- Speculation, cabin fever, and a desire to forge new ties are fueling the NFT craze.
- But claims of copyright theft and hacking are common, and most sales don’t come with legal rights.
- Now lawyers and fund managers say regulatory scrutiny is coming — which could dampen NFTs’ values.
- See more stories on Insider’s business page.
The enthusiasts, some 2,200 of them, flocked to a room on Clubhouse to talk about their new favorite topic.
The group — an eclectic mix of participants including visual artists, web developers, former T-Mobile CEO John Legere, and MC Hammer — batted around ideas in a gathering that seemed part group-therapy session, part college-philosophy class, part group text with like-minded friends, and part spiritual gathering.
The urgent matter at hand: NFTs, or non-fungible tokens, the digital collectibles selling for millions of dollars. The mania over NFTs seemed to reach a fever pitch last week with the sale of a work by the digital artist Beeple that fetched $69 million at Christie’s. Twitter CEO Jack Dorsey, a vocal cryptocurrency bull whose Twitter bio says only “#bitcoin,” said he would sell his first tweet as an NFT and donate the proceeds to charity.
The Clubhouse gathering on Monday had the air of the converted, with group members gushing that NFTs are part of a digital revolution. They touted the benefits artists can reap from selling their work as NFTs and theorized that they could make artists’ “drops” less exclusive to provide more equity to the art world.
Just hours before that gathering, Tesla chief executive and self-proclaimed “Technoking” Elon Musk tweeted that he would sell a tweet containing a song about NFTs as an NFT. Musk — whose girlfriend, the musician Grimes, sold a collection of art as NFTs in early March — then said Wednesday that he’d had a change of heart. He would no longer offer the tweet for sale.
But that didn’t dim the Clubhouse enthusiasts’ fervor. They gathered in a new, smaller room later on Wednesday and talked about NFTs just as passionately as they had earlier in the week.
The tidal wave of interest in this complex, emerging market has sparked surging prices, lots of transactions, and what some are calling bubble-like behavior.
“What we’re going to see, and what we’re already seeing, is there are going to be a bunch of scammers, grifters, and fraudsters who use this thing as a way to promise instant wealth with no effort,” said Stephen Palley, a lawyer at Anderson Kill and frequent commentator on blockchain issues. “We’ll also see some legitimate products come to market.”
NFTs, in their purest form, are assets verified as one-of-a-kind and based on blockchain technology, which keeps a ledger of ownership. Here’s how it works: A creator goes to an online NFT marketplace and uploads something like a video, a picture of a painting, or a tweet.
Then they create, or “mint,” a unique token, often paying a fee for the token to be folded into a blockchain. The token is non-fungible, meaning it can’t be exchanged for something with equal value, but it can be sold and transferred to other digital wallets.
NFTs actually date back to 2017, the year bitcoin went mainstream. As the value of bitcoin has surged, so has the interest in NFTs. And that has some money managers, lawyers, and even artists worried.
Wealth managers told Insider their clients are checking with them on whether they should want in. Jonathan Bergman, president of New York-based multi-family office Tag Associates, said the few calls he has fielded from clients in recent weeks on NFTs have primarily focused on two questions: “‘What are NFTs, and should we be doing something?'”
In a word, no, according to Bergman, whose firm manages approximately $8 billion in assets for roughly 110 high-net-worth families. While his firm is not averse to investing in burgeoning asset classes, this is different.
“We have invested in plant-based protein; we think that’s a trend. We have invested in cannabis; we think that’s a trend,” he said. “This doesn’t feel like a trend. It feels like a fad.”
Why some people are buying NFTs
Some art experts are equally skeptical, arguing that NFTs are not truly scarce — a quality that has for centuries helped determine a work of art’s value and returns.
“We still struggle with the use case,” said Scott Lynn, the founder and chief executive of downtown Manhattan-based artwork investments firm Masterworks, which securitizes artwork and allows investors to own shares representing different pieces.
Lynn told Insider that it feels as if NFTs are being used to manufacture artificial scarcity, as creators can just slap a digital image on the blockchain and then claim it’s scarce. “Whereas you have literal scarcity with a real masterpiece artwork.”
Another danger: If the value of ether, one of the leading virtual currencies for buying NFTs, were to fall, users’ speculative bets could sour. Offering prices for the same assets on NFT sales platforms like OpenSea, Rarible, and Gemini-owned Nifty Gateway — and even mainstream, dollar-denominated websites like NBA Top Shot — vary widely across multiple editions of the same asset.
Ardent NFT fans counter that the structure allows buyers to connect with artists and their work in a unique fashion, offering value that’s more than financial.
Collins Belton, a lawyer who specializes in digital assets and paid 4.5 ether for an NFT, said he saw social upside to supporting young Black artists. He said he’s texted and chatted with Andre O’Shea, the artist behind his NFT, and doesn’t plan to flip his work any time soon.
“What I bought, in my mind, is this marker that establishes, ‘I was here in this moment,'” he said.
First comes the boom, then come the lawyers
A few factors have converged to spark the NFT boom. One is pandemic-related: People are at home with more time on their hands, which is fueling intense interest.
Bergman said people are taking in more media and information about various investment trends, which is helping to spur bubbles across asset classes.
At the same time, the infrastructure to facilitate NFT transactions has come online, and investors have grown more comfortable with them as investments over time, according to Alex Batlin, the founder and chief executive of Trustology, a London-based startup that specializes in cryptocurrency custodian wallet services for customers looking to protect digital assets.
When NFTs first emerged as an idea, there was no infrastructure for decentralized finance, or financial transactions that don’t rely on traditional, centralized firms like brokerages. Now, with the emergence of decentralized exchanges, users can borrow, lend, and collateralize digital assets.
“All of a sudden, the utility of issuing an NFT has massively increased,” Batlin said. “This is not just about some way to collect.”
But with any new frontier comes new legal problems. Lawyers and regulators have been grappling with the promise and peril of digital assets for years, and NFTs are just the latest example.
Several compared it to the boom of initial coin offerings, or ICOs, when a mix of earnest entrepreneurs and con artists raked in millions by selling tokens, many of which should have been registered as securities. The terms and conditions of many NFT sales platforms emphasize that the legal implications of transferring an NFT are unsettled; very little litigation has surfaced concerning NFTs, and no public enforcement action has been taken to date.
Belton, the lawyer and NFT buyer, said shoddy terms could come back to bite market participants down the road. He said some sales platforms’ terms don’t mention what happens to the artwork that is hosted on a website if the company fails.
“If people think they’re buying actual art, they’re in for a shock if one of these companies goes down,” Belton said.
While some national brands and media companies, like Taco Bell and the NBA, have jumped headlong into NFT mania, some are sitting on the sidelines. Nifty Gateway said on Tuesday that an NFT project involving Zack Snyder, the director of several blockbuster superhero movies distributed by Warner Bros. Pictures, was canceled because of unspecified “IP complications.”
A Warner Bros. spokeswoman didn’t respond to comment requests. DC Comics, a sister company of Warner Bros., also made headlines earlier this week after it reportedly warned freelancers against using its famous characters like Wonder Woman to sell NFTs.
Only one lawsuit mentioning NFTs appeared in a search of a database of court documents. Jared and Pimporn Carty say they invested more than $200,000 with the creators of Splinterlands, which is marketed as a blockchain-powered card game but which the Cartys called a “multilayered Ponzi scheme.” The defendants have countered, accusing Jared Carty of defamation.
Some artists complained on Twitter earlier this month that they were having issues creating tokens on NFT platform Foundation; one told Insider that he considered hiring a lawyer before the issue was resolved. Kayvon Tehranian, Foundation’s CEO, said in an email that his platform didn’t have any issues but said congestion on the Ethereum network can make onboarding “challenging and expensive for newcomers.”
When the government gets involved
Creative issues aside, some NFTs could also qualify as securities that have to be registered with the Securities and Exchange Commission. Factors that might tip the balance include whether would-be buyers are told they can expect that the tokens they’re buying will appreciate in value and whether the NFT is divided among several owners, according to securities lawyers.
The complexities and unique risks that come with buying and selling NFTs could start commanding a new level of anti-money-laundering measures and due diligence, said Michael Greenwald, a director at New York-headquartered wealth advisory firm Tiedemann Advisors.
Keeping track of where the money is going and coming from around NFT transactions can be difficult, said Greenwald, a former US Treasury diplomat during the Obama and Trump administrations whose roles involved evaluating anti-money-laundering policy and financial-crimes intelligence.
“If you are the one buying the Damien Hirst piece, you may be using crypto or one of the forms to pay for it. That may go to the artist, but the auction house is still paid in dollars. As we evolve, the payment trail is going to be really important to watch,” Greenwald, who said he has been fielding inquiries and prospective clients about the market in recent weeks, told Insider.
Officials are paying attention to the manifold issues that can crop up with NFT transactions, Greenwald said. He said he has been in touch with the Biden administration, including the Treasury Department, which he said is closely monitoring the spurt of NFT activity and could release guidance on the market. A Treasury spokesperson did not return requests for comment.
“I think there’s great potential for artistic expression,” he said. “But I think you need to be mindful of the implications and the risks on both sides.”
Bubbles and backlash
For her part, Kathleen Breitman, the cofounder of blockchain network Tezos, is optimistic about the potential for NFTs to develop beyond one-dimensional digital images. Through her involvement in another venture, the gaming company Coase, Breitman is exploring how NFTs can be used to distribute and sell digital versions of collectible card games, for example.
To Breitman, the sky-high sale price of Beeple’s “Everydays: The First 5000 Days” last week was surprising but not entirely unexpected in the world of crypto.
“Do I think it’s sustainable? Absolutely not. Do I think that it was pretty obviously a marketing stunt from his business partners who bid on it? Yes. Do I think a Beeple piece will ever sell for $70 million again? No,” she said.
Amid the fast fortunes and copyright disputes, the NFT phenomenon has also generated intense backlash against naysayers.
Katie Menzies and Abel Reverter founded Cabeza Patata, a character-design studio based in Barcelona, Spain, that has produced digital art for the likes of Google, Spotify, and The New York Times.
In early March, Cabeza Patata’s Instagram account published a post detailing why they believe the recent crypto-art craze is a pyramid scheme — in their view, because it’s a closed system in which artists and collectors trade only among one another, all in the hopes of being able to sell the art they’ve created or bought at higher and higher prices to new crypto entrants joining the fray.
Since publishing the post, Menzies and Reverter told Insider, they’ve received a “level of hate” online that they’d never received before, even given Cabeza Patata’s prior outspokenness about issues like gender equality and diversity within the digital-art world.
“The obsession with community is really only if you’re in the community because if you have anything negative to say about it, you get severely attacked online,” Menzies said.
“If they’re telling me that 50% of the artworks are getting offers, I will think, ‘OK, there might be a viable system that could work here’,” Reverter said. But if only 1% of them are getting offers, he said, “The business of the platforms is basically charging people for the hope that they might make some money.”
Menzies and Reverter said they’ve witnessed firsthand the lack of regulation within the crypto-art world.
That Instagram post they published on March 11? Menzies and Reverter told Insider that in the week since it went live, the image has already been stolen and minted as an NFT for sale on OpenSea, “as a way to troll us,” Menzies said.
Nobody’s bought it.
In a bid that’s since been canceled, one potential buyer offered 2 ether, or about $3,600, to the anonymous account listing the image.