NFTs: Authenticity, accessibility and equitability in the art world
In March 2021, tongues in the international art world were set wagging when Christie’s auction house sold Beeple’s digital collage Everydays: the first 5,000 days, compiled by the artist from 5,000 images curated over a 13-year span, for a huge USD69 million as non-fungible token (NFT). What is truly astounding about this sale is not the price fetched for the work of art, but the highly publicised convergence of digital art and crypto tokens backed by one of the world’s oldest and most reputable auction houses, therefore lending credibility to the transaction.
NFTs are units of data created and stored on blockchain technology. Although the mere mention of blockchain establishes a mental link to cryptocurrency in the minds of most people, NFTs and cryptocurrency are not one and the same. The commonality between NFTs and cryptocurrency begins and ends at the blockchain. Yes, both NFTs and cryptocurrency are stored on blockchain, an immutable public digital ledger that records the provenance of an NFT or unit of cryptocurrency. However, NFTs are digital tokens that certify ownership of underlying real world or virtual assets. Unlike their fungible counterparts (money or cryptocurrencies such as Bitcoin and Dogecoin), NFTs are not interchangeable, and therefore cannot be traded on a like-for-like basis. The reason for this is that NFTs derive their value from their underlying assets, the respective values of which can be as varied as the array of images in Beeple’s collage.
Artists can tokenize their digital works as NFTs for sale on the crypto market. The tokenization of the art work does not convert the digital artwork itself into an NFT but instead links the virtual location of the original digital work to the NFT, such that the owner of the NFT can view the artwork using the NFT as the access token.
The market for forged artwork thrives. Unfortunately, the financial perils of the sale of forged artwork may fall upon parties to the sale who were not culprits of the forgery. This was the cautionary tale emanating from the litigation in the England and Wales case of Fairlight Art Ventures LLP v Sotheby’s & others (2020, EWCA Civ 1570).
In this case, an art investment company was held liable to repay its share of the USD10-million sale proceeds for selling a Frans Hals forgery on consignment to Sotheby’s, which had in turn sold it to a collector. At trial, one of the presiding judges commented that ‘the law has to fall on someone; obviously it did not fall on the forger.’
In the US, the Andy Warhol Art Foundation famously disbanded its Authentication Committee in 2012 after facing a number of lawsuits concerning the provenance of works attributed to Warhol, after the Authentication Committee had already opined on the provenance of those works and the opinions were relied upon in sales of those works.
In common-law jurisdictions, if a buyer suspects that they have purchased a forgery, their recourse against the seller typically lies in the law of misrepresentation (if there is any actionable misrepresentation at all).
Adding to discussions regarding the authentication of art is that fact that in most jurisdictions, there is no public register of origin or title to artwork to which a prospective buyer can refer when contemplating the purchase of notable works of art. Where digital artwork is concerned, the risk of accepting a forgery has been lessened to a degree by the tokenization of digital artwork as NFTs. The immutable and public nature of the blockchain makes the task of establishing the provenance of digital artwork less cumbersome and less speculative for a prospective buyer. Buyers of tokenized digital art are given added comfort in their due-diligence process by being able to review the blockchain to determine the origin of the NFT-linked artwork and view a record of each sale of it thereafter.
The accessibility of prized artwork has long been subject to the control of intermediaries, placing a divide between artists and buyers who may not wish to engage with traditional intermediaries such as auctions houses or galleries. However, the advent of NFTs has broadened artists’ opportunities to secure sales for their work, by allowing them to sell directly to the market of buyers. NFTs have built-in smart contracts that enable the artist and the buyer to agree the terms of sale and possible resale of the digital artwork. Smart contracts are self-executing, meaning all or some of the performance of the contract is automated, therefore requiring little or no human intervention.
Some commentators have championed this phenomenon as the ‘democratisation of art,’ in which we see not only a shift away from the lack of transparency in art sale transactions to one of total transparency, but also the free trading of art on the open market. It should be borne in mind that smart contracts are not written-form contracts but are a type of algorithm that provides for a pre-determined outcome to an event that is coded as ‘if/when…then.’ For example, when buyers offer the sale price for an NFT, the NFT is transferred to the buyer and funds are transferred to the seller automatically. Given this, although the sale of artwork through NFT smart contracts provides a novel means of conducting art sales, it may still be worthwhile for high-value NFT art sales to be underpinned by not only the smart contract but also a written supplementary agreement that defines the roles, responsibilities, representations and warranties of the seller and buyer in the transaction and allocates risk appropriately.
Not only do NFT self-executing smart contracts make accessibility to art more tangible, they can also be used to ensure that artists are paid fairly for their work, particularly on the secondary resale market.
The concept of droit de suit, or artists’ resale royalty rights, began to take shape in law in the late 19th century. One of the most famous examples of the inequities that shaped this concept was the sale of Jean-François Millet’s painting L’Angélus, which sold for a staggering FRF553,000 on the secondary market after his death. During his lifetime Millet had sold the painting for only FRF1,000, doing little to alleviate the poverty-stricken and destitute circumstances in which he and his family lived. After his death, his family received no benefit from the resale. This is said to have led to the introduction of droit de suite in French law: the inalienable right of the artist, or heirs of their estate, to receive a portion of the proceeds of the resale of the artist’s work.
The Berne Convention for the Protection of Literary and Artistic Works, established in 1886 to create a level playing field for artist’s rights among convention signatories, also contains droit de suite provisions at Article 14. Nonetheless, these provisions are optional and as such signatories are not obliged to incorporate droit de suite in their national legislation. In light of this, there are a number of signatory countries that have chosen not to provide this automatic right to royalties upon the resale of an artist’s work in their country’s legislation.
NFTs provide a means of addressing this issue. It is possible for the NFT smart contract to be encoded to automatically deduct a percentage of the resale price of a piece of digital artwork from all subsequent sales of the NFT and pay it over to the NFT creator or artist.
The introduction of NFTs is likely to have a profound effect on the way business is conducted in the art world. Though their use is a relatively recent development, NFTs seem to have positioned the art world for a paradigm shift through which artists can exert greater control over the sale of their work and reap the majority of the financial benefit.
As further development is stimulated, it will be interesting to observe the way in which technology, art and law converge and begin to influence one another.
Written by Kamala Richardson, Associate in the Higgs Johnson Private Client & Wealth Management practice group. Kamala specialises in wills, estate planning and matters related to trust law, foundations and company law. She is a STEP Affiliate and a member of the BFSB’s Trusts Working Group.
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