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February 27, 2023

Royalties and the New Collector Economy

Brian L. Frye considers the future of artists’ resale royalties in a divided NFT ecosystem
Credit: Kevin Abosch, Open Edition — Insert Coin to Play, 2023. Courtesy of the artist
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Royalties and the New Collector Economy

Everyone in the NFT community is talking about resale royalties. Artists love them, collectors hate them, and marketplaces are caught in the middle, trying to decide whether and how to enforce them. In a nutshell, resale royalties are bounties paid to artists when their NFTs sell on the secondary market. A resale royalty consists of a percentage of the sale price of a work, set by the artist who minted the NFT. So if an artist incorporates a 5% resale royalty into their smart contract and a collector sells the NFT for 10 ETH, the artist gets 5% of the sale price or 0.5 ETH.

Until recently, most NFT marketplaces enabled artists to set resale royalties for their NFTs, with certain restrictions depending on the marketplace. For example, OpenSea permitted a maximum resale royalty of 10% and Rarible a maximum of 50%. Unsurprisingly, most NFT collectors hate resale royalties, which are effectively a sales tax on NFTs. It’s a drag to see your 10 ETH profit become a 9.5 ETH profit because you have to pay the artist a 5% cut. What’s more, resale royalties apply even when a collector sells an NFT at a loss. So if a collector buys an NFT for 20 ETH and sells it for 10 ETH, a 5% resale royalty will still give the artist 0.5 ETH. 

Why should artists profit at the expense of collectors, when collectors take all the risk and eat all the losses?
Kevin Abosch, Open Edition — Adversarial Network, 2023. Courtesy of the artist

Up to now, many collectors have tried to avoid paying resale royalties by selling their NFTs on royalty-free or royalty-optional marketplaces like X2Y2, LooksRare, or Blur. Not even OpenSea is able to enforce resale royalties for NFTs created on its platform if they are then sold through a different NFT marketplace. Of course, artists can always write a resale royalty into their smart contracts rather than relying on NFT marketplaces. But they usually don’t, because it would make their NFTs unappealing to collectors. What’s more, there is no way to write a resale royalty into an NFT’s smart contract retroactively, so NFTs created without an on-chain royalty will always have to rely on off-chain enforcement. 

In the so-called “creator economy,” all artists can do is name and shame.

During the hype machine of 2021, successful NFT artists collected plenty of resale royalties, even despite deadbeat collectors. But the harshness of the current crypto winter has altered that reality. While OpenSea held the line as long as it could, change was inevitable. In February 2023, Blur announced that it would enforce resale royalties, but only if artists blocked OpenSea from listing their NFTs. OpenSea responded by making all off-chain royalties optional. Make no mistake, these decisions pose an existential threat to royalties in the NFT space. But are resale royalties actually a good thing? It depends who you ask. 

Kevin Abosch, Open Edition — Chaos, 2023. Courtesy of the artist

Conventional wisdom generally holds that resale royalties are essential to a thriving creator economy, but there remain plenty of dissenters. 

Supporters argue that artists deserve to collect resale royalties when their work is successful, justifying royalties as an ongoing revenue stream for creators who are forced to accept conditions of economic precarity in exchange for their chosen careers. Opponents argue that resale royalties are unfair to collectors. So who is right?

Despite their prominence in the NFT conversation, resale royalties are nearly as old as the art market itself. Back in the 19th century, artists complained that collectors were making all the profits and demanded a cut. Before long, European countries created statutory resale royalty rights, which were eventually incorporated into article 14ter of the Berne Convention for the Protection of Literary and Artistic Works.

The United States was a holdout. The Copyright Act of 1976 was largely a capitulation to the Berne Convention, which the United States joined in 1988, while The Visual Artists Rights Act of 1990 created limited moral rights. But Congress rejected resale royalties as a bridge too far. In response, artists in the US have sought to create private resale royalties, with Takis famously objecting to the Museum of Modern Art exhibiting his Tele-Sculpture (1960) without his permission. This led to the formation of the Art Workers’ Coalition, which included resale royalties among a number of demands. 

Kevin Abosch, Open Edition — Nostalgia, 2023. Courtesy of the artist

In 1971, conceptual artist Seth Siegelaub and lawyer Robert Projansky tried to realize that demand by creating The Artist’s Reserved Rights Transfer and Sale Agreement or “Artist’s Contract,” which sought to create contractual resale royalties. Several artists used the Contract to sell their work, including Hans Haacke and Adrian Piper, but it was always a fool’s errand because the contractual royalties it sought to create were largely unenforceable. Sure, artists can sue their collectors for reneging on royalties, but it’s usually unwise to bite the hand that feeds you. 

More importantly, artists can’t legally enforce the Artist’s Contract on the secondary market for lack of privity of contract. A contract is only valid against someone who has agreed to it, and collectors on the secondary market never agreed to pay a resale royalty. For most artists the Artist’s Contract either wasn’t realistic, because collectors wouldn’t accept it, or it wasn’t worth the trouble, because selling new work is always easier than collecting resale royalties. 

In practice, insisting on the Artist’s Contract was always a flex. Only the most popular artists could convince collectors to accept it. Nevertheless, as Lauren van Haaften-Schick has observed, the Artist’s Contract did spark a conversation about the relationship between artists and their work. 

For conceptual artists, the idea was the artwork. The art object was simply its physical realization. With NFTs, the question is whether art needs objects at all. 

While we pretend that artists are selling objects, they’re really selling an investment in their brand and an entry on their catalogue raisonné. An artwork is just a token that represents ownership of a ledger entry. NFTs are the same, except you don’t need the physical thing to sell the ledger entry. Artists regard resale royalties as a sine qua non of their art — they made the work, so they should benefit when it’s sold. There’s some intuitive appeal to that position, especially because it’s the artist’s brand that ultimately sells, or fails to sell, the work. But there’s also something conceptually unsatisfying about it. After all, artists get paid when they sell their work for the first time, why should they benefit from future sales? 

Kevin Abosch, Open Edition — Courage, 2023. Courtesy of the artist

In copyright law, the “first-sale doctrine” states that copyright owners only benefit from the first sale of a work, and cannot control future sales of a particular copy, which is why we have libraries and used bookstores. Why should artists have an ongoing financial interest in the sale of copies of their work when other authors don’t? And are royalties even equitable when the only artists who benefit from them are the ones who are already successful?

The overwhelming majority of art has no value on the secondary market, so it cannot generate any resale royalties. Indeed, some scholars argue that royalties harm emerging artists by reducing prices on the primary market. After all, if collectors know they will have to pay a tax in order to cash out their investment, they should expect a discount up front. While it may seem unfair for lucky collectors to make all the money when the artists do all the work, it rings a little hollow when you realize that most collectors lose money on their investments in art. 

In practice, it would be easy to make resale royalties more equitable. After all, they’re just a tax on art sales. If we want a more equitable distribution of tax revenue, we have all the tools we need already.
Kevin Abosch, Open Edition — Insert Coin to Play, 2023. Courtesy of the artist

Why not use resale royalties to fund the NEA (National Education Association), or make grants to underrepresented artists, or make payouts to less successful artists? There’s some equity for you. Of course, NFTs offer an enticing alternative by enabling artists to impose private resale royalties automatically. But collectors still hate resale royalties, and NFT marketplaces are heeding their cries. Ultimately, their real customers are the collectors who bring the money, not the artists who bring the product. 

On the other hand, NFTs are also investments in an artist’s brand, and that artist’s opinion can alter the value of their NFTs. If an artist objects to collectors selling their NFTs without paying resale royalties, it could affect the market for their work, whatever the blockchain says about it. 

Hans Haacke’s collectors respect his insistence on using the Artist’s Contract because they consider it an essential part of his artwork. Maybe NFT artists can create a similar social expectation.

With the winds of Web3 blowing against them, perhaps the real question is how much NFT artists really care about resale royalties. Because they do have a choice — they can insist on trying to collect them or else they can focus on releasing more work. I suspect that a major reason artists are clinging to royalties is because they also want to maintain a connection to their work after it is sold. Either way, royalties are on the ropes and artists have to decide how much they matter to them. Because if it’s only about the money, it’s game over.

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Brian L. Frye is the Spears-Gilbert Professor of Law at the University of Kentucky College of Law. His scholarship focuses on copyright, art law, and legal history amongst other things. He is also a conceptual artist.