Are non-fungible tokens (NFTs) going to replace fashionable cryptocurrencies or add additional value to the blockchain industry?!

When it comes to FTs, the art and digital gaming worlds have been on a roller coaster of late. The dominance of non-fungible tokens in these markets has also drawn most of the attention. Many believe that the next big breakthrough will be to designate ownership for virtual goods in the metaverse. But what if NFTS could also provide solutions in cumbersome, archaic systems for securing property rights, thus unlocking value from tangible assets.

Such possibly transformative uses of NFTs are in our opinion only vaguely starting to take shape on the economic and legal horizons. Technically, they are unique cryptographic tokens that exist on a blockchain and cannot be replicated. Unlike cryptocurrencies, they cannot be traded or exchanged at equivalency. By “twinning” an NFT with a particular version of digital work, it becomes possible to differentiate it from its myriad other versions and ascribe a distinctive value to it, conferring proof of ownership on a single identifiable holder.

NFTs already represent and “tokenize” physical objects, items such as artworks and luxury goods, expanding the attributes of their ownership into the digital world and permitting more efficient and secure transactions. Experiments in real estate are being undertaken as a new way of providing needed liquidity in a system that has historically been hostage to transaction costs.

The fact NFTs can act as immutable proof of ownership and provenance could in our opinion help solve persistent problem when it comes to property in developing countries. It could be a way to show and proof blockchain’s potential to establish a cost-effective mechanism for formalizing property rights for the poor. This would and could as per our estimates unlock 10 trillion dollar of formerly ‘dead capital’ globally. In our opinion it also seems increasingly possible the joint ownership and crowdsourcing investment of and NFTs could be used to support the preservation of world heritage sites, national artistic masterpieces or threatened biodiversity zones.

Practitioners are still trying to understand how exactly NFTs fit into or disrupt existing legal notions and what the legal and tax treatment should be.

Fractional ownership and instruments for the syndication of property rights are not a new concept: NFTs are merely their latest avatar. But the novelty is these blockchain – based tools provide the prospect of disintermediated new markets for creators and holders of otherwise non-marketable assets. This prospect in our opinion raises important issues of governance. Even if each NFT representing a particular value stake in the associated asset can be easily and individually traded, what is the basic framework needed to guarantee the preservation and integrity of the underlying asset as a whole? When do they become security instruments? What are the rights of holders as regards the asset and what obligations do they have with respect to any other holders?

Challenges in our opinion remain elsewhere, including the reliability and security of blockchain, the interoperability of different blockchains and, importantly, the big environmental footprint of NFT minting. Fraud and market manipulation are also on the rise. Regulators are hesitating as to the right approach, mindful of the need not to stifle innovation while attempting to exercise oversight. Neither the EU’s markets in crypto assets regulation nor the proposed US crypto bill make any explicit reference to NFTs. These technical, legal and regulatory considerations should in our opinion be grabbing much more of the debate. It is not impossible that NFTs could become important new instruments of fractional asset ownership, well beyond digital art and into the realm of more tangible repositories for creating and distributing wealth.

For now, however, they remain a state of flux.