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Technological Disruption and Digital Transformation

Prior to the “NFT art” paradigm, people tended to belittle the value of digital art due to its intangible and non-exclusive nature. An Internet surfer can screenshot, save or copy and paste the digital art onto their personal devices and end up with a piece identical to the original work. The current trend of endless technological disruption thus implicates a demand for systematic protection of transactional activities relating to commercialization of digital art. Such protection is now made possible with non-fungible tokens (NFTs) through blockchain, smart contract, and cryptocurrency technology.

Things only have value because we, as humans, give it value. Physical, tangible artistic pieces seen hanging on museum walls or real-life exhibitions possess high value due to its obvious existence, exclusivity, and proof of originality. To exemplify, there may be a plethora of Mona Lisa replicas and forgery, but this does not compromise the value of the “one true” Mona Lisa painted by Leonardo Da Vinci that hangs at the Louvre, which maintains a high market value in the eyes of universal collectors.

A collector engaged in a purchase transaction of a physical art piece is usually issued a Certificate of Authenticity to guarantee that the brush strokes are laid down by no one else but the artist, or Da Vinci in our example. They may also be provided with documents that list out the art piece’s previous owners to ensure that it was lawfully owned and traded.

Similarly, the blockchain technology that lies behind each NFT art transaction enables people to verify the originality of a digital art piece as it provides ownership information, timestamp, and records of each transaction linked together via the cryptography. The blockchain is also accessible and verifiable to the public, and cannot be deleted or altered. As a result, activities of traders and collectors are traceable and secured.

Opportunities for Artists

A modern-day Da Vinci may list a digital copy of the Mona Lisa on an online NFT art trading platform (known as “marketplace”), such as OpenSea, SuperRare, or Nifty Gateway. Such marketplace can issue NFTs on behalf of the creator through a process called “minting,” and facilitate the trading of NFT art using cryptocurrencies (such as Bitcoin’s BTC and Ethereum’s ETH) or fiat money (regular money such as US Dollars or Thai Baht). Once listed, Da Vinci’s work will be publicly available for marketplace users to view and trade.

Marketing of NFT art appears in various forms. For instance, there are thousands of variations in the Bored Ape Yacht Club (BAYC)’s NFT collection, each ranked in terms of rarity. Each of the piece features an ape with different fur types, facial expressions, clothing, accessories, and properties. Due to celebrity influence and regarded position as a status symbol, the apes are commonly used as profile pictures in various social media and gaming platforms. The apes have grown to become extremely popular and highly valuable, once sold for a price equivalent to 3 million US dollars in November 2021. BAYC continues to develop creative ideas for their NFTs. They launched the Bored Ape Kennel Club where collectors can “adopt” a dog NFT. Later in August 2021, they launched a “mutant serum” that collectors can mix with their Bored Ape to create “Mutant Ape” NFTs.

An artist producing physical art pieces can also mint their work into NFT art and trade both physical and digital versions of the work. As such, NFTs provide an additional distribution channel for creators. However, this may impair the “uniqueness” and market demand for the work.

In trading, artists generally sell ownership in the NFT (which is separate from ownership of the underlying art) while retaining intellectual property (IP) rights (such as copyright) in their work. Through the smart contract technology implemented on these marketplaces, an artist can choose to conclude a purchase agreement in a manner that automatically grants them royalty payment each time their work is subsequently traded. The amount of royalty may vary for each marketplace, and may depend on token standards (such as ERC-721 or ERC-1155). Artists can also grant certain IP rights to the buyer, such as the right to display the art piece in a private, non-commercial manner.

Essentially, the issuance of an NFT serves a purpose similar to a Certificate of Authenticity for digital art, now considered “NFT art.” The NFT’s exclusive, irreplaceable, “non-fungible” nature serves as a certification for the “one true” digital copy of an art piece. Therefore, with NFTs serving as a “trustmark,” parties engaged in an NFT purchase transaction may rest assured in the quality of goods, even when trading with online users whose identities remain anonymous. The blockchain and smart contract technology involved also ensure secure transactions and traceability of assets.

Endless Opportunities of NFT

The NFT world is not limited only to art work, but allows for tokenization and commercialization of digital assets in forms such as captured moments, games, collectibles, trading cards, music, memes, e-tickets, wallet and domain names, and even property on the Metaverse. For instance, when applied in the event organizing industry, such as popular music festivals, NFTs can function as an e-ticket to ensure transparency and later turn into an object of reminiscence. Organizers may also partner up with artists to create unique, randomized artwork for these NFT e-tickets, transforming them into tradeable, collectible pieces with high market value after the event.

There are opportunities for NFT’s application in the physical world as well. For instance, an NFT trading platform VeeFriends hosts exclusive events called VeeCon in the physical world and only grants access to people who hold their NFTs, signifying that NFTs can function as an access gateway and have been used as a social currency. Moreover, noticing NFT’s unique, non-interchangeable properties, there are discussions of matching a unique NFT to each specific bottle of collectible wine as a form of quality control certification, as collectible wines bear high risk of counterfeiting. Discussions also arise upon the application of NFTs in inheritance wills to prevent forgery. Thus, NFTs offer benefits in addition to ownership of a digital asset.

Growth and Grey Areas

A recent trend within the digital markets industry is the rise of “ecosystems”. An ecosystem may integrate several digital platforms into one service, providing interconnected digital tools and platforms developed within its group of businesses. For instance, the cryptocurrency exchange Binance has been expanding its activities to NFT marketplace, blockchain technology, debit card, games, education, and other digital services. Binance has also issued its Binance Coin that serves as a utility token which offers benefits when used for goods and services in Binance’s ecosystem. For instance, compared to other tokens, users pay a smaller transaction fee when trading with Binance coin.

Nevertheless, the novelty and disruptive qualities of NFTs pose a growing uncertainty among various industries. While property law governs tangible property such as land and houses, and intellectual property law governs intangible property such as artistic creations, the legal status of NFTs remains disputed.

A collector can “own” a physical piece of art such as a canvas or a sculpture. This ownership of a physical object, however, does not automatically entail any IP right over the artwork. For a collector to have any IP rights over the art (such as the right to reproduce, adapt, or publicly display the work in a commercial manner), the artist must actively grant such rights to the collector through a contract, such as through a license agreement.

Conversely, digital art is entirely intangible in nature and is essentially a form of data, while an NFT represents a specific piece of data on a blockchain. It has been argued that data, as free-flowing information, cannot be copyrighted or appropriated. This is comparable to how a method, recipe, technique, or piece of information cannot be copyrighted. It has also been argued that both an NFT and its embedded underlying art cannot be “purchased” at all due to its intangible nature, and that the transaction involved is purely of IP licensing nature, where the NFT serves a purpose similar to a receipt. Therefore, the “buying” of an NFT lies within a grey area between a transfer of ownership and a grant of a limited license.

Moreover, free trade may do more harm than good without proper balancing with fair competition. Likewise, although cryptocurrency, blockchain, and NFT technology are centered around freedom and decentralized finance (DeFi), regulation of such technology is crucial to prevent abuse and protect consumer welfare. Here, concerns arise upon the sufficiency of existing legal mechanisms. Are transactions concluded by smart contracts valid and enforceable? Are cryptocurrencies acceptable as legal tender? Are NFTs regulated as securities? Can transaction records on the blockchain serve as reliable evidence? What happens if an art piece is stolen and listed on an NFT marketplace?

Yet, NFTs pose revolutionary potential for businesses in the current age of big data and digital platforms, but which legal right has been transferred in an NFT transaction? Is there a limitation to which an NFT holder may exploit their purchased NFT? How can business operators adopt NFTs as part of their traditional business? How can NFTs assist in the digital transformation of businesses? Looking ahead, these unanswered questions only pave the way to greater developments.

Author

Dhiraphol Suwanprateep is a partner in Baker McKenzie's Bangkok office, where he is head of the IT/Communications Practice Group and co-head of the Intellectual Property Practice Group. Mr. Suwanprateep advises clients on government initiatives, particularly Thailand's Digital Economy Initiative which promotes the local ITC sector through strategies aimed at developing related infrastructure, accelerating innovation, and transforming the country's economy into one that is based on digital technologies. His work also involves advising on the amended Computer Crime Act which increases penalties for cyber crimes. He is also a regular commentator and contributor to local, regional and global media on the government's proposed initiatives and frequently participates in local community engagements throughout the country. Dhiraphol joined Baker McKenzie in 1987 and became a partner in 1992.

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