NFTs are about to go mainstream with a single-lot sale of 104 Crypto-Punks at the New York saleroom of auctioneers Sotheby’s.
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The sale marks the first live evening auction of NFTs by a prestigious auction house and hopes to raise millions of dollars for the anonymous owner.
CryptoPunks are among the earliest and most famous examples of NFTs minted as 10,000 computer-generated 24 x 24-pixel images on the Ethereum blockchain.
Originally given away for nothing, CryptoPunks can change hands for around $200,00 to a cool $23.7 million for #5822.
But despite their hefty price tags, collectors can own an NFT but do not have further rights over the work.
So if you buy an NFT, can you mint and sell copies and what are your rights?
NFTs – short for non-fungible tokens – moved into mainstream art when artist Beeple sold a collage Everyday: The First 5,000 Days at the auction house Christie’s. The price smashed Beeple’s previous record sale of $100, coming in at a massive $69 million.
Since the Beeple sale in March 2021, the NFT market has surged from a back-room enterprise to the world’s hottest art project.
NFTs are essentially image, movie, or sound files like jpegs or gifs regardless of the digital format. However, buyers can only display them on a screen, unlike physical artworks.
The key to NFTs is the term ‘fungible’. The word comes from Latin and means interchangeable.
Money is a fungible concept because a £50 banknote is interchangeable with any other £50 banknote. That £50 can also break down into smaller denominations, like £1 coins or £10 notes, while retaining the same value.
NFTs are different. They come as a unique one-of-a-kind or limited edition and are not interchangeable.
When an NFT is sold, copyright laws apply – and that’s when things become tricky for buyers.
Owning an NFT is a digital certificate proving ownership visible to everyone on the NFT’s blockchain. The purchase gives the new owner no other rights to the work, like adapting or reproducing.
That splits any money generated by the work. The creator can produce copies to sell or licence the work, but the value for the owner lies in any capital gain. And that gain is diluted if the creator decides to release copies or similar NFTs.
Another point to watch for is that an NFT does not prove the work is authentic. Someone can take a work, tokenise it as an NFT and sell it online in breach of the creator’s copyright.
The problems don’t stop with copyright and ownership. THere’s no other way to settle a dispute about NFT ownership other than reverting to expensive legal action, because:
- The blockchain hosting the NFT is unregulated
- Copyright laws are not international but drafted by each country and the rules can vary
The takeaway is to carry out thorough due diligence to verify an NFT is genuine, and the seller has the authority to complete the transaction.
Lastly, only the creator can act against anyone falsely passing off their NFT as the one the blockchain shows someone else owns.
Governments handle the international resale rights attached to NFTs in different ways.
An artist’s resale rights demand a royalty is paid each time their work is sold through an auction house or by an art professional for more than €1,000. The royalty is paid as a percentage of the sale price.
Some countries, including Australia, the European Union and the UK – recognise resale rights. But notably, the US does not.
A few NFT platforms automatically deduct resale rights for creators.
Who’d believe cryptocurrency would spawn an even higher risk, speculative investment?
The excitement generated by NFTs has gripped the planet with get-rich-quick art fever. So the question is, are NFTs just a fad?
Sellers and buyers would say no, but the jury is still out for the rest of the world. No one will find out for some time to come once the new tech bubble has burst and the market settles down.
One way of deciding whether to invest is the hype cycle, devised by US consultancy Gartner. Just pick the place on the curve where you think NFTs are at:
Why You Don’t Really Own An NFT You Buy FAQ
In the past, artists would sign their paintings as authentication that they were genuine Picasso’s Rembrandts or Van Goghs. Now the digital world has arrived, the blockchain has taken over.
The benefit is the blockchain cannot be changed, so the certificate proves who created the work forever. The work itself does not reside on a blockchain but in a separate digital wallet.
Research has yet to be carried out across all the blockchains that support NFTs, but credit is given by many to Terra Nullus, the oldest recorded NFT on the Ethereum blockchain. Terra Nullus dates from August 7, 2015.
The rule of thumb is 70 years after the creator’s death, but this can vary between countries and the type of NFT.
You can mint anything you can produce digitally, providing you created the work.
A novel twist on NFTs was when an original Banksy was set on fire and destroyed. An NFT of the work was later sold for £274,000. The principle is that the NFT is now the real artwork and is worth more.
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