Augmented reality artwork of hands floating in front of building facade

Nancy Baker Cahill, Contract Killers (Judicial), augmented reality still, 2021, courtesy of the artist, © 2021 Nancy Baker Cahill, all rights reserved

NFTs and the Museum Part 2: Legal Issues for Acquisitions

August 30, 2021
Joel Ferree, Program Director, Art + Technology Lab
Jeffrey Blair, General Counsel and Assistant Secretary
Sarah Conley Odenkirk, Partner, Cowan, Debaets, Abraham and Sheppard

Welcome to part 2 of NFTs and the Museum, a series of conversations between art and culture practitioners in and outside of LACMA. The series examines what NFTs mean for museums that collect digital art, and looks at the artistic, curatorial, conservation, registration, and legal issues of the new digital format. This post features Jeffrey Blair, LACMA General Counsel and Assistant Secretary, in dialogue with Sarah Conley Odenkirk, partner in Cowan, Debaets, Abrahams, and Sheppard LLP's Entertainment group. Odenkirk co-leads the firm's art law and NFT practice, and advises artists, collectors, dealers, and art institutions in art world negotiations and transactions. 

Jeffrey Blair: Thank you so much for agreeing to have this conversation about legal issues we have all been considering recently in connection with acquiring NFTs into our collections. At first, I was mostly overwhelmed just trying to understand what an NFT was and how the underlying technology may create any new legal concerns for acquisitions. NFTs definitely raise some new questions and issues which we will discuss, but the more I learn, the more I see NFTs as being not that different from other digital artworks that we have been collecting for years. We need to address questions about digital storage and preservation, migration to new technology, copyright issues and licenses needed to display the work, et cetera.  Is that a fair assessment and, if so, how will these issues be addressed in the NFT context and what new legal issues do NFTs raise that are different from other types of digital work?

Sarah Conley Odenkirk: Generally speaking, yes, I’d say that’s correct, but with some caveats. Luckily, the idea of NFTs being a magical vehicle that offers a guaranteed and sustainable financial solution to artists is quickly being disabused. This has resulted in the frenzy abating to some degree (which is not at all the same as the NFT market cratering as some headlines would have us believe), and the ability for us to more rationally consider the long-term possibilities for the NFT structure as applied to the arts or other various media.  

You are absolutely correct that the same intellectual property protection issues that apply to other forms of creative expression still apply here. The more perplexing issues are really how to handle infringement and conservation matters. Enforcing intellectual property rights for works on the blockchain is a bit more complicated. Normally, if there is an infringement concern regarding information online, the copyright holder can submit a take-down request to the web hosting service. If the request is granted, the web hosting service simply removes the content from their servers.  With NFTs, since information is stored simultaneously on a decentralized system consisting of many nodes, there has to be a solution that works across an entire network, which is not as easy. As standards and protocols are developed, both through articulated agreements as well as case law, we will hopefully see more reliable remedies emerge.   

With regard to the maintenance and conservation issues you point out, there needs to be a clearer and more sophisticated understanding by artists, collectors, and institutions about the importance of these considerations both from the standpoint of preserving an artist’s intentions and legacy, but also with respect to collector and institutional comfort in acquiring digital art assets.  

What NFTs do offer, however, is the promise for greatly expanding the ability of artists to package conceptual or digital works in a way that more easily allows them to be bought and sold. For that to happen, it is crucial that there is a greater understanding of what “smart contracts” are and are not. I submit that the term “smart contract” is a dangerous misnomer that creates a false sense of security for the marketplace. I would like to see this corrected, and propose that a more appropriate term is “armature,” which properly indicates that the code comprising NFTs provides the barest of foundational structures containing simple descriptions and reflexive “if-then” directions, rather than any nuanced or complex contractual terms.

Jeffrey: Well, I know you have already written about NFT smart contracts and have done a lot of thinking there, including your recent Contract Killers project with Nancy Baker Cahill. I was personally very excited about the possibilities that might be opened up when I first was hearing about these “smart” contracts, but I think my excitement has been diminished. Can you tell us a little about how those contracts work and what their limitations are in the context of acquiring NFTs?

Sarah: Sure! As I said, the term “smart contract” is really incorrect and unfortunately leads people to assume that there is a lot more substance contained within the NFT than there actually is.  The code that comprises the average NFT really just indicates the title, the creator or minter of the NFT (which, by the way might not be the true owner or rights holder for the content being minted), how many NFTs with the same content will be created, the functionality that facilitates the recording of transactions of the NFT, a link to the content (generally stored on a separate distributed file system, like IPFS), and sometimes a built-in resale royalty (which may or may not be recognized in future transactions if transaction occur within another marketplace). So, your current standard NFT is really quite limited both in content and function. This is important for artists and museums or other acquiring institutions to understand, especially if artists have clearly conceived or articulated intentions around how their work is to be viewed, displayed, sold, maintained, and generally used.  Any real discussion of rights, licenses, or obligations must be established in a separate written document which is likely not feasible to include in the coded instructions of the NFT. This is why I strongly advocate that we abandon the term “smart contract” and start using “armature” for the code comprising the NFT itself. 

Perhaps the most popular and lauded aspect of the NFT code is the establishment of a standard and automatic resale royalty to be paid back to the artist (or whomever minted the NFT) on the event of subsequent sales. In my view, this is one of the more positive facets to the NFT conversation and warrants further attention and honing to get us to a place where the amount of the royalty is appropriate (10–20 percent on gross sales amounts rather than just on the profits from subsequent sales is not sustainable) and actually enforceable. Currently, there are several ways to get around resale royalties for NFTs, ranging from transacting on compatible but separate marketplaces which won’t recognize the payment of the resale royalties to transacting the financial portion of a sale off-chain to avoid triggering automatic payments.  

So, while I fully support and applaud the efforts to make resale royalties standard practice, there is still quite a lot of work to be done regarding application and interoperability in order to ensure this is a meaningful and an enforceable facet of NFTs.

Jeffrey: I agree that the ability to build in resale royalties is one of the benefits to artists of NFTs and blockchain technology about which I have heard the most. And the discussion has certainly breathed new life into the consideration of resale royalties more generally. If the NFT smart contracts—excuse me, armatures—are not going to be an effective means of establishing and enforcing resale royalties until they evolve to be more sophisticated, are there other ways artists can consider to achieve that?  

Sarah: Absolutely! The old-fashioned way: by using actual contracts. And since NFTs have revived the resale royalty conversation at a new level, I’ve been delighted to have more than a few artists ask me to revise their existing sales contracts or draft new ones that include a resale royalties provision for all studio and gallery sales of physical art as well. As the concept of resale royalties becomes more the rule than the exception, and it gains traction in everyday business practices, it will hopefully become another expected part of any art transaction. Of course, the benefit of having the resale royalty baked into the NFT is that payment theoretically happens automatically and so the other challenge is simply how to keep collectors transacting on a platform that recognizes the existing code effecting the resale royalty. And the challenge for contracts with resale royalties that are not completed through NFTs or on blockchain is the same: tracking future sales and enforcing the royalty payments.

I’ve been saying for years that, whether IRL contracts, or NFT code, something to consider is to cut collectors in on the future benefits. By this I mean that if collectors also receive some portion of future sales (albeit smaller than the artist’s), they are literally invested in the process of resale royalties working and being upheld, and consequently there is a much higher likelihood that the resale royalty system will continue to function going forward. Recently, I see that SuperRare has implemented this exact strategy on a trial basis. I will be very interested to see how that plays out—I hope they will honestly share the results of this experiment, as it could be incredibly instructive on a number of art business levels!

Jeffrey: Again, it seems like all of this is still all going to come down to the need for negotiated agreements between museums and artists or their representatives.  If the NFT armature cannot achieve all of this, what format do you think these agreements are going to take in the NFT space?

Sarah: Currently the best option is that specificallydrafted agreements tailored to each individual NFT should be attached to the NFT the same way that the files that constitute the artistic content are attached: through a linked file that is also stored on a separate and secure distributed file system.  This does then raise the question of what purpose do the NFTs serve if the best solution is still relying on a traditional contract attached to artwork delivered in a digital format. I think this is a legitimate question when considering the potential for NFTs in the art market, but remember: We are still at the very beginning of this technological transformation. To keep this in perspective, the first question I always ask a client is “Who is your audience?” As I said earlier, creating an NFT is not a magical process that creates a self-selling product where there’s been no market before. NFTs create an exciting new vehicle for engagement and ownership of digital assets and products, and are an obvious evolution for other environments such as marketing and promotion campaigns for branded products, entertainment, music, fashion, gaming, and the further development of ownable or tradable products intended for consumption exclusively within the metaverse. But with the exception of a few blue-chip artists who can sell anything no matter what it is, most artists who aspire to be in museum collections or collected by more traditional collectors are going to find the adoption of NFTs to be a bit of an uphill battle until more standards are developed and adopted within the art world in particular.  

That said, I see three places where NFTs could be transformative in the art world:

  1. First, enabling wider acceptance of collecting natively digital art (as opposed to the digitization of existing physical visual art). NFTs might finally be the unifying mechanism that the digital art field can use to package the interesting and meaningful work being done in the digital space.
  2. Second, NFTs, when paired with representations and warranties (either as a separate written document, or as an element integrated into NFTs as a standard requirement for minting a work), could indeed provide a digital and easily searchable certificate of authenticity. In their current format, NFTs really don’t do a satisfactory job of this —but they could.
  3. Finally, and perhaps most exciting to me at least, NFTs could be a powerful mechanism for providing an engagement and financial support tool for artists whose work traditionally can’t be commodified, like for conceptual or performative practices. But in order to be a functional vehicle for both audience engagement and museum acquisition, some not-so-novel concerns will need to be addressed. Basically, the same concerns that exist around the conservation and maintenance of other time-based media. 

In any event, as museum counsel, you’re going to have your work cut out for you on the NFT front for some time to come!

Jeffrey: Most disappointing to hear. One last question I’d love your thoughts on is what should museums be thinking or doing now in connection with the anticipation of future gifts. With other works of time-based media (video, film, non-NFT digital native works) that have been around for decades, museums are now receiving them as gifts from collectors who never obtained the licenses and other permissions that we need to be able to acquire, display, and conserve these works. So the museum is now tracking down artists or artist estates to try to get those rights which is very labor intensive and costly. Is there anything we can do now in the NFT space to anticipate this issue and hopefully avoid that future problem?

Sarah: Yes, there’s a lot you could and should be doing right now! To begin with, you’ll have to consider some of the simple mechanics involved in being able to accept donations of or acquire NFTs. This will likely begin with you convincing your board and administration that it is a good idea to establish a crypto wallet for the purpose of receiving and holding NFTs for the museum’s benefit, as well as accepting or acquiring crypto currency to allow for any museum-instigated acquisitions or other on-chain transactions. Beyond that, museums have an incredible opportunity to take the lead in thinking about proactively promoting best practices and standards in the field! For instance, any digital media acquisition (including NFTs) should include a statement of the artist’s expectations regarding parameters for the display or viewing of the work.

Further, artists should specify whether the owner of the work has the ability to migrate the work to another platform or medium when the inevitable technological obsolescence makes the original difficult or impossible to access.There should be a clear understanding of what happens to NFTs in the event that the link to the related content breaks or there is any other issue with the blockchain. Is there a back-up file stored anywhere? Can that back-up file be considered the “work of art” if the NFT is in any way undermined? Can the NFT be re-minted? What rights (including licenses), if any, are the artist transferring with the work? Are there rights to create display copies or develop merchandise based on the work, and if so, on what terms? Is it permissible for the work to be lent to other institutions or venues? This is not an exhaustive list, but you get the idea. By clearly articulating and publicizing these types of standards, museums can be at the forefront of defining best practices in the areas of NFT creation and collection. I imagine there will be a lot of crossover with what museums want and how insurance concerns are resolved around the ownership and protection of NFTs and other emerging technologies. This will in turn impact the marketplace and production standards.  Ultimately, I hope we see some sustainable practices emerging that allow for the evolution of technology’s role in fine art. The bottom line is that museums have a responsibility to meaningfully contribute to the smart, collaborative thinking around these concerns so that they can continue to support the full scope of relevant artist practices and ensure a responsibly curated cultural legacy. 

Jeffrey: Sarah, thank you so much for your thoughtful engagement in this discussion and for helping to frame the issues art museums are chewing on as we enter the brave new world of NFTs, cryptocurrency, and blockchain technology. There is certainly a lot for us to think about and solve and you have given some insightful and concrete ideas that really help in that process. I’m sure I’ll be back in touch with you soon with many more questions as this area continues to evolve. 

Stay tuned for Part 3 of NFTs and the Museum.

The Art + Technology Lab is presented by

The Art + Technology Lab is made possible by Snap Inc. Additional support is provided by SpaceX and Google.

The Lab is part of The Hyundai Project: Art + Technology at LACMA, a joint initiative exploring the convergence of art and technology.

Seed funding for the development of the Art + Technology Lab was provided by the Los Angeles County Quality and Productivity Commission through the Productivity Investment Fund and LACMA Trustee David Bohnett.