Our ip & technology practice group advises on various projects involving new technologies. For Non-Fungible Tokens (NFTs), they decided not only to advise but to participate in the whole process, from creating a token to selling it (*spoiler alert*) to a museum.
Webinar NFT: An all-round legal view of Non-Fungible Tokens
23 June and 30 June 2021
Join our webinar to get a 360° NFT legal perspective - from ip law to it & technology law, civil law & contract law and energy law! Learn more and register here!
Follow the whole story below and learn more about the legal perspective in our weekly legal insights:
The NFT hype
The art industry is changing and is even moving into the digital sphere. This brings new opportunities and challenges, but also raises many question marks. NFTs are an especially hot topic in the industry, and NFT artworks are being sold for millions. Still, uncertainty surrounds various legal aspects.
NFTs give creators and investors the ability to sell and buy exclusively digital objects that range from paintings and gifs to songs and everything in between. But before you quit your day job to become an NFT artist, you have to know how NFTs work.
What is an NFT?
To understand the concept of NFTs and what "non-fungible" stands for, think about a EUR 10 banknote. If you lend someone EUR 10, it is sufficient if he or she gives you back any EUR 10 banknote (or the money otherwise in equivalent banknotes and/or coins). Of course, you do not expect to get back the same banknote that you gave away when lending the money. So the value of EUR 10 is fungible. However, if you give someone your pet because you are going away for the weekend, you expect that after the weekend they will not give you back just any pet, but exactly yours, because it is not easily exchangeable, i.e. your pet is "non-fungible". Same with NFTs: An NFT is a unique assignment of e.g. an artwork to an owner in the blockchain that can be freely transferred.
The popularity of NFTs is not only rising in the virtual world, but also in the legal sphere. Our lawyers, many of whom also lecture at various universities, have fielded a lot of questions about NFTs in their university courses, which were also discussed at Schoenherr's regular ip & technology practice group meeting. The topic was explored and the idea to conduct an experiment came into being. Guido Kucsko, who headed the ip practice group for several years (and is also a conceptual artist), Anna Katharina Tipotsch, who has a focus on art law, Alexander Pabst, an expert in technology law, and Dominik Tyrybon, specialised in transactions, decided to start an NFT self-experiment. We will take you step-by-step through our self-experiment and examine the legal issues that arise at each stage on a weekly basis.
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we need a wallet and an artwork!
In order to conduct an NFT self-experiment one needs an artwork to sell on the blockchain.
For our self-experiment, Guido Kucsko provided an animated GIF with the title "CONCEPTUAL ARTIST PULLING AN IDEA OUT OF HIS HEAD".
Every one of us owns at least one wallet – but when selling something on the blockchain we need a crypto-wallet, and in specific one that we can use on the world's largest marketplace for NFTs, OpenSea that supports the Ethereum blockchain.
What type of crypto-wallet should we choose and why?
The process of creating a token and deploying it onto the blockchain is commonly referred to as minting. Minting, inter alia, requires a smart contract. No, that's not a super smart contract in the legal sense, but a program that runs on the blockchain.
To find out more about the considerations we took into account as to whether to formulate or use an existing standard smart contract, as well as on how we managed for the NFT to remain unambiguously assignable and permanently linked to the artwork and the associated data (keywords: URI, IPFS, hash value), read "Formulating a smart contract and minting an NFT".
Connecting the NFT with a licence
In general, no automatic transfer of copyright will occur when purchasing an artwork linked or connected to an NFT.
It is thus advisable – as NFT creator / author – to connect an NFT with a (copyright) licence (clearly stipulating what rights are included in the NFT) and – as NFT purchaser – to check, whether the NFT (e.g. in a licence) includes the rights that fit the specific needs for the intended use and exploitation of the NFT. For this experiment, we decided to connect our NFT to a non-exclusive licence limited to a certain purpose.
After receiving three bids for the NFT on the NFT platform OpenSea (in quite a short time), Guido Kucsko accepted the offer to buy the NFT, selling it to the Francisco Carolinum Museum in Linz. This was not entirely unexpected: The director of the museum was in the process of preparing one of the world's first museum exhibitions on the history of NFTs in art and he was already in touch with Guido in this regard.
We enthusiastically accepted the offer from the museum, however, this was not possible with only a simple click. We had to perform several necessary transactions for the NFT to be assigned to the museum's wallet (specifically, its public key).
Finally, the NFT was sold, but which law applies to the sales contract? And what is the contract comprised of? Are there certain rights that purchasers of NFTs can always rely on (because they cannot be waived)?
These are important questions to ask when buying and selling an NFT.
Minting an NFT, its transfer and even the sheer existence of an NFT requires a lot of energy.
High energy consumption is not just the fault of the (Ethereum) blockchain, however, although it remains inherent to it. The higher the value of the cryptocurrency of the respective blockchain, the more miners will seek to verify the blocks and the greater the computing power in the system will get, which in turn leads to even higher energy consumption (cf. "proof-of-work", POW). Furthermore, due to the technical nature of the blockchain, energy consumption increases proportionally with the size of the transaction.
This is one of the world's first museum exhibition on the history of NFTs and digital art, giving an overview of the origins of NFTs and their development: from the first formative attempts with digital technologies, first artistic experiments with the blockchain, through to current crypto art. The exhibition presents around 25 positions by artists (one from Guido Kucsko) who deal with the new system of meaning and values, examining the role of artists in a high-tech environment and discussing the effects of virtual spaces on our everyday life.
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