns. Sales continued to be carried out in the shadow segment with a complex and opaque assessment mechanism, kept on personalized relationships, in which it was necessary to contact the site in order to buy work, not allowing to remain anonymous.
A completely digital market began to form as an alternative to the traditional art market. Digital artists, who often came from the IT community and were far from the traditional world of the visual arts, initially built the digital world on different foundations: freedom of expression, lack of recognized experts and criteria for evaluation, free pricing and self-regulation.
The most radical movement in the digital art world has been in crypto art. Blockchain contributed to this process, which began to be used to form the doctrine of digital assets. Blockchain was the first to offer a tool for creating an intangible competing asset, the technology made it possible to realize an artificial shortage, to limit the possibility of replication and distribution of copies. Thus, giving impetus to the development of the digital art market.
Before blockchain, the market was largely hampered by a number of problems, which Laurence Lessig, a well-known expert in IP and Legal Tech, described in 2008.
- Firstly, digitized content is “non-competitive” because it can be reused by a number of different people without diminishing or degrading the original digital object.
- Secondly, it has a near-zero marginal cost of reproduction, which makes it possible to obtain cheap and accurate copies of digitized information.
- Thirdly, the ease of replication of digital content, its interactive capabilities, lead to the proliferation of creative repeated combinations, calling into question the monetization of the copyrighted work, and in general, the ability of copyright to protect the rights of digital creative products.
To this we can add that the digital form generally blurred the differences between the original and the copy, and therefore the issue of the implementation of copyright and protection against counterfeiting was the cornerstone until it appeared …
NFT is a non-fungible cryptographic token on the blockchain, which is a unique type of asset that can be either fully digital or a tokenized version of real resources.
The NFT concept continued the “business started by blockchain” and essentially proposed the implementation of the idea of creating a programmable digital scarcity, which allowed launching the process of forming critical collectibles. Unlike cryptocurrency, where all tokens are identical and have generic characteristics, which means they are fungible, NFT tokens are limited in their number and each of them is unique. NFT tokens were first picked up by gamers, using them as digital collectibles or game props, such as weapons, clothing and other items, and then NFT came into game art.
In 2017, the first critical art platforms emerged: CryptoKitties and CryptoPunks. Already in January 2021, critical punk # 2890 was sold for a record amount of 605 ETH (equivalent to 761,188.57 USD), and just yesterday the critical head # 7804 went for 4200 ETH (equivalent to 7,820,520 USD at the exchange rate).
Later it became clear that NFTs are ideal not only for game-art, but also for art objects, rare items and collectibles.
The cherry on top was the sale on February 22, 2021 of a work by Mike Winkelmann, a web artist named Beeple, called “Crossroads” for $ 6.6 million just days before Christie’s auctioned it. The sale took place at Nifty Gateway, an online crypto marketplace for digital art. No sooner had the media announced the news about the most expensive sale of a digital work in its entire history, as this Thursday the auction house Christie’s closed the sale of its first ever digital work of art, consisting of 5,000 works, created by the same author for 69.3 million dollars.
The gold rush for NFTs, and in fact, cryptological certificates of authenticity, is already under way. In 2021, experts predict a boom in NFT platforms, and NFT evangelicals preach a full-scale tokenization of art.
To top it all, Megan Doyle, a post-war and contemporary art specialist at Christie’s hype, sums it up, “NFTs give digital artists the agency to sell their work with the assurance of authenticity and rarity. They are creating a new path forward.“
Imagination paints a picture of general prosperity, but the critical mind of a lawyer makes you look at things soberly.
Is everything so perfect in the NFT world?
We decided to analyze the pros and cons of this tool, as well as NFT platforms for artists and collectors, and came to the following conclusions:
1. First of all, you need to understand that NFT remains outside the legal regulation, most platforms operate outside the legal field. This means that at any time with the adoption of such regulation in the future, there is a risk of closure of platforms with all assets and services, as well as a sharp change in the rules of the game. Users become a kind of hostage to the situation along with their digital assets.
2. At the moment, the most common framework for NFT remains the ERC-721 standard for issuing and trading non-fungible assets. This means that the token holder does not have any rights in relation to the issuer, the authority to make decisions on the issuer’s project and the ability to find out the volume of the supply of assets. The owner of the token has no monetary rights, does not participate in profits, which means that his asset cannot be used as an investment tool. While NFTs are indeed transferable, they usually are not transferable in the organized market. Otherwise, NFT can qualify as a security token, and a platform that offers such functionality can be subject to AML (Anti Money Laundering) — regulation aimed at combating money laundering, and the notorious KYC (Know Your Customer), without having passed compliance with the verification policy your client. For most of these platforms are based on the anonymity of their users and do not guarantee security. In fact, NFT is becoming a good investment for crypto millionaires who cannot cash out their assets and buy the conventionally “living art” of Da Vinci or Picasso.
3. Blockchain builds trust in the digital artist community by offering them a decentralized market model and transaction transparency. Blockchain really allows you to create sales history and provenance on the platform that cannot be faked by recording transactions, shaping the capitalization of the artist and his work. However, the blockchain does not verify the authenticity of works and does not verify the author at the entrance. In other words, anyone can upload someone else’s digital images, posing as their own. Nor does he necessarily commit an offense from a legal point of view. This possibility is especially evident for digitized traditional art, for which the copyright has expired. This means that rare items that make up museum funds, but at the same time popular and expensive ones, are at risk, which can easily turn into private digital assets.
4. One of the important features of NFT is the so-called tokenized certificate, which binds the property object to the subject at a certain point in time using a unique link. The certificate confirms that a digital asset is something unique and rare. However, similar certificates were known before. For example, in 2020, the World Intellectual Property Organization WIPO proposed the WIPO Proof certificate, which in practical terms is a “digital notary” certifying the existence of a digital file at a particular point in time. The same can be issued by any electronic platform when uploading digital content, certifying the certificate with an electronic digital signature. In this case, the blockchain will not protect against multiple uploads of the same art object to the same platform or on different platforms, as well as from replacing the source code using the same link. Most NFTs will not be able to prove their uniqueness without contacting an authorized expert center.
5. Finally, recent NFT art sales cases show a lack of clear pricing process. HYIP sales inflate the value of a digital asset and can turn it into a soap bubble, which has already happened more than once with intangible assets, one has only to recall the well-known NASDAQ stock market crisis in the early 2000s. NFT has other disadvantages as well. Artists complain about high fees for using this technology. The most popular blockchain for NFTs at the moment is Ethereum, and gas fees are charged every time a transaction is made on the network. This can happen at different stages in the process: when artists join the marketplace as a one-time fee on first listing, or when buying artwork as a commission that is charged to buyers.
I would like to end the article by paraphrasing the words of Marcel Duchamp about his ready-made art: it is not necessary to create something brilliant, it is only important to clearly explain why this is a unique masterpiece.
© Olga Simson, Doctor of Law, Founder and Director of the Institute of Law, Technology & Innovation, co-founder and CSO at V-Art