The recently released Netflix documentary Made You Look, highlights one of the biggest fraud scandals in the high-end art world. The Knoedler Gallery in New York City was found to have sold over 80 million dollars’ worth of forged artwork over a roughly 10-year period. This spectacle underscored the issue of provenance in the high-end art world. Provenance is paperwork or documentation that verifies the authenticity of the artwork. Unfortunately, it is common for expensive artwork to lack provenance. The documentation might not have ever been created because the artist was obscure at the time the work was created, or it might have simply gone missing as a result of time or theft. American case law is littered with disputes arising from art purchasers being defrauded and purchasing fake works, as well as disputes over ownership of artwork that was stolen at some point. As society and art moves toward an increasingly digital world, a potential solution to this issue can be found in non-fungible tokens (NFTs).
Recently, NFTs have begun to make headlines as the technology rises in popularity, not only in the art market, but also in other areas such as sports trading cards. This recent rise in popularity has seen NFTs sell at exorbitant prices. The latest examples include, the artist Beeple selling his digital artwork at Christie’s for over $69 million dollars and the New York Times selling a digital column for over $700 thousand dollars.
NFTs function in a similar manner to cryptocurrency tokens in that they are built on a blockchain, the most popular one being Ethereum. Unlike cryptocurrencies such as Bitcoin, the “non-fungible” aspect of NFTs means that each one is unique and one-of-a kind. In terms of digital art, owning the NFT is akin to owning the original artwork. Of course, the work of art can be replicated, but the person that owns the NFT can be considered the true owner.
The benefit of this blockchain technology is that all transactions are documented on a ledger. For example, the aforementioned New York Time’s article can be found on the digital marketplace OpenSea, which lists the current owner as well as the entire trading history of the NFT. In addition to viewing the transactions on OpenSea, it is possible to find the contract and transactions directly on the blockchain. Each transaction forms a smart contract, which is a self-executing contract with terms that are embedded in the code. These smart contracts stay on the blockchain. In essence, each NFT has a chain of ownership that connects from creation of the NFT to the current owner. This solves any issues of provenance for digital art because the blockchain is able to validate both the authenticity of the NFT and any subsequent transactions.
There are still a many legal considerations that will need to be sorted in the future. One of these issues is the enforceability of the smart contracts that are encoded into the blockchain transactions. Contract law can vary by jurisdiction, however, generally for contracts to be enforced they have to include an offer, acceptance, consideration, and meeting of the minds. The first three elements are easily present in any smart contract transaction, but it can be difficult to establish a meeting of the minds, particularly if all the parties are not able to understand the terms of the contract. For example, most current NFT smart contracts include a requirement that the original creator is entitled to a percentage of any subsequent sales. A potential solution to this problem would be to create ancillary contracts that contain additional provisions separately and in writing. Courts would likely treat an ancillary contract and the code in the smart contract as one unified agreement.
As with other innovative technologies, courts will have to catch up and ensure that the law adapts. Implementing blockchain technology into the art world brings many benefits to the creators, dealers, and purchasers of art. It gives each participant the confidence that they are buying authentic works. However, questions such as the enforceability of smart contracts are still up in the air and must be resolved in subsequent case law to ensure that the parties are confident that their digital works of art also include legal protections.
* Derrick Vallejos is an Associate Editor on the Michigan Technology Law Review.