Just as the proliferating blockchain technology is underpinning the crypto world, an estimated $25bn market for non-fungible tokens (NFT) seemingly sprang out of almost nowhere in 2021.
NFTs are digital certificates of authenticity: a unique, irreplaceable identifier created by an algorithm.
When an artist wants to sell a work, they create, or “mint,” an NFT that will from then on stand as a digital claim on ownership for the piece. NFTs are registered on open blockchain ledgers, making it possible to track ownership, prior sales prices and the number of copies in existence.
In theory, the security provided by the blockchain technology means that selling fake tokens is all but impossible, which can’t always be said of physical works even of famous artists.
But as the seemingly ubiquitous crypto asset exploded in popularity, so have the warnings over risks as reports of scams and counterfeits have become commonplace.
The platform which sold an NFT of Jack Dorsey’s first tweet for $2.9mn has halted most transactions because people were selling tokens of content that did not belong to them, its founder said, calling this a “fundamental problem” in the fast-growing digital assets market.
The US-based Cent executed one of the first known million-dollar NFT sales when it sold the former Twitter CEO’s tweet as an NFT last March. But as of February 6, it has stopped allowing buying and selling, CEO and co-founder Cameron Hejazi told Reuters.
Hejazi highlighted three main problems: people selling unauthorised copies of other NFTs, people making NFTs of content which does not belong to them, and people selling sets of NFTs which resemble a security.
There are regulatory caveats too.
The US Treasury Department on Friday issued a set of recommendations to combat illicit finance in the high-value art market and warned that the emerging digital art market, such as NFTs, may present new risks.
The Treasury found that there is some evidence of money laundering risk in the high-value art market,
but limited evidence of terrorist financing risk.
And British tax authorities on Monday made their first seizure of NFTs in a crackdown on suspected criminal activity to hide money. They seized three NFTs after investigating an attempt to defraud the public coffers of £1.4mn ($1.9mn).
NFTs appeal to the human desire to collect rare things vis-à-vis technology that defines all aspects of human lives. The clear-and-present market is now capturing the imagination of artists and blockchain enthusiasts all over the world.
Critics, however, warn that the digital assets are risky and point to similar concerns around cryptocurrencies.
There are downsides, for sure.
Since not every technology sticks around, blockchain could potentially go down and theoretically orphan a slew of NFTs. As with anything that lives on the internet, getting hacked is an ever present threat.
If proper security precautions aren’t taken by exchanges or the owner of the NFT, they could wake up to an empty wallet one morning.
While blockchains solve the problem of trust with their open ledgers, they don’t prohibit people from trying to pass off another artist’s work as their own.
There’s also the concern about the massive amount of energy that is expended to power blockchains.
Market experts are now cautioning that amid the burgeoning popularity vis-à-vis surging risk factors, investors need to adopt a balanced approach towards NFTs and such digital assets with a longer-term perspective.
