NFT, Blockchain: “Crypto-Art” and legal validity.

Free network.

Since the early days of the web, the concept of a “free” network that would be a center for the exchange of ideas and information has always inspired programmers and users to act and create with the utmost freedom, leading to an incredibly fast development of what we know as the “internet” and which is now taken for granted by most people.

However, such freedom, aided by the anonymity guaranteed by the network, has facilitated – and not a little – countless people more interested in their own ends, almost always economic, than in the dissemination of free knowledge.

One of the most widespread and damaging phenomena – as is well known – is computer piracy, or the distribution (almost always free for the end user) of works protected by copyright, distribution that occurs thanks to the simplicity of “duplicating” the same file infinite times, be it a film, a song or an artist’s drawing.

Upon closer inspection, digital art (understood as the creation, existence, and distribution of a work in cyberspace) has always clashed with the very easy – and unpunished – unauthorized dissemination. And in fact, a simple “copy and paste” of a file available online is enough to possess a copy, or rather, an identical clone in every way.

The advent of peer-to-peer technologies or, in general, those that allow the distribution of files among users, without any minimum control over the actual “ownership” of what is exchanged, has made it very difficult for a digital creator – be it figurative or producing musical pieces, it doesn’t matter – to profit from their own work.

In short, “copy and paste” and “save as” have become an almost insurmountable barrier for those trying to make a living from their creativity in cyberspace.

Blockchain.

More or less recently, however, the advent of blockchain technology – “exploded” thanks to the hype of cryptocurrencies – has undoubtedly overturned the rules of the web: thanks to the certified and unchangeable transactions recorded in blockchains, today it is possible to keep track of every “movement” of a certain file (be it a document, a song or a figurative artwork) and, finally, digital creators have a way to create (“mint”) and sell their works, ensuring recognition even economic.

To do this, tokens are used, which are digital files associated with that particular work and existing on a given blockchain. These tokens, moreover, are not freely interchangeable, or rather, they are not fungible with each other, unlike – for example – a sum of money.

These Non-Fungible Tokens (NFTs, for short) therefore allow those who own them to become its actual owner: upon closer inspection, this technology has assimilated the concept of “private property” to a certain digital file, which can be bought and sold and therefore subject to market dynamics and becomes a part of it.

It is understood, therefore, why the art market was a precursor to NFTs and blockchain technology, immediately grasping their scope. Some of the most well-known artists in the virtual world such as Beeple, Pak, XCopy, Trevor Jones, and Italians such as Dangiuz, Giovanni Motta, Skygolpe, Fabio Giampietro, Mattia Cuttini and many others have created works then sold and resold at exponentially higher prices. A very fast revaluation and immediate exchange, precisely because everything exists in the virtual space, accessible to anyone with an internet connection.

Furthermore, digital art galleries have emerged that promote and support this market: Art Innovation, founded by Francesca Boffetti, was one of the first Italian start-ups to organize “alternative” exhibitions, surpassing the traditional concept and mentality of art consumption. International exhibitions where the “canvases” are maxi LED walls distributed in the world’s largest cities and where anyone who wishes to own a work can purchase it in seconds from their own phone.

Consequently, it becomes possible to invest in this new stateless and telematic market: just like “classical” works of art – such as a painting or sculpture – it is possible to buy and sell works existing in cyberspace, without incurring logistical, transportation, insurance, conservation, and other issues. With absolutely real gains.

However, NFTs are not only bought for investment purposes: behind them there are always, also, the taste and spirit of the true art lover. Virtual worlds exist, such as Decentraland, Earth 2, Sandbox, and others where each collection can be organized into virtual galleries or museums and shown to anyone.

But all this is possible, as mentioned, only thanks to blockchain technology, whose name is now quite well-known but whose functioning, at least in general terms, deserves a deepening – also and above all because, thanks to the principle underlying the technology, it is abstractly possible to give legal value to what we “own” in the virtual world.

Well, blockchain could be indicated as a kind of public and decentralized register that uses peer-to-peer technology to validate transactions between two parties securely, verifiably, and permanently. A network of computers reaches consensus on the creation of a new “block” that contains all validated operations, and joins the chain without being modifiable by a single subject without all subsequent “blocks” being modified.

In this way, there will be no doubts about what happened during the process: there can be no different versions of the same document, and every change is transparent and traceable by anyone. In short, in theory, blockchain could play the role of “notary” to transfer, for example, the ownership of any asset such as real estate, vehicles, money, stocks, and so on instantly and without intermediaries.

The main advantage of the aforementioned technology can be found in the fact that there is no single server controlled by someone, but all participants have a copy of the “register,” and at any time can verify if a data has been modified, by whom, and isolate it, since it does not match the original copy that everyone has. When there is a need to modify information, a new block must be opened and declared. There is, therefore, no possibility of corruption, fraud, or theft, at least in theory.

Now, without going into the “technical” details of the technology, it is enough to know that each blockchain weighs a few gigabytes, is accessible via the internet, and works (approximately) like a shared email or a Google Doc, which can be accessed by all those who have the “key.”

However, it should be noted that for economic transactions, the adoption of a cryptocurrency is necessary. There are three types of blockchains:

1. public, to which anyone can access on an equal footing and make transactions once the blockchain has been downloaded;
2. belonging to a consortium, and therefore formed by a pre-established group of nodes, which anyone can access or only consortium participants, sometimes with limited access to information;
3. private, and therefore managed by a single organization (which may be the case of a company that uses it for all its activities, of which all participants are aware). This technology reached the peak of popularity with the phenomenon of cryptocurrencies, which were booming in the last quarter of 2017. Bitcoins, in fact, existed and were traded precisely through blockchain technology, and with the exponential increase in their value, more and more people (as well as entities and organizations) began to take an interest in the phenomenon.

Since today, in various countries, the use of blockchain technology is being experimented with in systems such as banking or industry. However, what is of primary importance is the possibility for individuals to use this technology in order to develop their own business, using a public blockchain (for example, managed by the Public Administration), analyzing the advantages of the protocol compared to those currently used.

Above all, it will be necessary to establish the legal value of the documents contained in the blockchain and their probative effectiveness in the event of disputes.

In any case, it can be said that the evolution towards blockchain technology is due to: (i) the evolution of computer and computing powers; (ii) the internet tool; (iii) the globalization of social relationships. Blockchain can therefore be defined as a distributed network or distributed ledger: during technological evolution, we have moved from a centralized organization to decentralized organizations, and then to distributed organizations where all participants (nodes) interact without any central or centralized control, and where each node has a copy of the shared database (i.e. the blockchain).

The blockchain constitutes a record of all transactions grouped in blocks that form a chain. The creation of a blockchain occurs through “consensus algorithms” that differ depending on the blockchain in question. The integrity of the ledger is maintained through the “consensus” reached by the participants on the validity of a particular transaction.

Blockchains are therefore complex systems, enabled by the combination of distributed computer networks and protected by high levels of cryptography.

Characterization of the legal value of a blockchain.

Understanding the legal and evidentiary value of blockchain technology is essential, as it is crucial in case of disputes and can determine (legally) the necessary information on the blockchain and its security criteria. In other words, from a legal point of view, it may be “certified” that a particular transaction occurred at a certain date and time, and between whom, with particular regard to the security and “goodness” of the information.

The public blockchain (such as the one used for Bitcoin) is very secure precisely because it is widespread to all users, and unless 51% of them agree to a retroactive change, the protocol will be almost inviolable. Furthermore, a public blockchain (which does not require any authorization) reduces costs (fees, development codes, etc.), enabling decentralized activities, storage capacity, security (resistance to failures, tolerance to attacks, collusion resistance, avoiding cartels, etc.).

Therefore, this environment offers good security: in fact, the Bitcoin blockchain has never been hacked, at least until now.

Legal framework for the use of the blockchain protocol.

Regarding the evidentiary value, the purely legal aspect of the blockchain is of definite interest. However, this type of information does not depend on actors (developers, miners, and investors) but on the legal framework of the individual countries where the activity in question takes place. Let us, therefore, try to provide some information on the “state” use of blockchain technology, as far as possible, despite being aware that what we are about to describe will change very quickly and therefore cannot be considered universal from a quantitative point of view.

In August 2016, the European Central Bank created a task force on distributed ledger technology (DLT) and launched a joint research initiative with the Bank of Japan. In member states (at that time), countries such as Britain and France followed the same trend to closely analyze the practical uses of the blockchain.

In 2016, the Bank of England became a member of the Hyperledger blockchain initiative, led by the Linux Foundation, and the British regulator FCA drafted an extensive document in April 2017 on DLT and crypto-tokens. France adopted two bills that recognized blockchain technology in 2016 and 2017.

These laws are related to the use of the blockchain as a way to efficiently record financial instruments and other types of assets and to improve the authentication of ownership and various real rights. The first step was the adoption of the law of August 6, 2015 (also known as “Macron Law 2”), which allowed the French government to authorize the use of DLT for the issuance and registration of a new type of debt-based instrument: the so-called “minibonds.”

This rule provided that the issuance and transfer of “minibonds” could be recorded in a shared electronic registration technology and that the registration of a transfer of “minibonds” in the shared electronic registration technology would constitute a valid legal contract under French law.

The French legal recognition of blockchain technology took another step forward after the adoption of the “Sapin 2” law in December 2016, whose main terms concerned the registration of some financial instruments on shared electronic registration technology, as decided by the issuer, which would be assimilated to registration in the form of an accounting entry.

The financial instruments that could be registered on a blockchain would be, in particular, shares and some debt instruments of unlisted companies.

Furthermore, under an important legislative proposal from abroad (i.e. the PACTE law), new clarifications will be provided regarding the use of blockchain as evidence, especially on how and when to consider a right enforceable in what is written on the blockchain and how to specify questions related to property rights.

However, as of today, this legislation has not yet come into force in the areas of interest here. On the other hand, in the United States, in December 2016, the FED published a report stating that blockchain technology represents “potential opportunities” in payments, clearing and settlement, particularly by providing “a new way of storing, recording and transferring any type of digital asset”. Therefore, there is a trend in the United States towards the legal recognition of blockchain technology, which is expected to evolve in some states (Arizona, Nevada, Delaware) and possibly be adopted at the federal level as well.

In June 2018, the Hangzhou Internet Court in China ruled that the use of blockchain technology in the deposition of evidence can be legally admissible, but the decision must be evaluated on a case-by-case basis. In September 2018, the Supreme People’s Court of the PRC extended this directive to all countries, considering that blockchain can now be legally used to authenticate evidence in legal disputes, clarifying that some “telematic” issues in China should also be decided using such technology, including the storage and authentication of digital evidence, provided that the parties can demonstrate the legitimacy of the technology used in the process.

In conclusion, considering the previous analysis, we have identified several parameters for analyzing the reasons for adopting one blockchain over another at the state level, mainly in relation to the type of registrations/transcriptions that will be made through the mentioned protocol. Indeed, the blockchain protocol promises a great change in the way certain sectors are structured today.

The “digital trust” and third-party self-regulation it represents is made possible by the various properties guaranteed by its technology, particularly the immutability of the data it contains. However, it should be noted that this immutability is not guaranteed solely on the pretext of complying with a blockchain protocol, as “authorized” blockchains (i.e. those not public or widespread but controlled by a small group of actors) do not benefit from strong probative validity and can be easily modified.

In summary, it can be stated that a public blockchain, used by a large number of users, guarantees (almost complete) immutability of the data it contains and can find “space” within the Italian legal system – through a specific legislative proposal – so that it gradually replaces Public Registries, in parallel with the use of Certified Electronic Mail which has gradually replaced – where possible for the interested parties – the sending of registered letters by postal service.

The cost in terms of human and technological resources required for a widespread attack (i.e. by more than 51% of public blockchain users) would be so high that, in fact, it is impossible, just like the counterfeiting of European banknotes, which is increasingly rare.