Defining NFTs
The crypto-asset markets have seen a surge of Non-Fungible Tokens (“NFTs”) in recent years. Despite that the first NFT was reportedly created in 2014 on the blockchain Namecoin, and then minted and sold in 2021 on another blockchain, Ethereum. Furthermore, they started gaining traction in 2017, in the form of figurines of digital kittens, as part of the first ever popular blockchain game ‘CryptoKitties’. Finally, in 2021 NFTs acquired their current intriguing position in mainstream culture, especially amongst prospective investors.[1] NFTs shall be analysed from an objective point of view and their contribute towards the blockchain world should be appreciated.
Different approaches
Despite the fact that there have been several discussions, especially from a regulatory legal perspective, there has been no formulation of a harmonised definition of NFTs yet. However, when one compares all the potential definitions outlined by various researchers, one notes that there are several phrases and keywords which are recurrent in the majority of these definitions. For instance, in one of its reports on NFTs, the EU Blockchain Observatory Forum interpreted NFTs as, “a special type of digital asset or token that can be proved to be unique and not interchangeable with another digital asset”.[2] Several researchers also tend to delve into the technical aspect of NFTs and define them as a mere code which is typically encoded within a smart contract whilst providing a non-fungible implementation of a token.[3] To sum it all up, the main characteristics of NFTs which are widely accepted include the characteristics of uniqueness, transparency and provability of ownership, asset programmability, and immutability of records.
Maltese regulatory classification
Malta has also caught up with NFTs as MFSA issued their own guidelines to clarify where NFTs will stand with regards to the Virtual Financial Assets (“VFA”) Framework in place as well as with the upcoming Markets in Crypto-assets Regulation (“MiCAR”).[4] In fact, for the purpose of the said Guidelines, NFTs refer to a crypto-asset which is considered unique and not fungible with crypto-assets within the parameters of these Guidelines. Therefore, MFSA excluded NFTs from the scope of VFA definition and framework. However, the Authority still left a leeway whereby NFTs could potentially fall under other categories of DLT Assets, including financial instruments.
Examples of NFTs
One of the most popular NFT marketplaces is Opensea whereby it provides several NFT categories. These include amongst other photography, in that photographers tokenise their work and offer total or partial ownership. Art also plays an important role in the NFT market, as well as music whereby artist tokenise their music and then grant buyers certain rights as the artist deems fit.[5] One of the most renowned NFT collections is the Bored Ape Yacht Club, each token depicts a unique ape which in turn grants the owner membership to a swamp club for apes.[6]
Advantages and Disadvantages of NFTs
Pros:
- Authenticity;
- Ownership is transferable, easy to verify and transparent;
- Provision of new revenue streams for artists and creators as enables them to sell memorabilia and tickets to concerts as NFTs amongst others;
- Due to being digital they can be easily traded and accessed from around the globe;
- Instigating innovation in the art world amongst other sectors.
Cons:
- Fraud:
- Wash Trading – when an NFT creator or seller inflates the price of their NFT. The fraudster creates a false appearance of demand through selling and buying the NFT from multiple fake accounts with price increases through each transaction;
- Rug pulling – NFT seller announces a new project that is supposed to come with future features, then closes the project and takes off with the money invested once the first element of the supposed project is sold;
- NFT owners do not control the copyright, the artist continues to control this. Moreover, when compared to a traditional asset like property, it can still be viewed, copied, screenshot and downloaded by anyone on the internet;
- A collateral disadvantage is the environmental footprint of one NFT transaction on the Ethereum network, as it generates around 128kg of carbon dioxide[7];
Fractional NFTs
Another weakness is that NFTs tend to be very expensive to acquire and thus making access exclusive only to a certain tier of investors. One of the most expensive NFT sales on Ethereum of 2022 amounted to a crowdfunding of $52.7 million in donations to reach a winning bid of 16,953 ETH. This was the NFT ‘Clock’, a collaboration between Julian Assange, the founder of WikiLeaks and NFT artist Pak.[8] This is where F-NFTs come in useful as an investor would be able to own just a portion from a larger and more expensive NFT.
Whether you are interested in the realisation of an NFT project or the legal differentiation of an NFT from another token, do not hesitate to contact us.
[1] Andrea Sestino and others in Non-Fungible Tokens: Examining the Impact on Consumers and Marketing Strategies (Palgrave Macmillan 2022) 13.
[2] EU Blockchain Observatory and Forum, ‘Demystifying Non-Fungible Tokens (NFTs, 29 November 2021)’.
[3] Joshua Ellul and Ioannis Revolidis in Smart Contracts and Contracts: The need for Legal and Technology Assurances’ (2023) University of Malta.
[4] Read our Summary of the NFT-Guidelines.
[5] Rakesh Sharma in Non-Fungible Token (NFT): What It Means and How It Works.
[6] Visit the clubs web presence.
[7] Lucy Ingold outlining certain risks in Sevenpillarsinstitute.
[8] Callan Quin in ‘Yuga Labs dominates most expensive NFT sales of 2022’.
