This article has been published in the PLI Current: The Journal of PLI Press
Despite some early flirtations with blockchain technology.1 it was not until early 2021 that the art market finally sank its teeth into the complex digital world of blockchain technology. Even though “non-fungible” tokens, “NFTs” for short, have gained notoriety in the press, how they are defined can be a surprisingly thorny question to answer and still appears to be understood only by a relative few. However, answering this question is essential in order to spot the potential legal issues associated with NFT transactions. Therefore, this article begins by addressing what an NFT is.
By now, most readers are likely familiar with the concept of cryptocurrency, which is comprised of “fungible” tokens bought and sold using blockchain technology and tracked on a digital ledger.2 Cryptocurrency tokens are fungible in that each is readily exchangeable with another, both having an inherently equal value, the same way that a one-dollar bill is readily exchangeable with another one-dollar bill. For example, one Bitcoin for one Bitcoin; one ETH for one ETH.
By contrast, NFTs are like cryptocurrency in that they are tokens bought and sold using blockchain technology and tracked on a digital ledger. However, they are unlike cryptocurrency in that they are “non-fungible,” i.e., not readily exchangeable with one another for equal value. Rather, each NFT is a token that points to a unique underlying asset, such as a digital artwork, a YouTube video, a song, or even, in some cases, a physical asset. An NFT may be conceptualized as an expression of ownership over that unique underlying asset.
Many critics have wondered aloud at what the benefit of buying an NFT might be, especially when ownership of an NFT does not necessarily convey the traditional bundle of ownership rights over the unique underlying asset. The perceived problem is encapsulated in the following description of an NFT as “a publicly available token that links to a work. For example, for a digital picture, the token may be a unique number and a link to a copy of the picture, hosted on a service such as the InterPlanetary File System (IPFS). The token itself is visible to all, as is the work to which it points, so anyone else can look at the work and download it” (emphasis added).3 The crux of this perceived value problem is that minting an NFT for a digital asset does not prevent others from accessing and viewing that digital asset in a way that may be very similar to how the owner of the NFT might access and view the digital asset.
Irrespective of any criticisms, the past year has proven there is a true market demand for NFTs and that big-money buyers are coming to the table. In 2021, the market for NFTs exploded, with approximately $10.7 billion traded in the third quarter of 2021, up from a staggering $2.3 billion sold in the first quarter and $2.4 billion worth of NFTs traded in the second quarter.4 It remains to be seen whether the majority of these buyers are speculators, long-term investors, collectors, or hobbyists simply looking to get into the experience. There are clear experiential and sociological benefits associated with participating in the NFT market, including supporting artists and other content creators, taking part in a new digital movement and community, and acquiring the bragging rights associated with NFT ownership on the internet. As Jonathan Zittrain and Will Marks put it, “[A]n essential part of NFTs’ value is that they don’t convey anything resembling traditional ownership.”5
While it was the March 2021 $69 million Christie’s Beeple sale which seems to have grabbed the public’s attention, the NFT market has been around for some time.6
The full article can be read here.
