DANIEL MAYOR—The recent high-value sales of digital art NFTs (non-fungible tokens) byBeeple, and, even more recently, of a self-portrait NFT made bySophia the Robot, signals the digital token’s acceptance as an attractive new asset for tech-savvy creatives. But avant-garde digital artists are not the only early-adopters of this craze andorganizations like the NBA have madesignificant investments into NFTs. Last year alone, the total value of NFT transactions was$250 million. However, many critics question whether these “tokens” are worth anything at all.

NFTs can represent a variety of copyrightable works (e.g. artwork, GIFs, songs, or sports highlights), but are unique in that they are issued on adistributed ledger such as a blockchain. This grantstwo distinct advantages to the purchaser: (1) the blockchain network will keep anunalterable record of every owner of the NFT, and (2) it prevents the NFT itself from being altered. For example, while everyone can see Jack Dorsey’s first tweet on Twitter,Sina Estavi can now claim alimited “ownership” over that tweet after he purchased the NFT in March 2021. NFTs differ from digital currency, like bitcoin, in that they cannot be fractionated orexchanged for another thing of equal value. Importantly, NFT salesdo not require the artist to assign their associated exclusive rights or copyright in the work. This may allow artists toretain the ability to license the work and create derivative works, among otherexclusive rights. The nature of NFTs is not as limited as the traditional baseball card, but their market appeal is analogous to a unique collectible.

The digital artworks sold in these exchanges are protected under the Copyright Act of 1976, aspictorial, graphic, or sculptural works, provided they meet theother requisite factors to obtain copyright. Even though the Founders may not have contemplated that there would be a market forNyan Cat GIFs, the concept of protecting artistic works is a matter of express constitutional significance. The Constitutionauthorizes Congress to create Copyright law “[t]o promote the Progress of Science and the useful Arts.” Theutilitarian argument has framed this broad mandate as an economic incentive for authors to produce creative works.

So, what are consumers purchasing when they spend their dollars, ordigital currency, on NFTs? The benefits of authentication in the world of digital art, which is easily reproducible and redistributable, can help validate digital assets andprevent corruption from unfettered piracy on the web. However, the legal certainty granted by clearchain of title may be aninadequate incentive to drive average consumers towards NFTs as an asset. For collectors, the digital and unalterable nature of NFTs provides a more reliable, albeit tech-based, solution to certify theprovenance and authenticate both tangible and non-tangible works.

Recent purchases also suggest that NFTs can be used as astatus symbol by creatingscarcity in the market for digital assets. Eccentric purchasers, such asMetakoven and888, have already demonstrated how enthusiasts of an artist can receive a reputational enhancement, including extensive media coverage, from theexclusivity of owning a given NFT. If NFTs remain restricted to inflated bidding among wealthy technophiles, then their status may remain that of aluxury good––one that primarily signals wealth throughconspicuous consumption. However, if NFTs continue toattract investment, then we need to be cognizant of preventing our laws from allowing consumers to be exploited while abubble forms.  Even Beeple, now thethird most-valuable artist alive,admitted that “[t]here is definitely some froth” when asked if we are in the midst of a valuation bubble.

Current market volatility suggests the market needsgreater federal oversight, and that securities regulators need to play a larger role for in managing the asset’s fluctuating value. However, we must recognize that since other law, such as the Copyright Act, legitimizes these assets and the creative works’ underlying these exchanges, artists will be incentivized to explore this opportunity to capitalize on either a bubble or a fundamental shift in the supply of digital assets. While NFTs may not be guaranteed to retain value, theexcitement surrounding these exchanges will continue to drive investment to the tokens in the short term.