Non-Fungible Tokens Explored – And (Partially) Explained
- Martin Baker, award-winning journalist and head of communications at Money&Co., looks at Non-Fungible Tokens (NFTs).
The lunatic with the loudest voice in the asylum at the time of writing is undoubtedly the NFT. Artist Damien Hirst is set to enter the NFT world with much-heralded plans to sell 10,000 artworks tied to corresponding NFTs. The launch is entitled “The Currency Project”, in case you didn’t get the joke, and is being released on a new technology called Palm, connected to the Ethereum blockchain network whose native cryptocurrency is Ether, the second-biggest cryptocurrency behind Bitcoin.
An NFT can manifest itself in the form of art, videos, audio – or even Tweets. For example, Twitter founder Jack Dorsey’s original Tweet 15 years ago was bought as an NFT by crypto entrepreneur Sina Estavi for $2.9 million. Estavi compared the purchase to buying the Mona Lisa.
While NFTs and whatever is attached to them may be the very height of financial fashion this week, there’s nothing intrinsically innovative or new about the tokens themselves. As US technology lawyer Lee Schneider puts it [8]: “As with anything tokenized on blockchain, it is the functions and features of the NFT that determine what it is, as well as its legal and regulatory classification. In this respect, there is no difference between fungible and non-fungible tokens. They are both a form of digital representation of an asset or item on a blockchain database. As such, an understanding of the rights and entitlements inherent in the token, including those programmed into the blockchain and smart contract as well as any associated written terms and conditions, is necessary to properly classify it. This is true regardless of its fungible or non-fungible nature.”
The adoption of the NFT as the preferred medium of the art market is a product of the fact that an NFT is “essentially a unit of data stored in a blockchain ledger that can only have one owner, cannot be copied and cannot be lost or maliciously duplicated, unlike other forms of cryptocurrency”. These are early days still in this extraordinarily fast-expanding market, and although an NFT can be bought and sold with any cryptocurrency the crypto of choice is Ethereum, which accounts for the great majority of transactions. An unintended consequence of this is that digital art buyers need an Ethereum wallet to operate in the market.
At the top end of the market are auction houses such as Christie’s. In mid-February Christie’s catalogued a work by Beeple (born in 1981, in case you were wondering) whose digital effort “Everydays – The First 5000 Days” was described thus: “Minted on 16 February. This work is unique.” Just as well for the buyer, who paid $69 million for it.
Once the stupefaction has cleared, it seems fair to say that the NFT sector looks to be a medium in search of a message. More plainly, these platforms are attracting vast amounts of cash and are clearly desperate to find new products to sell. The rocketing sales volume figures fit well with the current mania: according to NonFungible [10], a media site that monitors NFTs, trading in the tokens rose by 300 per cent in 2020 – a million years ago in crypto-time – with a total volume over $250 million. The latest product leading the surge isn’t even art, but an NFT of a defining moment in a sports game.
To be clear: this is the tokenisaton of the media coverage of a moment at a sporting event. Trade media site Crowdfundinsider, citing DappRadar as a data source, reports that “NFTs had a great February as the top 3 NFT dapps went from $71 million to $342 million. NBA Top Shot was said to be responsible for 67% of the transaction volume. In February, NBA Top Shot said it had over 30,000 ‘moment owning collectors’ [sic] on the platform and $50 million in marketplace transactions.” [11]
Owning a moment? Isn’t that a little manic? NFTs can be used as a form of option contract – conferring the right to buy a physical piece of art, or again to be the prime medium of consumption of art in a digital format – but owning a moment? We may not be at the stage of full-blown tulipomania yet. Amid the greed there is understandable concern in some parts of the market and amongst regulators and commentators.
In the wake of Bitcoin’s late 2017 surge to $20,000 the chief US financial regulator, the Securities and Exchange Commission (SEC) tightened up the environment for launching Initial Coin Offerings (ICOs) as they began to proliferate. Bitcoin of course fell back sharply to around $5,000 not long after this peak, and the speculative fury abated. But the SEC still clamped down, classifying ICOs as securities and requiring issuers to comply with mainstream securities-issue regulation.
Chris Blackhurst, writer, communications consultant and former editor of The Independent, identifies a cool attitude among regulators and governments toward cryptocurrencies and tokens, which he collectively refers to as “Crypto”: “Crypto supporters will say this is proof of the conspiracy against it, that the mainstream is inventing reasons why Crypto can’t succeed. Really?
“Put motive to one side and show me. That’s right, tell me how Crypto is underwritten. You know the Anti-Money Laundering and Know Your Client rules that prevent money laundering? Well, explain to me how when you trade Crypto, you’re confident you’re not transacting with a drugs cartel.”
The US is legislature is currently processing the Stablecoin Tethering and Bank Licensing Enforcement (STABLE) Act [12], whose policy aim is to protect investors from risks posed by digital payment instruments. If passed, the STABLE Act would require any prospective issuer of a stablecoin to obtain a banking charter, follow appropriate banking regulations, obtain approvals from the US Fed and specialist regulator the FDIC, and demonstrate that any token can be readily converted into mainstream US dollars.
Speaking at a recent Bank of International Settlements (BIS) conference [13], US Federal Reserve Chairman Jerome Powell articulated the scepticism and suspicion that Cryptoland can engender. Powell cautioned against the volatility of cryptocurrencies, and argued that even Bitcoin might not serve as an effective store of value, as it is not “backed by anything.”
Powell went on to claim that Bitcoin was “more a speculative asset that’s essentially a substitute for gold, rather than for the dollar”. And yet, despite his argument for the general inadequacy of Bitcoin in particular and cryptocurrencies in general, Powell added that the Fed would eventually issue its own digital currency, with feasibility studies already well under way.
If you can’t beat Cryptoland, join it, seems to be the underlying message. Which is why the US is just one of several countries jostling for pre-eminence in the newly competitive world of central bank-controlled digital currencies.
- A further instalment of this article will be published shortly.
