What are “non-fungible” tokens… Really?

Non-fungible tokens (NFTs) are not a new concept but the past 6 to 8 months has seen an explosion in interest and NFT minting volume has skyrocketed. From the initial Crypto Kitties craze in 2017 to the more recent US$69 million dollar sale of Beeple’s “Everydays: The First 5000 Days”, there is an obvious connection between NFTs and artwork. Being uniquely identifiable, as their name suggests, it’s no wonder NFTs have attracted attention in the art world, which is grounded in rarity and originality.

Apart from the subjective, because art can be reproduced, its value (just like digital items) is about authentication and provenance. If you can authenticate a print as a true copy of an original artwork, it has some value. If you can authenticate the original of that artwork, it will have even more value. But if you can authenticate an original artwork as being signed by the artist… this is what NFTs can do.  They can attach scarcity (or originality) to an asset, and with scarcity comes value.

How do NFTs work?

In simple terms, NFTs are digital assets that represent a wide range of unique tangible and intangible items. While created on a similar foundation to other cryptocurrencies, unlike fungible tokens such as bitcoin (ie, each token is ubiquitous, divisible and interchangeable with others of the same kind), NFTs are unique and indivisible.

If it exists, it can be tokenised

NFTs don’t stop with art. Digital currencies have had a tumultuous upbringing. From humble and fungible beginnings to more established institutional implementations, this is a new era for tokens; the digital authentication of any unique asset (even time).  This raises the question - what’s possible when I can irrefutably prove that I own a thing, or part of a thing?

Fractionalised real or virtual property ownership (Metaverse and Decentraland); music perks (Kings of Leon) and conferences (VeeFriends); digital identities; collectible cards (Gods Unchained); parcels of freelance worker time priced through free market mechanisms; digital finance documents to manage financial supply chain logistics. The current list of how NFTs can be used is only beginning.

Are NFTs regulated in Australia?

Ever dreamed of owning Mona Lisa’s smile? Not just an interest in a collective ownership of the Mona Lisa, but the part that is the actual smile? NFTs make this kind of fractionalisation and ownership possible.  Direct legal ownership; where you hold full legal title. With the value of art based NFTs tied to such ownership and possession, commentary has generally been focussed on creators, buyers and sellers being careful about intellectual property rights attached to the underlying content. While this is true and relevant in the context of any activities involving artwork (including where ‘true’ ownership can be a tussle between artist and consumer), there is a range of other legal considerations when dealing with NFTs in Australia.

Simply holding an NFT may not trigger Australian regulatory obligations. However, issuing or selling NFTs may. Given an NFT can be used to authenticate anything (even a financial product), implementation is key because you can easily trigger regulatory considerations associated with collective ownership and the implications for those inadvertently stepping into a jurisdiction’s financial services regulatory framework without preparation can be significant.

Like any other token, whether an NFT triggers an Australian regulatory outcome will depend on what the NFT represents, certifies or authenticates, as well as any rights that may attach to it.

Where does this lead?

The market is rife with speculation as to what the future of non-fungible tokens looks like but the strategies we are seeing (and can imagine) present opportunities to create greater access to more assets for more people and further challenge the intermediaries.