NFTs – Risks and returns

Author: Business Law Chamber |

Article by Business Law Chamber

Non-fungible tokens (NFTs) have become widely popular in the digital world. Exclusive and premier NFTs such as Bored Ape Yacht Collection or CryptoPunk have been sold for millions of dollars and promise huge returns for the creators as well as the sellers/resellers of such NFTs. However, a counter view, proposed by a lot of people suggest that these NFTs are nothing more than a bunch of privileged people engaging in their vanity and casually overpricing shoddy images that are not worth pennies by creating artificial rarity. According to them, a digital image, unlike the original Mona Lisa or the weeping women by Picasso which cannot be replicated, can be copied endless times and so the argument of rarity in a piece of digital image makes no sense. This almost certainly points us towards the heated debate in the space of utilization of NFTs and their value as an investment. Therefore, let us take a look at the possible risks and returns that are associated with NFTs:

NFTs – Risks and returns

Risks

Wash Trading: There has been a recent trend among a group of individuals buying and reselling an NFT multiple times across the platform to generate fake volumes of trading and artificial demand. This generally leads to cheap NFTs to sell for higher NFTs – Risks and returns prices than what they deserve. The phenomena is most commonly seen on the popular NFT site Looksrare where sellers are on both sides of the transaction and deceive buyers into perceiving the NFT to be valuable. The usual deterrence to this is the ‘gas fees’ that is to be paid in order to do an NFT transaction, but a lot of people have made profits as well doing this fraudulent activity. It is to be noted that wash trading is considered illegal in the stock market, however, in the absence of any legislation regulating digital assets (such as NFTs), it remains a legal grey area for NFTs. Also, a major effect of this process is that people affected by wash traders generally lose faith in this system which further discourages investment is this nascent sector.

Fraud: For Unwary buyers who are not well versed with verification of ownership of NFTs, hackers can easily scam them by selling duplicate NFTs. This is done by either replicating the token number and manipulating the item on a different smart contract, or by simply using another person’s work as your own and selling them as an NFT. However, in both the cases, fraud has to be carefully checked upon by the buyers. Authenticity of an NFT can be checked by NFT metadata and transaction history or by using an NFT verification service.

Regulatory Open space: NFTs and their sale and purchase go unregulated currently with no legal bar or regulatory provisions in relation to the same. This generates fear in the mind of investors who seem to have little to no recourse in case of concepts such as fraud or wash trading. Moreover, IP based litigation is the only legal recourse that may be available to the traders that will only cater to the original owners whose works are copied and duplicated without their consent. Regulatory provisions are certainly the need of the hour to streamline this industry and put it up for the mainstream investors.

Ownership conflict and disappearance of NFTs: Another noticeable risk that NFTs run is the idea that the site which hosts the NFT or the image can be removed from the host site or the whole site may be shut down, thereby erasing the image and the buyer left with just the cryptographic signature and nothing else. This has been seen multiple times and a decentralized ledger which stores the image has been suggested to prevent this from happening.

Returns

Exclusive Access: Apart from being a collector’s item, the fact that rare and expensive NFTs usually create a club of their own and can often be a symbol of wealth and status. Imagine owning the bored yacht club NFT and attending an event where people like Eminem and Post Malone are invited simply because you also own one such kind of NFT. These trends are becoming popular and there is a possibility that, in future, these lead to a culture where events are catered to through NFTs making the potential NFTs boost in price and demand.

Investment Bloom: NFTs can be seen to be adopted by various notable artists in India as well, ranging from Amitabh Bachchan to Sonu Nigam. Also, various sport NFTs are being launched that include the NBA NFT collection as well as Dinesh Karthik’s newly launched NFT of his winning six at Nidahas Trophy. All of these events suggest that NFTs are here to change the way we look at art and create long term and lucrative value for investors as well.

Metaverse incorporation of NFT: Inception of a life-like world in the digital landscape with our avatars, the whole world is speculative and excited about this innovation in the field of technology that is deemed to be the future of the world. In this virtual life-like world, NFTs are going to take a major place since plots of land and digital characters are all going to be sold through and in the form of NFTs. This means that in the digital universe, NFTs will allow for tangible investments and value creation that, in the near future, can be traded like tangible goods and real estate. A worthy example of the same can be the sale of neighboring properties to properties of artists like Snoop Dogg on the Metaverse.