In our July 22, 2021, article, we introduced you to the concept of a type of cryptographic token called a Non-Fungible Token (NFT), described its "non-fungible" nature, and described examples of digital "items" that a created token can contain. Continuing this series, we would like to present further aspects of the burgeoning NFT token market.
On September 10, 2021, SCOPE Miami Art Festival, one of the largest art fairs, announced that it will be the first to sell tickets as NFT tokens. Tickets in the form of tokens will be awarded to VIP attendees. The token can take the form of one of a series of artworks created by more than a dozen artists. The cheapest Barbie Meltdown by Nychos is currently valued at around $700.
On or around October 12, 2021, an anonymous artist from the generative design community Art Blocks* donated 25% of the proceeds from the sale of NFT artworks, or 1,188,226 Ethereum tokens (equivalent to $3.5 million USD), to Médecins Sans Frontières Australia, the Australian branch of Doctors Without Borders, setting a record (as of November 23, 2021) for a single donation from cryptocurrency-generated revenue.
The common denominator between the two NFT token use cases described above, aside from the technology used, is the OpenSea.io platform, through which the SCOPE Miami Art Festival and Art Blocks sell their works. OpenSea is at the heart of the NFT token trade, acting as a sort of "Allegro" for tokens. As mentioned in the previous article, NFT tokens have a wide range of applications. Tokens can function as a kind of passport for online communities, many celebrities distribute their works through them, and tokens are used for charitable purposes or various types of crowdfunding. Among all the possible applications, we must not forget that for the vast majority of NFT users, like many cryptocurrencies, they still serve as a tool for speculation and expanding their investment portfolios.
On September 14, 2021, a Twitter user pointed out that each time, just before the token's public launch and its positioning on the OpenSea main website, someone would purchase the token in several different virtual wallets, only to then sell it within minutes of the launch for an average six-fold profit and transfer the proceeds to a single main account. In response to OpenSea's allegations, the platform assured that it would introduce appropriate regulations to prevent similar events in the future. As a result of the disclosure of these events, Nate Chastain, who held the position of "Head of Product," left the startup.
Trading in NFT tokens, despite their often speculative and investment purpose, is not as precisely regulated as trading in securities. It is difficult to find definitions within the legislation governing NFT tokens for the use of insider information in cryptocurrency trading, manipulation of a token's value, providing false information, or unlawfully conducting a public offering. Of course, under appropriate circumstances, a given country's regulator could recognize a token as a type of security, for example, by conducting the Howey-Reves test. However, this will most often be a secondary review, occurring after the token has reached a certain threshold of popularity and, consequently, high demand. Gary Gensler, chairman of the US Securities and Exchange Commission ("SEC"), stated in his report before the Senate Banking Committee on September 15, 2021, that most cryptocurrencies available on the market are a type of security or investment contract.
An NFT token represents a digital asset that, in each case, has a defined resale value, rising and falling according to the trend. An NFT might represent a body part of a favorite artist or a VIP backstage pass. Whatever the token, it is most often a resale item or a bargaining chip. Purchasing a single token means participating in the cryptocurrency market, with its ups and downs. The speculative nature of cryptocurrencies means there will always be participants in token trading who attempt to skew the market to their advantage, whether through insider trading or fraudulent token issuances, such as the creators of the "Squid" token, who capitalized on the immense popularity of the TV series Squid Game to raise $3.38 million, only to then vanish into thin air. Discussions on the future of the token market are still ongoing. On the one hand, cryptocurrency purists are known for their antagonistic attitude towards any regulations, on the other hand, if tokens are to become a permanent part of the investment portfolio of the average citizen, it is necessary to introduce basic rules to protect investors, as well as restrictions on intermediaries in trading and those offering them.
*Generative design, in short, is a design process in which the artist prepares a program, input data, scopes, distribution method, introduces specific constraints and guidelines, and the program, most often in the form of an algorithm or a type of artificial intelligence, produces a work that is the result of all the components.
This alert is for informational purposes only and does not constitute legal advice.
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