In OpenSea and other NFT marketplaces, royalties can be set up so that a certain percentage is paid to the author for the secondary sale of works of art. The concept is similar to the Artist's Resale Right, which is widely introduced in Europe.
The Resale Right is granted to artists under a system in which a certain percentage of the transaction amount is paid to an artist/author when an original work of art is resold by art dealers, auction houses, etc.
It was originally born in France in 1920, and has been introduced in Europemainly by EU member states under the Directive 2001/84/EC.
Nevertheless, although NFT royalties and the Artist’s Resale Right are similar in basic concept, they should be understood as completely different structures.
Two Perspectives for Realizing Royalties to Authors
The Artist’s Resale Right is designed on the basis of traditional disputeresolution systems that resolve disputes in court. The preconditions for resolving disputes through litigations are (i) to identify the other party and (ii) cost-effectiveness.
When a system is established by a contract between the parties, rather thanvia a legal system of Artist’s Resale Right, (i) an artist to be paid is not involved in the sale and purchase in the secondary sale, so the seller and the buyer cannot be identified (practically difficult to identify), and (ii) the
amount of royalties arising from individual transactions is often small, and there is a problem that the effect of any litigation is not expected to be commensurate with the cost.
Solutions through the Artist’s Resale Right
The Artist’s Resale Right resolves these issues by designing royalty payments within a legal system. In other words, (i) royalties based on the Resale Right are limited to transactions involving professionals, such as art galleries and auction houses, and allows these professionals to identify the other party by requiring collecting societies to report transaction information; (ii) because the amount of royalties generated by individual transactions is often small, collecting societies balance cost-effectiveness by exercising rights on behalf of many artists/authors.
Solutions through Smart Contracts
In contrast, royalties in NFT marketplaces are set to be automatically executed by a smart contract. Smart contracts resolve the issues by (i) identifying the buyer's or seller’s wallet address and (ii) royalty payments from the buyer or seller are automatically executed and remitted to artists through a smart contract. No collecting societies are necessary within this structure.
Impact on the ArtMarket (Market Mobility)
Since each country hasits own legal system, what is often pointed out when the Artist’s Resale Right
is introduced is the concern that the Resale Right may cause the market to move to another country that has not introduced the Resale Right.
For example, if you sell your works of art at an auction house in the UK, you will also need to pay the Artist’s Resale Royalty, which is subject to the Resale Right. However, if you sell it at an auction house in Switzerland, which does not have the Resale Right, you will not need to pay the Artist’s Resale Royalty.
Assuming these unbalances, since royalties of the Resale Right only range from 0.25% to 4% and
the upper limit is limited to €12,500, there is no clear adverse effect between the introduction of the Resale Right and the UK art market.
In contrast, transactions on NFT marketplaces do not have to take account of market movements. As a result, the determination of royalty rates in NFT marketplaces is not necessarily bound by the percentages set in the Resale Right.
In practice, 10% is common, and sometimes a rate higher than 20% is set for NFT royalties. When
creating a new NFT marketplace, it is useful to understand the Resale Right system for reference only since the structures differ from one another.
