Non-Fungible Token: A Self-Experiment

The NFT hype 

The art industry is changing and is even moving into the digital sphere. This brings new opportunities and challenges, but also raises many question marks. NFTs are an especially hot topic in the industry, and NFT artworks are being sold for millions. Still, uncertainty surrounds various legal aspects. 

NFTs give creators and investors the ability to sell and buy exclusively digital objects that range from paintings and gifs to songs and everything in between. But before you quit your day job to become an NFT artist, you have to know how NFTs work. 

What is an NFT? 

To understand the concept of NFTs and what "non-fungible" stands for, think about a EUR 10 banknote. If you lend someone EUR 10, it is sufficient if he or she gives you back any EUR 10 banknote (or the money otherwise in equivalent banknotes and/or coins). Of course, you do not expect to get back the same banknote that you gave away when lending the money. So the value of  EUR 10 is fungible. However, if you give someone your pet because you are going away for the weekend, you expect that after the weekend they will not give you back just any pet, but exactly yours, because it is not easily exchangeable, i.e. your pet is "non-fungible". Same with NFTs: An NFT is a unique assignment of e.g. an artwork to an owner in the blockchain that can be freely transferred.

Read more about the various legal aspects we examined during our self-experiment-journey in our legal insight "Let the NFT Self-Experiment begin".

Dare we start an NFT self-experiment? 

The popularity of NFTs is not only rising in the virtual world, but also in the legal sphere. Our lawyers, many of whom also lecture at various universities, have fielded a lot of questions about NFTs in their university courses, which were also discussed at Schoenherr's regular ip & technology practice group meeting. The topic was explored and the idea to conduct an experiment came into being. Guido Kucsko, who headed the ip practice group for several years (and is also a conceptual artist), Anna Katharina Tipotsch, who has a focus on art law, Alexander Pabst, an expert in technology law, and Dominik Tyrybon, specialised in transactions, decided to start an NFT self-experiment. We will take you step-by-step through our self-experiment and examine the legal issues that arise at each stage on a weekly basis.

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The artwork

In order to conduct an NFT self-experiment one needs an artwork to sell on the blockchain.

For our self-experiment, Guido Kucsko provided an animated GIF with the title "CONCEPTUAL ARTIST PULLING AN IDEA OUT OF HIS HEAD".

Read more about the artwork and why it is a copyright-symbolic act in "NFT Self-Experiment: The artwork".

We need a wallet

Every one of us owns at least one wallet – but when selling something on the blockchain we need a crypto-wallet, and in specific one that we can use on the world's largest marketplace for NFTs, OpenSea that supports the Ethereum blockchain.

What type of crypto-wallet should we choose and why?

Find out more in "What is a crypto-wallet?".

We shall mint  

The process of creating a token and deploying it onto the blockchain is commonly referred to as minting. Minting, inter alia, requires a smart contract. No, that's not a super smart contract in the legal sense, but a program that runs on the blockchain.

To find out more about the considerations we took into account as to whether to formulate or use an existing standard smart contract, as well as on how we managed for the NFT to remain unambiguously assignable and permanently linked to the artwork and the associated data (keywords: URI, IPFS, hash value), read "Formulating a smart contract and minting an NFT".

Connecting the NFT with a licence

In general, no automatic transfer of copyright will occur when purchasing an artwork linked or connected to an NFT.

It is thus advisable – as NFT creator / author – to connect an NFT with a (copyright) licence (clearly stipulating what rights are included in the NFT) and – as NFT purchaser – to check, whether the NFT (e.g. in a licence) includes the rights that fit the specific needs for the intended use and exploitation of the NFT. For this experiment, we decided to connect our NFT to a non-exclusive licence limited to a certain purpose.

Read more about how to connect copyright to NFTs in "Tokenized copyrights: Linking an NFT to a copyright licence".

Bid, bid…sold! – Selling the NFT

After receiving three bids for the NFT on the NFT platform OpenSea (in quite a short time), Guido Kucsko accepted the offer to buy the NFT, selling it to the Francisco Carolinum Museum in Linz. This was not entirely unexpected: The director of the museum was in the process of preparing one of the world's first museum exhibitions on the history of NFTs in art and he was already in touch with Guido in this regard.

We enthusiastically accepted the offer from the museum, however, this was not possible with only a simple click. We had to perform several necessary transactions for the NFT to be assigned to the museum's wallet (specifically, its public key).

Finally, the NFT was sold, but which law applies to the sales contract? And what is the contract comprised of? Are there certain rights that purchasers of NFTs can always rely on (because they cannot be waived)?

These are important questions to ask when buying and selling an NFT.

Transactions must be analysed in their "new" technological, as well as in their "classic" legal contexts. Read more about determining the applicable law and the contract contents in an NFT transaction in "Civil law aspects of selling a token – a random selection".

NFTs and related energy and climate issues

Minting an NFT, its transfer and even the sheer existence of an NFT requires a lot of energy.

High energy consumption is not just the fault of the (Ethereum) blockchain, however, although it remains inherent to it. The higher the value of the cryptocurrency of the respective blockchain, the more miners will seek to verify the blocks and the greater the computing power in the system will get, which in turn leads to even higher energy consumption (cf. "proof-of-work", POW). Furthermore, due to the technical nature of the blockchain, energy consumption increases proportionally with the size of the transaction.

Find out more about the reasons for the vast energy consumption in relation to NFTs and whether there are regulatory instruments to potentially curb it in "NFTs: What about energy and climate issues?".

We made it into a museum!

The exhibition "PROOF OF ART – A brief history of NFTs, from the beginnings of digital art to the metaverse" at the Francisco Carolinum in Linz opened on 11 June 2021 (available to the public until 15 September 2021), and our NFT which had been sold to the museum, was one of the works presented.

This is one of the world's first museum exhibition on the history of NFTs and digital art, giving an overview of the origins of NFTs and their development: from the first formative attempts with digital technologies, first artistic experiments with the blockchain, through to current crypto art. The exhibition presents around 25 positions by artists (one from Guido Kucsko) who deal with the new system of meaning and values, examining the role of artists in a high-tech environment and discussing the effects of virtual spaces on our everyday life.

Learn more on the legal challenges and hurdles of museums buying NFTs and what considerations should be made in that context in "When a museum buys an NFT: Legal challenges and considerations" (also including interesting input from the museum's director Alfred Weidinger).

Checklist for NFT artists and buyers of NFT art

In the process of conducting our self-experiment we collected the most important questions every artist should keep in mind when considering tokenising his/her artwork. For museums, and buyers of NFT art in general, we prepared a list of key questions most relevant for them, too.

Find the list of key questions in our Legal Insight "NFT art: The most important (legal) questions for artists, buyers in general and museums".

…and: We made it into the virtual museum!

The Francisco Carolinum's exhibition "PROOF OF ART – A brief history of NFTs, from the beginnings of digital art to the metaverse" is being held (physically) at the museum's location in Linz, and also online on Cryptovoxels, a blockchain-based virtual world.

For the museum's digital offshoot for photo and media art, the museum acquired a property, the parcel #4650 located at 17 Clarion Alley on the island of San Francisco, in the Metaverse Cryptovoxels. This is also the location where our NFT artwork was presented.

Learn more about what issues may arise in the virtual real estate world from a legal perspective in "Blockchain and (Un)Real Estate".

NFTs and branding – (how) can trademark protection be utilised for NFTs?

Having one's intellectual property protected by appropriate registered intellectual property rights should be on the agenda of every diligent businessperson. Whenever new technology is developed that results in new products and/or services, such will usually be commercialised under a specific name – a brand that can be protected as a trademark.

Explore our considerations as to whether goods and services offered by stakeholders in connection with NFTs can already be found in the Nice Classification, the international classification of goods and services used by most IP Offices for the registration of trademarks, in "NFTs and branding – Does trademark protection need to be considered?".

NFTs and labour law: Crypto salary? Crypto bonus?

To mint NFT art, you need to have enough cryptocurrency in your wallet (and even more to buy it). A successful NFT artist could therefore consider paying his or her studio assistants (and others) in cryptocurrency from the proceeds of the sales. But can or should remuneration be paid in a cryptocurrency? Can you incentivise employees by paying them a bonus in a cryptocurrency?

Let's take a closer look at these questions from an Austrian employment law perspective in "Austrian Labour Law: Is crypto-salary a thing?".

Tension potential with GDPR

The GDPR is technologically neutral, meaning GDPR compliance must be ensured whenever personal data of natural persons is processed in a structured manner. With that, it can also be applicable to the blockchain – and in particular also to NFTs (because they are more or less a data set stored on a blockchain).

We took a look at tensions between blockchain technologies and the GDPR in our article "The tension between the GDPR & NFTs".

Taking security over NFTs

NFTs can have significant market values. So, can NFTs also serve as collateral?

The legal aspects of taking security over NFTs and other crypto assets are far from being settled. However, blockchain entries may be an appropriate means of creating and perfecting security over NFTs. Furthermore, the blockchain technology offers creditor protection because its decentralised design significantly reduces the risk of manipulation or of errors occurring.

Read more on the legal characterisation of NFTs and the creation and perfection of security over NFTs in our article "Taking security over NFTs: Some legal considerations under Austrian law".

meet the core nft-experiment team: