In February 2021, people spent over US$1 billion on digital assets, according to data from CryptoSlam, a live crypto trading market. Digital artist Mike Winkelmann, alias Beeple, sold a collage for US$69 million. So, what’s going on? According to some, the surging price of Bitcoin, the impact of the pandemic and the distrust in the US dollar have all played a part in creating a bubble for the overinflated NFTs.
When you buy a non-fungible token (NFT), you are getting exactly that – a token – that connects your name with the creator’s art on the blockchain. If someone buys an image or meme, they can own it on the blockchain, but they have no control over rights to its distribution.
It is a fascinating and hot topic, seemingly a trend that makes no sense. But under the hype there are some valuable insights that brings us to an inflection point in how any piece of originally created work is owned, viewed, sold and bought… and changing the way it is created itself. Like the Internet bubble, though NFTs might be overinflated now, it looks like it is here to stay, undergirded by the democratization and decentralization of blockchain technology governance.
It was necessary to find out more. Capital Club Dubai hosted a panel discussion comprising local experts in digital art, blockchain technology and regulations. Led by moderator Hala Bou Alwan, the panel answered some important relevant questions.
Moderator: Hala Bou Alwan LLB, LLM, ELLM; Founder and CEO at Hala Bou Alwan Consultancy Co-Founder at H.A.D Consultants.
Joel Dietz: A serial entrepreneur and intellectual historian, Joel helped found several key initiatives in the cryptocurrency space including Ethereum, MetaMask, the first smart contract educational channel, and the first academic work on cryptoeconomics. His research interests focus on the confluence of blockchain network topologies and swarm intelligence, especially how the principles undergirding decentralized organizations can be used to fuel global innovation. He also works on holonic philosophy, the evolution of jurisprudence, data-driven approaches to innovation, and smart city data architecture.
Amrita Sethi: Amrita is an ex-banker turned NFT artist, and one of the first NFT artists in the UAE, launching her portfolio in 2020. She created a new multimedia art form called Voice Note Art, that has won her awards, exhibited at Art Dubai, World Art Dubai, as well as the Contemporary Art Fed in Hong Kong. She was selected for an Expo’s public art project and you can see some of her work and murals at the Souk Madinat Jumeirah.
Elisabeth Wallace: is a senior manager in the DFSA strategy, policy and risk team. She is currently working on the DFSA policy to regulate crypto assets as well as leading on innovation policy issues.
What is an NFT?
A fungible asset is something with units that can be readily interchanged. For example, a US$10 bill can be interchanged with two US$5 bills. However, if something is non-fungible it means it has unique properties and cannot be interchanged with something else. For example, a painting or a baseball collectors’ card, even if valued the same, they are one of a kind. So, the NFT platform is a great boom for digital artists who have struggled to hold on to the originality of their creation, since it can easily be reproduced as a digital asset. Now, through the NFT technology an artist can receive a unique code that gives it a stamp of originality and thereby rarity.
What is the technology undergirding this?
Since the late 1980s, people have been looking at the future of governance, and what a decentralized ledger system would look like. The first application of this was bitcoin, which was designed to be a digital gold equivalent, a sort of reserve currency. Continuing this track, blockchain was developed that allowed a kind of scripting to be embedded into the technology and NFTs emerged from this innovation around 2015, when people started looking at distributing virtual land with the ability to own bits of the land. Virtual real estate, virtual reality, various forms of digital art pieces, etc. can now be given a unique code and owned in parts by various people.
What are the regulations for this?
The structure of the NFT will determine the regulations required. NFTs that don’t provide the token holders any rights against the issuer or decision-making rights over the issuer’s project don’t need to be regulated. There are other rules and regulations that will have some applicability depending on the jurisdiction, such as data protection rights, intellectual property, or copyright laws.
At present, we do not have any specific framework for regulation of non-fungible tokens. Recently, we issued a consultation paper on the regulation of security tokens, where we define security tokens and set out detailed guidelines to assist the market in determining whether tokens issued are security tokens or not. We are looking at how exchanges or trading platforms are going to be able to exchange the various crypto currencies, and then we will be able to license entities in the DIC to be able to carry out those transactions. Our intention is to get the security tokens rules agreed and put in place by early July 2021. We are also working on the rest of the crypto asset ecosystem that doesn’t fit within the security token framework and we will be issuing a consultation paper on this later this year.
What do the investors say about NFTs?
In the cryptocurrency space, there’s often an initial cycle of hype and then consolidation. So, there are some mature and sophisticated investors who’ve gone through multiple cycles and know what holds value. Some other considerations that determine value are whether assets are intrinsically geared for technology, like virtual land and digital rights for user adoption; an iconic piece of art which carries lasting value regardless of the digital ledger; or is it something that is being just sold during a particular hype cycle.
Are art collectors skeptical about NFTs?
Many are new to the concept of digital art itself and need to have a shift in the intrinsic understanding of ownership. For example, we don’t have to go to the bank every day and physically touch and feel our money to know that we own it and have access to it, and our photographs are stored digitally, etc. We’ve made that mental intrinsic shift from physical to virtual. Art is going in the same direction.
Is this sustainable or is the NFT bubble about to burst?
We are on a hype cycle, but it’s there for a very good reason. Beeple’s collage for US$69 million is less about the value of the collage and more about capturing a moment in history that’s pivotal. NFTs are moving out of the crypto space and more into mainstream. A bit like the internet boom. Prices did normalize, but the internet didn’t go away, and it’s the same thing with the NFT space.
The more interesting edge that digital art will have over physical art is its ability to take art off the page. Now your paintbrush can become a very different medium, like adding sound waves. I can take the user into a deeper sensory experience, involving 3D, being able to go within the artwork, flow with the sound. Maybe even explore the realms of VR, AR, and AI. It opens a whole new world of artists and galleries.
What is the regulatory challenge from the regulators and from investors’ perspective?
In terms of consumer risks, there are varying levels of sophistication in the market. Some are very familiar with non-fungible tokens, some are not, and so we need to make sure that any misconceptions are addressed. If it is to be regulated, then proper disclosures will be required. And we need to monitor the price volatility because US$69 million for a token is a considerable amount of money. Will that be worth that in a year’s time? Is there a liquid market to accommodate the sale of the token when somebody wants to sell it?
Besides NFTs, what other models are evolving?
A very interesting development is around fractional ownership of different types of assets. Both physical assets like the Mona Lisa and virtual universities can be sold off with fractional ownerships models. This is an open area for innovation. People are building social currency platforms to monetize influencers and what they can deliver. I helped an influencer, who happens to be here in the UAE, and launched her BitClout account and within two hours her social currency was worth around US$33,000.
A lot of artists who’ve been successful in traditional mediums, are saying, “We want to be able to distribute our audio-visual content only to people who have our NFT, as a streaming audio, but we don’t like Spotify, iTunes or You Tube. We want to have access control so that people who really appreciate and want to buy the art can experience it.” Some of the value proposition is going to move from these traditional digital platforms and that itself is a very large market.
What is the outlook of regulations and to what extent can it keep up?
Will we need to think about regulating a new part of the market, or looking at new products and services? When we look at new policy initiatives, we take quite a deliberate and measured approach. Some may call that slow, but it’s because there can be extreme unintended consequences that flow from hasty regulatory responses in respect to nascent financial technologies. Being the first mover is not always an advantage. Rather, in respect of crypto assets, including non-fungible tokens, we spent the last year looking into the market. We’re trying to understand the nuances and characteristics. We’re trying to understand why they’re sold. We’re trying to understand why they’re bought. We’re getting feedback on how things really work in practice.
What is the environmental impact of the crypto world and NFTs?
The GreenNFT project is one that does very specific calculations of the carbon footprint related to each NFT transaction. There is significant energy consumption cost related with everything in most current large distribution blockchains.
Is there a way to display your NFT art?
There will be different kinds of screens for viewing and immersion experiences, and the way interior design and the aesthetics in which we will surround ourselves in our homes and hotels will change, using AI and VR for new ways to experience the art.
How do you know if you own a copy of a digital artwork or the original? How do you establish, with security and in a simple way, that you are the owner?
It goes back to that intrinsic sense of knowledge of ownership. You have that individual ownership in terms of the token. You can sell it, trade it. The collectors in the virtual space love it because it’s easily liquidated and there is a quickness characteristic to this asset which raises its value. It’s about the blockchain view and you can see ownership rights. You don’t need to show your private key, but your code will be locked within the blockchain. For example, when you buy an NFT or digital art, you can see who’s bought it, which also mitigates against some of the kind of forgery that you get in the physical world.
It really illustrates one of the benefits of an open source ecosystems and the developments that happen in them. Right now, within each individual platform, you can easily see who the creator is. You can see who the purchaser is based on their handle, account registration, etc. There is no cross-platform standardization around any of those things.
For those interested in this space, where do we even start?
One of the first things I recommend people do is open your web browser and go to cryptovoxels.com, which is a virtual 3D world where people have set up digital art galleries of many different types. There are hundreds of them, each one with its own unique experience, and has art pieces listed linked to other types of marketplaces and platforms. Some of my favorite artists are listed on SuperRare, Foundation, the Nifty Gateway and Christie’s.
There are two distinct things – the NFT in the art world and how you’re able to buy on those platforms, and it’s also all about the crypto coins. You can make a lot of money in both worlds, but it shouldn’t be the reason why you go into it. The way you approach your money and art collection in the physical world needs to also be the same way you do so in the virtual world.
How do I go understand where I should invest my ETH?
You must get a feeling for the process, and then go with whatever resonates with you aesthetically. You don’t necessarily have to go through that whole investor mindset for every art piece that you acquire.
However, if you’re looking long-term and deploying larger amounts of capital, it’s essential to partner with someone who has a multi-year exposure to cryptocurrencies and crypto assets and have had experience in riding out both the hype and consolidation cycles. NFTs is still a relatively new market, and sometimes it is tricky to see which platforms have real user adoption and which platforms are just feeding into the hype wave.
The journey of understanding and participating in the world of crypto art and NFTs has only just begun. Despite the sentiment of unbelief in the crazy pricing and current volatility, the fact that a credible institution like Sotheby’s validates the sales of unique digital collectibles, gives this space legitimacy.
Sotheby’s CEO Charles Stewart said recently, “We believe that there are long-term implications and opportunity. And one of the most exciting things is that we are accessing an entirely new audience and group of artists as well. What I think is really more interesting and pervasive and powerful and here to stay is the idea of the blockchain ownership and authentication. This potentially has implications for physical art as well as digital art and I definitely think that irrespective of the ups and downs of the primary and secondary markets in a monetary sense that this category will continue to grow and develop over the years ahead.”