NFT to protect Digital Art

 
PIIS278229070026281-5-1
DOI10.18254/S278229070026281-5
Publication type Article
Status Published
Authors
Occupation: Student
Affiliation: Institute of Philosophy and Law Novosibirsk State University
Address: Russian Federation,
Journal nameLaw & Digital Technologies
EditionVolume 3 №1
Pages35-40
Abstract

Emergence of non-fungible tokens (NFTs) has led to considerable changes in the creative industries markets associated with the emergence of fundamentally new opportunities for the transfer and protection of intellectual property rights. The explosive growth of the NFT market has led to close attention of both regulators and market participants to the problems of legal regulation of the turnover of these digital assets. The lack of a legal definition gives rise to problems related to the delimitation of NFTs from other digital assets named in the legislation.  This article examines the legal nature of NFTs, distinguishes them from securities, digital rights, digital financial assets, digital currencies and utilitarian digital rights. The author analyses the draft law on NFT and draws conclusions about the prospects for legal regulation with special emphasis on the legal problems of acquiring NFTs.  Based on the study, the author concludes that it is possible to classify NFT as "other property" and that it is necessary to develop a special legal regime.

KeywordsNFT, blockchain, intellectual property, digital law, digital asset, digital art
Received21.06.2023
Publication date05.07.2023
Number of characters22685
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INTRODUCTION

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NFT is a digital tool for tokenising works of art, predominantly digital art. Tokenisation in this area has become possible thanks to the appearance in 2017 of the ERC-721 standard on the Ethereum blockchain, which allows unique tokens creation. Currently, there are several standards for creating NFTs on the Ethereum blockchain, including ERC-1155, which also provides storage for multiple works in a single NFT (Ethereum 2021).

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The popularity of NFTs continues to grow every day. According to Chainalysis (Bykovskij 2021), by the end of 2021, the global NFT market reached $26.9 billion, andthis figure is forecasted to double by 2030. Currently, the most expensive work on NFT, a digital painting "The First Five Thousand Days"by the artist Beeple (Mike Winkelmann), sold for $69 million (Evseeva 2021). In 2023, the first NFT marketplace was launched in China (Kuzmicheva 2022).

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In Russia, this technology also turned out to be very popular. Pokras Lampas sold his first NFT for 2.1 million rubles (RBC Style 2021), and the duo of digital artists 404.zero decided to donate the NFT work to charity, which was sold for a record 6.6 million rubles at that time (Tekdeeps 2021). In December 2021, the online gallery SAMPLE, together with an association of experts from the arts and culture, finance, technology, law and project management industries NFTMASTERTS, presented the first curated NFT collection of Russian art. Those works were sold for more than 11 million rubles. The widespread use of NFTs requires the development of appropriate legal regulation that would eliminate the risks of legal uncertainty in the NFT market.

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NFT DEFINITION

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An NFT is a record in a distributed ledger (DLT) that contains unique data that cannot be tampered with or copied. Such a record can be transferred to another user of the corresponding distributed ledger, while the previous owner irretrievably loses the token after its transfer. This NFT feature makes them look like physical objects, where the transfer of the token is similar to the transfer of a physical object, unlike ordinary electronic files that can be sent to the recipient by keeping them.

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Blockchain technology allows a clear-cut distinction between the original file saved in the form of an NFT and its copy, since the blockchain has records of the creation, ownership and transfer of the token. Moreover, such technology ensures that each token has only one owner. Unlike conventional electronic files, this makes a particular token unique and unique. Thus, NFT is a non-fungible token.

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In common law countries, goods are considered interchangeable if they can be substituted for each other and have the same value. Stocks, currencies, commodities and other assets, for example, are fungible, which simplifies civil turnover. However, non-fungible assets are those that have unique characteristics that cannot be replaced by other assets(Frankenfield 2022).

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In Russian law, instead of the terms "interchangeable" and "non-interchangeable", the terms "individually defined" and "determined by generic characteristics" are used. However, the latter are used only in the classification of things. NFTs are not considered things due to their intangible nature, so their characteristics as “individually defined” is not entirely correct from the Russian legislationpoint of view.

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NFT creation allows forobtaining a certificate of authenticity for a specific digital asset. This means that an NFT becomes proof of ownership of the original version of a digital object (painting, photographic, musical or other work, 3D model, etc.), regardless of who can view or download it. Just as a painting, while remaining unique, can belong to a museum or a private person, which can be viewed in an exhibition or in a catalog.

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The value of the work after the creation of the NFT lies in the token. By buying a token, the buyer becomes the sole owner of the digital object associated with the token. If the owner sells the NFT, the access to the digital object is lost in the same way as when selling a regular item. Therefore, when selling digital works in NFT, the object of the transaction is a unique digital code (token) into which the work (painting, video or other digital file) is pre-converted, and not the paintings, videos or other art objects themselves.

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There are three possible ways to tokenise works of art on the blockchain:

  • tokenisation of an analog object (for example, the work "Morons (White)" by Banksy) (Korneev 2021)
  • tokenisation of an object created in digital form (for example, Mike Winkelmann's digital painting "The First 5000 Days") (Tetkin 2021)
  • creation of a digital object immediately on the blockchain, such as CryptoPunks Lavra Labs (https://www.larvalabs.com/cryptopunks).
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It is important to distinguish between the methods of tokenisation, as this affects the legal structuring of transactions related to the turnover of NFTs. If, for example, an analog work is tokenised for further sale of NFT on marketplace and a lawyer accompanies this transaction, it is necessary to pay special attention to legal tracking of the analog work will be in the future, who will become its copyright holder and whether the purchaser of the NFT will have any rights to this work.

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