Whilst the hype around non-fungible tokens (NFTs) may have peaked in 2022, they continue to play a key role in brand engagement. For artists operating in the digital space and consumers of NFT art, they have presented opportunities, whilst also raising intellectual property concerns. These concerns are the focus of a recent report by the Digital Culture, Media and Sport (DCMS) Committee which deals in particular with the role of NFT marketplaces, and their current "safe harbour" protections. The Committee recommends a code of conduct for NFT marketplaces to address the problems created by the existence of "safe harbour" provisions and that the Government should engage with NFT marketplaces to find solutions to the issue of widespread copyright infringement. The Report also suggests that the Government carry out an analysis of the implementation of the regime set out in Article 17 of the EU Directive on Copyright in the Digital Single Market, and comparable provisions in other jurisdictions, presumably to inform future discussions about the possibility of introducing similar provisions in the UK.
NFTs and the art world
The report notes that NFT marketplaces have introduced a new way for artists to draw in greater revenue from their work. These marketplaces are accessible to a wide range and large number of potential consumers and the barriers to entry remain low. Further, the use of smart contracts when transferring NFTs assists artists in enforcing revenues from the onward sale of their work. For NFT consumers, the ability to verify the authenticity of NFT art is seen as a key benefit.
However, the report draws attention to some of the pitfalls for artists and consumers, in particular, in relation to copyright ownership and enforcement, and in relation to limitations arising from smart contracts.
For example, potential issues of infringement arise where an NFT, which is based upon an artist's original piece of work, is "minted" in circumstances where the artist of the original work did not give their permission. Artists who find NFTs of their works on NFT marketplaces have limited options other than to notify the relevant NFT marketplace on each occasion and request that the NFT is removed. The marketplaces themselves are not obliged to take a proactive approach. The report highlights that the practicality of artists having to use this notice-and-takedown procedure is limited, particularly given the vast number of NFTs available on NFT marketplaces.
The report suggests that part of the problem lies with the "safe harbour" provisions which allow NFT marketplaces to require their users to sign up to terms and conditions which absolve the marketplaces of responsibility, for example, for infringement of the intellectual property rights of artists.
Another issue identified in the report is consumer confusion in relation to ownership of, and rights to, the underlying asset. Some consumers of NFT art are unaware that the purchase of an NFT will not inherently involve the purchase of rights to the underlying digital file. Further, the report warns that consumers of NFTs may risk inadvertently infringing IP rights of artists where the NFT they have purchased is an infringement.
Caution must also be exercised in relation to the use of smart contracts. Given that smart contracts are simply "self-executing lines of code", they are not therefore inherently enforceable, and so the usual requirements for a valid and enforceable contract must be met. A further constraint of smart contracts is that they do not always enable artists to enforce their resale rights across different NFT marketplaces. These limitations of smart contracts can result in artists being unable to receive resale royalties in respect of their work.
The report recommendations suggest a desire to shift the responsibility of identifying and resolving issues relating to NFTs which infringe intellectual property rights onto the NFT marketplaces themselves. Such a movement would alleviate some of the burden that currently rests on the shoulders of artists and NFT consumers. Specifically, the report recommends that the Government engages with NFT marketplaces to assess and address the scale of the infringement issue and to enable copyright holders to enforce their rights. Further, it recommends a code of conduct for online marketplaces in the UK, including NFTs, that protects creators, consumers and sellers alike (recognising that the issue of online infringement is wider than just in relation to NFTs).
The report also considers whether the issue of copyright infringement could be addressed through a licensing system, similar to the system in the EU under Article 17 of the EU Directive on Copyright in the Digital Single Market relating to online content sharing service providers. The DCMS Committee has previously considered this provision when considering issues relating to music streaming, and so recommends again that the Government undertakes a review of how Article 17 has been implemented across the EU and what licensing frameworks are currently in place in other jurisdictions.
Given the volatility of the NFT market, it remains to be seen whether enhanced regulation of NFTs will be a priority or, indeed, even if it is, seen as too little too late.