People pass by sign on a small shop that hosts digital art collecting platform Neon’s first in-person NFT vending machine in Lower Manhattan’s financial district, New York City, US, on March 1, 2022. Photo: Reuters
Opinion
The View
by Zhijin (Donna) Huang
The View
by Zhijin (Donna) Huang
Resolving NFT disputes in the art world needs more action and awareness on arbitration
A common problem with any innovation is that laws can be slow to catch up, leaving individuals and businesses exposed to risk and uncertain about what to do
Arbitration can help settle NFT disputes in a private and friendly manner, but more must be done to educate people about their options
Art Basel Hong Kong, Asia’s biggest art fair, recently opened its doors to the world for the first time since the Covid-19 pandemic. This event is an important barometer of the success of Asia’s art scene but, nowadays, it is not just traditional artwork drawing attention and investment. Non-fungible tokens (NFTs) are a hugely popular and accessible form of art which draws a broader market of buyers.
NFTs are blockchain-based tokens which represent a unique asset such as a piece of art, video or other type of digital content. Brought into the mainstream by the landmark sale of digital mosaic Everydays –The First 5,000 Days in March 2021 by Christie’s for US$69.3 million, the NFT market has continued to grow and develop.
In China, NFTs are seen as an important building block for future growth. Shanghai’s 14th five-year plan for developing its digital economy, issued last year, underlined its support for leading enterprises to establish NFT trading platforms.
With the government’s support, the China Digital Asset Trading Platform officially launched on January 1. Unlike previous trading platforms, which are only open to primary transactions, the government-endorsed platform allows secondary, user-to-user transactions.
Hong Kong, which has also set out a vision of becoming a global virtual asset hub, published a policy statement on the development of virtual assets in the city last October. Amid the growth of these hubs, it is reasonable to expect increasing disputes. More complex issues will follow, such as whether to choose a public or private chain and how to determine the ownership of digital assets if a private chain is chosen.
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SCMP Explains: What are NFTs?
SCMP Explains: What are NFTs?
While the growth of NFTs in Hong Kong, mainland China and across Asia more broadly is great news for the art world, this burgeoning market does hold its own inherent risks, and the number of disputes related to NFTs is growing. Recent reports suggest that consumer complaints in China about NFTs over pricing and service problems surged 300-fold in 2022, exposing a problem that has become increasingly difficult to address, according to the State Administration for Market Regulation.
A common problem with any innovation is that laws and regulations can be slow to catch up, leaving individuals and businesses exposed to risk and uncertain about what to do if something goes wrong. By their very nature, NFTs can be precarious and disputes can arise around authenticity, fraud, verification of sellers’ and buyers’ identities and fake or duplicated artwork, which brings with it many intellectual property concerns.
There have been a handful of high-profile disputes regarding NFTs so far, and this issue is still in its infancy in the courts. Last month in New York, a court ruled that an artist’s NFT, which featured copies of Hermès’ iconic Birkin bags, amounted to trademark infringement and the jury awarded Hermès US$133,000 in damages.
NFTs being broadly decentralised can make meaningful regulation difficult. In China, the State Administration for Market Regulation has acknowledged that “problems arise in nascent business models, which makes it increasingly difficult for regulators”. However, none of this means successful and efficient dispute resolution related to NFTs is impossible. In most cases, the current system of arbitration is well placed to solve any disputes over NFTs.
The problem of regulations and legislation trailing any fast-evolving technology also means it can be difficult to find a lawyer or judge who fully understands the complexities involved in the technology. This is especially true in relation to NFTs, which can be complicated in terms of ownership, intellectual property rights and applicable jurisdiction.
Arbitration as a means of NFT dispute resolution means those involved can choose expert arbitrators who have the specific knowledge and understanding needed. For instance, identifying the origins of the artwork, especially when it is on the blockchain, could require referring to specialist forensic science.
Many arbitral institutions don’t have a closed panel of arbitrators. This means parties can nominate whoever they believe to be a real expert to resolve their disputes. Institutions can use their vast networks to identify specialists tailored to each dispute. Adding fresh blood to the pool of arbitrators is significant for emerging industries.
Likewise, more parties are choosing to settle disputes around NFTs through arbitration because of the confidentiality it provides. As NFTs move into the mainstream, especially in the high-end art world, more big-name players from artists, to auctioneers and buyers are involved.
A man looks at an NFT by artist Jen Stark at a festival called The Gateway: A Web3 Metropolis, during Miami Art Week on November 30, 2022. Photo: AP
Many of these players don’t want their names splashed over the world’s media if something goes wrong. Arbitration can help settle NFT disputes in a private and friendly manner, boosting the industry and supporting growth without undermining its foundations and reputation.
Another key consideration is the global nature of NFTs. For the art industry, London, Paris, New York and Hong Kong are hubs for transactions, and when it comes to disputes there are often choices to be made around where to bring the claim. In these instances, an expert arbitrator can help choose the best jurisdiction depending on the case. In addition, arbitral institutions tend to have a significant presence in these major hubs.
However, despite there being good solutions in place to deal with NFT disputes, there remains a lack of education about these options. While NFTs present many exciting opportunities, more needs to be done to ensure those involved in this market are aware of their rights and where to turn if things go wrong.
Zhijin (Donna) Huang is director of arbitration and ADR, North Asia, at the International Chamber of Commerce (ICC) dispute resolution service
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