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Gregor Kleinknecht discusses NFTs and why artists must protect their copyright in The Times

  • December 16, 2021
  • By Gregor Kleinknecht, Partner

This article was originally published in The Times and can be accessed here

NFTs: Fad, Future, or Fraudsters’ Paradise?

The much-publicised sale by Christie’s of Beeple’s digital collage The First 5,000 Days certainly put non-fungible tokens (NFTs) on the map. So much so in fact that the Collins Dictionary made “NFT” its 2021 “Word of the Year”; but are they just another fad or here to stay? And what about the risks behind the hype? While many traditional bricks-and-mortar galleries were suffering from Covid-related lockdowns, NFTs appeared to capture the spirit of the moment: able to be bought online, directly from artists and supporting them in hard times, and offering seemingly unquestionable provenance and transactional security through a blockchain embedded smart-contract.

Too good to be true? NFTs are neither art nor digital art but are properly classed as crypto assets. They give rise to a myriad of unresolved legal and ethical issues: to start off with, any blockchain transaction is only as secure as the company and platform hosting it; will they still be around tomorrow? Quite what you buy also tends to vary from platform to platform but buying an NFT will generally neither transfer ownership in the underlying artwork nor will it give the buyer exclusive rights in the image. An NFT is effectively no more than an access code to some form of digital content. Authenticity and copyright concerns are also emerging because some NFTs are being minted fraudulently without the knowledge or consent of the artist who produced the underlying work and owns the copyright and moral rights in it. Not much thought appears as yet to have been given to the privacy and data protection implications of NFT trading and ownership. By contrast, the challenges of anti-money laundering compliance arising from transactions in NFTs using crypto currency have recently come to the fore in a government consultation seeking to bring them within the regulated sector.  When things do go wrong, buyers may well find that their contractual protections are limited and that there are no easy and effective remedies. And then, there are the tax implications: for example, a liability for capital gains tax may well arise at the point when an NFT is paid for using crypto currency.  [The environmental burden of all that computing power required to keep the newly discovered metaverse churning is easily overlooked.]

Many will remember the last crypto bubble bursting a few years ago and there are some warning signs that history may well be repeating itself.  From a collector’s point of view, at least for now, it appears prudent only to invest real world (fiat) money in NFTs, if you are not only hoping for investment gains but can equally well afford to lose your investment and are prepared to live with the legal uncertainties. Likewise, artists may well benefit from the additional income stream that NFTs can open up but need to be mindful of protecting their copyright against fraudsters.

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