WAC Resources

What Are Some Of The Legal And Regulatory Implications Museums Have To Consider?

Primer on Blockchain for Museums
Whether NFTs can or should go into museums' permanent collections is an open question: is the NFT the artwork itself, or is it just a piece of documentation certifying ownership?

This gets more complicated for museums in countries like France, where the proposition is entering NFTs into the public collection. And the acquisition of NFTs is further complicated if museums aren't able to hold cryptocurrency in their wallets: without it, they can't move NFTs around to other wallets or perform on-chain computations that might be part of the work.

One of the selling points of NFTs is their immutable, cryptographically verified provenance. But despite that, copyright infringement and piracy are just as rife on web3 platforms as they have been on Web 2.0. A piece of information might be recorded on-chain, but you're still relying on the parties involved to be telling the truth. The real provenance of any piece being accessed, then, is a piece of due diligence that museums still have to do. Fraudulent or copyright-infringing NFTs are still rife on general-purpose marketplaces like OpenSea. While more niche digital art marketplaces are free of this, that’s because of the dedicated staff running them, not something inherent to the technology.

When NFTs started getting mainstream attention in the pandemic, one of the promises for artists was that they'd have a cut of all secondary sales of their work built into the tech. In October 2022, Galaxy Digital found that NFT creators on Ethereum had made $1.8 billion in royalties. But after the market crash, we saw NFT marketplaces like OpenSea drop the artists' royalties to 0% one by one, in an attempt to protect their business and give traders more of the margin on their sales. How was that possible?

In general, NFT royalties were a benefit provided by the marketplace to creators, not something baked into the technology. If somebody sold an NFT from OpenSea on another marketplace, there's nothing OpenSea could do to enforce a royalty.

In theory, those royalties could be baked into the smart contracts that run these marketplaces, but that would make those contracts a single point of failure for every sale of that artwork in perpetuity. fx(hash) was one of many Tezos-based marketplaces that pledged to protect creator royalties, but fx(hash)'s Head of Communications Alfredo Asuzano was skeptical that technological solutions could work without massive centralization. He wanted to see more change happen at the level of community: the royalties won't be paid unless all stakeholders feel it's mutually beneficial (read more).

Web3's runaway growth has put it in a strange middle ground: it's too big to not have some regulations defining what responsibilities different parties have and what rules they have to follow, but those regulations are still at their very early stages in slow-moving legislatures.

The EU recently passed the Markets in Crypto Assets act, which mainly focuses on demanding thorough disclosures from firms offering crypto assets. It looks like no clear regulation is coming from the USA anytime soon, but as we saw throughout this season of talks, lawmakers there are looking at the crypto industry with extreme scrutiny after the FTX scandal in late 2022.

This partially explains why some businesses and institutions, who don't add crypto to their offering, are careful to avoid the word "crypto" in their communications. It's important to give people a clear idea of what they're buying if they buy a "digital souvenir" or "digital pass" in the form of an NFT; indeed, "NFT" refers to such a general-purpose technology at this point that it's not that useful a term to describe something that could be a unique generative artwork, an edition of a photograph, a certificate corresponding to a physical painting, a memento, a coupon, an ID, etc. Similarly, "crypto" might no longer be useful as a catch-all term to describe the whole world of cryptocurrencies, smart contracts, NFTs, and decentralized ledgers, which are all branching off into directions like supply chain management, ecommerce loyalty, and entertainment that have nothing to do with each other.

When Musée Granet in France wanted to keep some of the NFT artworks minted as part of an exhibition, they had to work closely with the French Ministry of Culture to do so in a way that was compliant with the country's regulations around accessioning art into the public collection (read more).

Every on-chain interaction with an NFT is a kind of "transaction" that requires a small fee to go towards the nodes running the blockchain. That fee is paid in the chain's native cryptocurrency like ETH or XTZ, which the museum wasn't permitted to hold due to the price volatility. If the price goes down, they're losing taxpayers' money; if it goes up, they have unrealized capital gains that become a tax headache.

Under the current regulations, the museum had to have artists mint their own works as NFTs and "donate" an edition of each token to the museum's crypto wallet. In the long term, the museum would like those NFTs to be considered the artworks which the artists intended them to be, so they can be properly acquired into the public collection. But that would require proving that an NFT can be an art object in and of itself. As we saw in our WAC Weekly session on this, the solution they found was to work closely with the authorities to bring this forward as a legal test.

Illustration from Unsplash