DANIEL MAYOR—The recent high-value sales of digital art NFTs (non-fungible tokens) by Beeple, and, even more recently, of a self-portrait NFT made by Sophia the Robot, signals the digital token’s acceptance as an attractive new asset for tech-savvy creatives. But avant-garde digital artists are not the only early-adopters of this craze and organizations like the NBA have made significant investments into NFTs. Last year alone, the total value of NFT transactions was $250 million. However, many critics question whether these “tokens” are worth anything at all.
NFTs can represent a variety of copyrightable works (e.g. artwork, GIFs, songs, or sports highlights), but are unique in that they are issued on a distributed ledger such as a blockchain. This grants two distinct advantages to the purchaser: (1) the blockchain network will keep an unalterable record of every owner of the NFT, and (2) it prevents the NFT itself from being altered. For example, while everyone can see Jack Dorsey’s first tweet on Twitter, Sina Estavi can now claim a limited “ownership” over that tweet after he purchased the NFT in March 2021. NFTs differ from digital currency, like bitcoin, in that they cannot be fractionated or exchanged for another thing of equal value. Importantly, NFT sales do not require the artist to assign their associated exclusive rights or copyright in the work. This may allow artists to retain the ability to license the work and create derivative works, among other exclusive rights. The nature of NFTs is not as limited as the traditional baseball card, but their market appeal is analogous to a unique collectible.
The digital artworks sold in these exchanges are protected under the Copyright Act of 1976, as pictorial, graphic, or sculptural works, provided they meet the other requisite factors to obtain copyright. Even though the Founders may not have contemplated that there would be a market for Nyan Cat GIFs, the concept of protecting artistic works is a matter of express constitutional significance. The Constitution authorizes Congress to create Copyright law “[t]o promote the Progress of Science and the useful Arts.” The utilitarian argument has framed this broad mandate as an economic incentive for authors to produce creative works.
So, what are consumers purchasing when they spend their dollars, or digital currency, on NFTs? The benefits of authentication in the world of digital art, which is easily reproducible and redistributable, can help validate digital assets and prevent corruption from unfettered piracy on the web. However, the legal certainty granted by clear chain of title may be an inadequate incentive to drive average consumers towards NFTs as an asset. For collectors, the digital and unalterable nature of NFTs provides a more reliable, albeit tech-based, solution to certify the provenance and authenticate both tangible and non-tangible works.
Recent purchases also suggest that NFTs can be used as a status symbol by creating scarcity in the market for digital assets. Eccentric purchasers, such as Metakoven and 888, have already demonstrated how enthusiasts of an artist can receive a reputational enhancement, including extensive media coverage, from the exclusivity of owning a given NFT. If NFTs remain restricted to inflated bidding among wealthy technophiles, then their status may remain that of a luxury good––one that primarily signals wealth through conspicuous consumption. However, if NFTs continue to attract investment, then we need to be cognizant of preventing our laws from allowing consumers to be exploited while a bubble forms. Even Beeple, now the third most-valuable artist alive, admitted that “[t]here is definitely some froth” when asked if we are in the midst of a valuation bubble.
Current market volatility suggests the market needs greater federal oversight, and that securities regulators need to play a larger role for in managing the asset’s fluctuating value. However, we must recognize that since other law, such as the Copyright Act, legitimizes these assets and the creative works’ underlying these exchanges, artists will be incentivized to explore this opportunity to capitalize on either a bubble or a fundamental shift in the supply of digital assets. While NFTs may not be guaranteed to retain value, the excitement surrounding these exchanges will continue to drive investment to the tokens in the short term.