Are NFTs Really a Wild West?

Surprise! Laws do regulate “unregulated” markets‍

In his seminal 2008 documentary, The Mona Lisa Curse, art critic Robert Hughes declared that “apart from drugs, art is the biggest unregulated market in the world.” Today, “unregulated” is still a familiar refrain. But as art lawyers, we see the impact of regulations on the art world on a daily basis. For example, the EU’s Fifth Anti-Money Laundering Directive (5AMLD) has forced dealers and galleries to adapt their sales practices by conducting due diligence on sales exceeding €10,000 (inclusive of taxes). Courts and legislators are also starting to recognize resale royalty rights, including drafting new copyright law reforms. If the art world really was unregulated, we’d probably be out of a job. 

Curiously, the argument for greater regulation is often espoused by both crypto critics and believers. 

Clickbaity news headlines proclaiming NFTs as a “Wild West” distort the reality that both crypto and contemporary art markets remain subject to legal regulations and internal standard operating protocols. 

Indeed, the pendulum swings the opposite way in some countries where laws have been implemented significantly restricting cryptocurrency activity, including in China where its central bank announced a ban on all cryptocurrency transactions in the Fall of 2021.  

Where does the “Wild West” label come from?‍

The blockchain has heralded the dawn of an era characterized by both resistance to third-party control and libertarian “reverence for freedom of choice as the ultimate right.” Decentralization gives agency to users and creators to control how their data is used and monetized — directly connecting supply and demand. For Satoshi Nakamoto, “[t]he root problem with conventional currency is all the trust that’s required to make it work.” Decentralized cryptocurrencies look to eliminate costly intermediaries, allowing for smoother transactions that leave more for the recipients of funds. In a decentralized utopia, users know what’s best for them, and cryptocurrencies seek to remove the external structures that limit what would otherwise transpire organically in the market.

Yet, critics of crypto markets and NFTs identify a lack of structure in these systems as both the cause and effect of the Wild West. One site, sarcastically titled, “web3 is going just great,” catalogues anecdotes of daily rug pulls and other scandals, swindles, and instances of fraud. Many of these reported events imply that, had there been some sort of safety network — for instance, consumer protections or legal guard rails such as securities regulation — consumers would have been better protected. 

As art lawyers in this burgeoning ecosystem, we think it is important to note that existing regulations still apply to Web3. 

Laws do apply to these “unregulated” markets, and while the foundational principle of Web3 may be individual freedom, its proponents should acknowledge existing rules that are designed to protect and support consumers and artists. 

Of course, where regulations do exist, enforcement issues will always remain, which is why it is important for NFT platforms to remain active in removing infringing content going forward.

Code is not law, at least not yet‍

One prominent hashtag on crypto Twitter is #CodeIsLaw. This view was first proposed by Lawrence Lessig in his foundational text, Code and Other Laws of Cyberspace (1999), who asserted that code might help to construct rules that govern how individuals interact in cyberspace. But while there are social codes that have become standards regulating human behavior, code is not law — only the law is the law (at least for the time being). Though legal regulations often adapt to reflect and incorporate the technological environment, and code can contractually set its own unique guidelines in limited circumstances, the pre-existing legal frameworks cannot and should not be ignored.  

#CodeIsLaw in fact runs counter to the principle of individual agency on which Web3 is premised. For Charlotte Kent, who earlier this year developed an aesthetics of smart contracts: codes which execute automatically — like laws that are too narrow — are often too rigid to be practical in all circumstances, thereby undermining the socially significant process of developing new ideas through dialog, discourse, and debate. 

A state of #CodeIsLawlessness may be a novel form of anarchy, but it is not equal nor fair to all. 

In crypto markets, the false belief that smart contracts are also legally binding contracts has bred confusion and the chance for a small minority to take advantage. Appropriate guard rails can level the playing field for new creator communities who depend on crypto for their livelihoods. They are also necessary to support a sustainable ecosystem that protects current stakeholders and new users. 

#CodeisLaw is sometimes understood as a set of guidelines to enforce existing laws. To take an example, Digital Rights Management (DRM) uses hardware and software restraints to enforce protections afforded by copyright and other intellectual property frameworks. Where a DRM protocol is implemented in copyright-protected games, videos, and images, you may be able to play the game, but you may not be able to copy it. DRM can also be implemented using hardware devices such that you may be prevented from opening a specific file unless you open it on an approved device. As Primavera De Filippi and Samer Hassan explained in their 2017 essay, “The Expansion of Algorithmic Governance: From Code is Law to Law is Code”: 

“The advantage of this form of regulation by code is that, instead of relying on ex-post enforcement by third parties (i.e., courts and police), rules are enforced ex-ante, making it very difficult for people to breach them in the first place.” 

The #CodeisLaw mantra holds far greater promise where code is used as a means of regulation, rather than as a substitute for regulation. 

Artists can still rely on copyright and consumer protections‍

In his groundbreaking new book, Surfing with Satoshi (2022), art critic, curator, and educator Domenico Quaranta laments that laws and customs are increasingly obsolete. He is correct that copyright is outdated, seeking to apply centuries-old laws to new forms of art and media that were not envisioned when the laws were originally drafted. However, absent an alternative legal framework, copyright still exists to protect artist rights. Retaining copyright in an artistic work allows the artist not only to adapt their work, but also to realize potential monetary benefits from their creative labor. That copyright — which is a form of “intellectual property” in many jurisdictions — applies to digital art represents a seismic shift in the way stakeholders think about creation, collection, and stewardship of non-physical and non-tangible art. 

For artists in the US who believe they are victims of copyright infringement from a copycat NFT, they can still rely on the takedown notice procedure afforded by the Digital Millennium Copyright Act (DMCA). Sending a notice to a marketplace is formulaic and does not require the help of lawyers (like us!). At the time of writing, if a marketplace removes an NFT listing in response to a copyright claim, even if the token stays on the underlying blockchain, the marketplace can prevent virtual wallets from displaying the NFT.

While minting an NFT does not register its underlying copyright, the use of smart contracts and additional applicable terms and conditions may allow artists to share their intellectual property with others. 

These legal structures may also help collectors to better understand what they are receiving when they purchase an NFT.

While no simplified solution can provide an answer in all cases, Mintable, for example, allows creators to transfer the underlying copyright in an NFT to a purchaser if the creator is prepared to do so. Hopefully, in such cases where the purchaser receives further rights, the creator is paid more for their work and for their relinquishing their intellectual property rights. 

Right now, collectors often do not often have clarity as to what rights they are receiving upon purchase, including whether or not they can use their NFT artworks to create merchandise. As Arizona Ice Tea found out last year, Yuga Labs was excited that it had purchased a Bored Ape, but it was none too happy for the drinks brand to use its name and logo for marketing. Sticking with Yuga Labs, who claimed upon purchasing the licensing rights to CryptoPunks that they would allow NFT holders certain commercialization rights, their recently published licensing terms still do contain restrictions. Most importantly, Yuga Labs continues to own intellectual property in the Punks. Suffice it to say, NFT purchasers would do well to understand their use rights upon purchase via platform T&Cs, project terms, and FAQs, and to consider actively questioning project founders on their respective Discord servers. 

Some highly successful NFT projects, including Nouns and now Moonbirds, are also releasing their intellectual property under a CC0 license, allowing creators to waive their IP rights in favor of sharing content with the public. CC0 lets anyone distribute, remix, adapt, and build upon an original work even commercially, as long as the author of the original work is credited for their original creation. The CC0 model is also starting to appear in artist-led NFT projects like Ian Cheng’s “adaptive artwork” 3FACE. To create each work, 3FACE “performs a reading of your wallet’s public transaction history and […] renders an existential portrait of you.” The ownership license terms provide 3FACE NFT purchasers with limited rights — namely, to store the artwork in an account and transfer it between accounts, to sell or otherwise transfer ownership of the artwork to a third party, and “[t]o view, display, and/or exhibit the Artwork for any purpose in any manner on any device.” By contrast, the same ownership license provides all members of the general public with broad “Public Usage Rights”:

‍Everyone, including you and each and all members of the general public, regardless of ownership of the NFT, is granted a nonexclusive, royalty-free, worldwide license, in any medium or format, digital or physical, to reproduce, redistribute, remix, transform, build upon, create derivative works based upon, and exploit, for any purpose, commercial or noncommercial, the Creative Content produced by the Artwork (the “Public Usage Rights”). As used herein, “Creative Content” means the imagery, personality metadata, artwork, text, and other content produced and presented by the Artwork NFT when it is viewed or displayed (but excluding the Reserved Rights, as specified below).‍

While it remains to be seen whether CC0 will become the predominant standard for NFT projects, it has become an accepted protocol whereby creators can distinguish between the value of owning (and having the right to transfer ownership in) an NFT and the (value of) sharing creative content for the public good. 

Setting aside the question of artist rights, an art collector may feel that they have been misled about the nature of their purchase, or their entitlements upon purchase. On this question, the Australian Competition and Consumer Commission (ACCC) has recently taken things into their own hands by launching proceedings against Meta for publishing allegedly misleading celebrity endorsements about crypto in Facebook ads. Legal precedents that support victims are also starting to emerge in courts across a wide range of legal jurisdictions. In the UK, a High Court judge has ruled that NFTs are private property and that such assets have legal protections. By regarding the location of the NFTs as the place where the owner lives, the Court granted a legal order to freeze the accounts of the anonymous NFT thieves, and compelled OpenSea to provide information about the account holders (with accounts identified by the plaintiff using Mitmark, a security and investigation firm). A similar decision has also been issued by the Singapore High Court. Based on these judicial decisions, legislation protecting consumers may soon become more commonplace. For example, New York recently introduced Senate Bill S8839, which attempts to penalize those who develop scam projects.

NFTs must learn to live with the law

In Surfing with Satoshi, Quaranta notes that because blockchain is here to stay, it is important to “make it the subject of public debate, and to call for structural changes before it is too late.”¹ The same can be said for laws and regulations. Legal evolution may be slow, but it is taking place, with opportunities for reform including in the UK and many other jurisdictions. Even in the US, President Biden’s March 2022 executive order has launched a coordinated inter-agency process to develop regulations that can facilitate financial efficiency while clamping down on consumer abuse. Like it or not, the NFT space must learn to live within the legal environment.