What, one might wonder, might the City of London have in common with regulation in El Salvador?
According to lyrics.com there are 220 songs which feature the word “NFT” – a word that made Collins Dictionary word of the year for 2021 after an 11,000% rise in its usage. NFTs definitely caught the public’s attention with the sale of a collage by digital artist Beeple for £50.3m at Christie’s in March last year. Currently the most expensive NFT sold is Pak’s ‘The Merge’ which made $91.8m on the NFT decentralised marketplace, Nifty Gateway. Clearly there was a market willing to take a risk on a new technology, and a market that had serious investment clout.
NFTs, or ‘non-fungible tokens’, are one-of-a-kind digital assets. They have no physical or product equivalent but are registered on the blockchain thus proving ownership. Currently NFTs have consisted of digital works of art, or creative content, varying from photographs to in-game content, but also including unique sneakers in a limited-run fashion line, domain names and event tickets. Undoubtedly there is potential for digital artists and merchandising opportunities to be explored. There are also extensive possibilities for fraud.
Digital wallets may be hacked, the NFT may be a fake to start with, or the NFT may be sold to more than one buyer, each of whom has paid a premium to be the sole owner of a valuable commodity. NFTs have value in their uniqueness – like owning original paintings rather than a print – and the blockchain is able to record this and provide a stamp of authenticity. There are also issues with the ‘minting’ of NFTs. Only copyright owners can offer an NFT of their work but attaching an NFT to a digital piece is fairly straight-forward and there is no requirement in the transaction to demonstrate ownership of copyright. Often providing a social media handle is the only verification required – hardly adequate security for the investor. Transactions also generally involve users hiding behind pseudonyms and both legal and illicit transactions are difficult to trace.
Enter the Royal Mint. The UK government has announced that the Royal Mint will release an NFT this summer as it prepares to welcome the establishment of stable coins. The form of the NFT, and indeed the number that will be released has not yet been announced. The irony of governments jumping on the bandwagon of the cryptocurrency market is self-evident. The platform created as an alternative to the regulated financial system is now being co-opted by state actors.
The UK is not the first country to dabble in the crypto sphere. Bitcoin is legal tender in El Salvador (hence the reference above) and the Lugano region of Switzerland, while the Eastern Caribbean Central Bank and the Bahamas have both issued digital currencies, DCash and the Sand Dollar respectively. Donations to the Ukrainian war effort may be made in crypto, while the Ukrainian government has released an NFT offering to help their fundraising.
Is the potential intro of the Royal Mint’s NFT proof of their credibility and perceived value? The NFT process plainly allows fraudsters and dishonest wrongdoers to try to act with impunity. If the UK government is intent on engaging with NFTs, possible investors need a serious caveat emptor mentality. The instability in the value of crypto and NFTs highlights how this market is unregulated and forms a speculative investment.
The acceptance of crypto as property in UK courts allows investors a range of legal tools to follow misappropriated funds such as proprietary injunctions, disclosure orders and worldwide freezing orders, and are increasingly being used to track cryptocurrency assets that have been lost (possibly irretrievably) to fraud.
Although there is demand for NFTs, Bloomberg reported last month that daily sales had dropped 83% since January with the average selling price falling to under $2,000. Investors need to be wary of a market that both lacks regulation and may have reached its high point last year.
Introduce in haste, repent at leisure?