NFTs: buyers beware! The view from Russia
According to the research firm Block, the trading volume of non-fungible tokens (NFTs) exceeded $13 billion in 2021. This is 400 times that for 2020 ($33 million). It is estimated that the art market currently accounts for about 30% of all NFT trades.
In light of this trend, it is crucial for those intending to trade in digital art NFTs to have a firm grasp of how IP rights come into play.
Under Russian law an NFT is not, in and of itself, an IP asset. It is a digital certificate of ownership of the digital asset linked to it. An NFT contains data about its owner (or the chain of owners, if the NFT has already been resold), and information about rights to a digital asset linked to it, which its buyer acquires.
Broadly speaking, two types of digital art may be linked to an NFT:
- digital copies of real-world objects (eg, NFT copies of Hermitage-hosted artworks); or
- works first created in the digital space (eg, famous pixel art images of CryptoPunks).
Since NFTs are stored on the blockchain (a decentralised database simultaneously stored on multiple computers connected to each other on the Internet), this guarantees that this information cannot be destroyed or illegally modified.
NFTs can be created, sold or purchased on various NFT marketplaces. Currently, some of the largest and most popular NFT marketplaces are OpenSea, Binance, Rarible and Nifty Gateway. Typically, users can buy NFTs in exchange for cryptocurrency; however, some NFT marketplaces such as Nifty Gateway allow users to buy NFTs with fiat currency (government-issued currency, including US dollars, that is not backed by a commodity like gold or silver), using their credit cards. This makes the process of buying NFTs easier and more accessible to everyone.
Potential buyer of NFTs linked with digital art should focus on two main issues. First, ownership - find out the chain of title from the creator through to the seller of the NFT, and whether they have the right to transact in it.
The seller of an NFT relating to certain digital art must also be the current owner or authorised agent, as regards copyright and other IP rights.
Anyone transacting in NFTs should also be alert to the fact that art objects associated with them might be subject to copyright restrictions and possibly other related rights of third parties. If someone’s pictures are being offered for sale in the form of an NFT, for example, it would be useful to ensure that the photographer or creator also received legal permission from the person depicted in the pictures.
Second, IP rights - learn what IP rights for art objects you will acquire by purchasing an NFT linked with a particular digital art piece.
- for the buyer’s own personal (non-commercial) use;
- for use on the marketplace for the purposes of buying and selling NFTs; and
- for use on a third-party website in connection with transactions with tokens.
Therefore, this means that the purchase of an NFT does not give a seller the right to publicly display, perform, distribute or otherwise reproduce the NFT or its related digital art for any commercial purpose, unless otherwise specified by the seller of an NFT in the sale agreement.
In 2021, when Russia’s Hermitage Museum sold several masterpieces, including a work of Leonardo da Vinci, in the form of NFTs through Binance NFT Marketplace, they included additional permission that stated that the owner could present the NFTs in digital format for any purposes (commercial or non-commercial). However, this did not mean that the buyer could use the artworks to produce physical souvenir products bearing those images.
Therefore, before creating, selling or purchasing NFTs, you should always make sure that the IP rights for the art objects are cleared and that you understand the extent of the rights you are selling or purchasing.
This is an Insight article, written by a selected partner as part of IAM's co-published content. Read more on Insight
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